National Irish Bank Report

8/14/2019 National Irish Bank Report

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REPORT ON INVESTIGATIONS INTO TH EAFFAIRS OF

NATIONA L IRISH BANK LIMITEDA N D

NATION AL IRISH BANK FINANCIAL SERVICESLIMITED

BY HIGH COURT INSPECTORSMR JUSTICE BLAYNEY AND TOM GRACE FCAAPPOINTED 30 MARCH 1998 AND 15 JUNE 1998


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SUMMARY AND INSPECTORS' OBSERVATIONS


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SUMMARY AND INSPECTORS' OBSERVATIONSOur work com menced on 30 March 1998, the date of our appointment to investigatethe affairs of the B ank, and its scope was broadened on 15 June 1998 on ourappointment to investigate also the affairs of N ational Irish Bank Financial ServicesLimited. In the initial stages of the investigations, we requested and received a largevolume of documentation from the Bank. Preliminary review of this documen tation,in particular the reports of Internal Audit, indicated that the Bank had a case to answ erin each of the areas we w ere required to investigate.We next initiated a programm e of interviews, commencing w ith interviews of Bankstaff; this had to be suspended, however, almost immediately, when Bank employeesraised the issue of w hether, when interviewed, they could refuse to answer ourquestions if there was a risk that their answers might incriminate them. This issuehad to be determined in Court proceedings, wh ich lasted until January 1999, andconcluded with a Supreme Court judgement to the effect that interviewees could notrefuse to answer our q uestions.W hile these proceedings w ere pending w e interviewed customers who had invested inClerical M edical Insurance ("CM I") policies and further considered thedocumentation provided to us by the Bank.Following resolution of the C ourt proceedings, we re-comm enced interviews of Bankpersonnel, m eeting initially with branch managers and thereafter with seniormanagement, past and present, of the Bank.Interviews with CM I policyholders and Bank personnel, together with review ofreports prepared by the Bank relating to interest and fee amendm ents and to the saleof CM I policies, provided persuasive evidence of the existence of improper p racticesin each of the areas we were investigating. Extensive further work was howeverrequired to establish wh o was aw are of, and responsible for, these p ractices.Summary Conclusions - Improper PracticesOur conclusions on improper practices m ay be sum marised as follows:

Bogu s non-resident accounts were opened and maintained in the branches,enabling customers to evade tax through concealment of funds from theRevenue Comm issioners; Fictitiously named accounts were opened and maintained in the branches,enabling customers to evade tax through concealment of funds from th eRevenue Comm issioners; CMI policies were promoted as a secure investment for funds undisclosed tothe Revenue Commissioners; Special Savings Accoun ts had DIRT deducted at the reduced rate,notwithstanding that the applicable statutory conditions were not observed; There was improper charging of interest to customers; There was improper charging of fees to customers.


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At no time prior to our appointment did the Bank address the issue of a potentialretrospective liability to the Revenue Com missioners for tax arising from theirregularities in the operation of DIRT.Culture and Operational EnvironmentWe consider it important to set the conclusions of our report in relation to tax evasionin the context of the culture of the period the subject of our investigation. This washighlighted in the report of the C omm ittee of Public Accounts following their enquiryinto DIRT, published in Decemb er 1999. The problem of DIRT evasion was anindustry-wide phenomenon.The op erational environment in the Bank at the time has also to be taken into accountand the behaviour of individual branch managers and staff must be viewed in thiscontext. The branch network was target driven - there were, amongst others, targetsfor fee income and deposits, but limited support by way of systems or training toenable the achievement of these targets. Managers felt under pressure to meet thesetargets, in the setting of which they had negligible participation and which manyconsidered u nreasonable; they feared criticism and possible humiliation before theirfellow managers if they d id not meet the targets set.W hile many branch m anagers operated, or played a part in, the improper practices, wehave concluded that it would be inappropriate to find individual m anagersresponsible, as we believe that responsibility for the practices lay at a higher level inthe Bank. We must add also that we received no evidence that branch man agersperso nally d erived any direct financial benefit from the operation of an y of thepractices.Summary Conclusions - ResponsibilityWe have concluded that responsibility for the improper practices which ex isted restswith senior managem ent of the Bank during the period covered by the investigations.It was their duty to ensure that the business of the Bank was so conducted that suchpractices did not occur and, if they did, that they were stopped immediately.

We have also concluded that the Head of the Ba nk's Financial Advice and ServicesDivision, and a num ber of the financial services managers in that Division, wereresponsible for the promotion of the CMI policies as a secure investment for fundsundisclosed to the Revenue.We h ave also considered the discharge of their functions by the following:

the Ba nk 's internal audit; the external auditors to the Bank; the Audit Com mittee of the Board, and the Board of Directors.


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We have concluded that, in respect of the matters under investigation, none of thesewere responsible for the improper practices which pertained. We are however of theopinion that both the external auditors and the Audit Com mittee were remiss in notrequesting that man agement quantify the potential retrospective liability to theRevenue Commissioners arising from the high level of non-com pliance by branchstaff with DIRT statutory requirements reported by Internal Audit in December 1994.The A ttitude of the BankWe wish to record that in the first year of our investigations w e believed that we didnot have the full co-operation of the Bank. The Bank 's attitude during that period isillustrated by the Ba nk 's reaction to our December 1998 interim report to the Court, inwhich w e set out evidence received from investors in CMI policies, most of whomwere at the time custom ers of the Bank. We made it clear in our interim report thatwe had reached no con clusion on this evidence, as we had not then heard anyevidence from the Bank. Notwithstanding this, we were heavily criticised by theBank, in correspondence conducted by the Bank 's solicitors, for having prematurelymade up our minds on the matters we were investigating. The Ban k's criticism wasdescribed by M r Justice Kelly, in a judgem ent delivered on 19 March 1999, as whollyunjustified.Subsequently, the working relationship with the Bank improved. We had a numb erof helpful meetings with the Ban k's Project Director, and with other mem bers of theBank's senior management.

At the Ban k's request, in October 2000 we attended a presentation from seniorexecutives of the Bank on changes in organisation, managem ent and procedures sinceour appointment. We were informed that many of these changes would have takenplace in any event as part of global developments in the National Australia BankGroup, but that there had been special emphasis on co mpliance issues in Ireland as aresult of the news m edia reports of improper practices at NIB. The changes outlinedat this presentation are summarised at Appendix 18. This summary was subsequentlyupdated by the Bank as part of its response to our draft report - see below.The B ank's Response to our ReportWe delivered our draft report to the Bank on 1 August 2003. The Ba nk's response,dated 24 March 2004, is a brief Reaction Paper, supplemented by docum ents set outin seven schedules. This Paper is reproduced in full as Appendix 19.In its Reaction Paper, the Bank does not take issue with anything in the report,apologises to all those who have been affected by the events which took place, andoffers to discharge the Inspectors' reasonable taxed costs of the investigation.The do cuments in the schedules set out the changes m ade by the Bank in the policiesand controls relating to the matters the subject of our investigation, and indicate howcustomers deem ed to have suffered loss as a result of the B ank 's actions will berefunded or compensated.


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The Paper also sets out details of costs amounting to Euro 64 m illion incurred by theBan k, or anticipated, in addressing the issues identified in the investigation. Thistotal includes Euro 23.3 million in respect of customer refunds and compensationresulting from the investigation, and the Bank expects that there will be furtherpaym ents on top of this figure.Closing ObservationIn order to form a balanced view of our findings, the report, together w ith theappendices, should be read in its entirety.


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CONTENTS


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REPORT ON INVESTIGATIONS INTO THE AFFAIRS OF NATIONALIRISH BANK LIMITED AND NATIONAL IRISH BANK FINANCIALSERVICES LIMITED BY HIGH COURT INSPECTORS MR JUSTICEBLAYNEY AND TOM GRACE FCA APPOINTED 15 MARCH 1998 AND 30JUNE 1998PagePART 1: INTRODUCTION

APPOINTM ENT OF INSPECTORS 3THE COMPANIES 4

National Irish Bank L imited 4National Irish Bank Financial Services Lim ited 4MAN AGEM ENT STRUCTURE OF THE COMPANIES 4

Summary 4The Chief Executive 5The General Manager - Banking 5The Regional Managers 7The Financial Advice and Services Division 8The Internal Audit Function 8BACKG ROUND TO APPOINTMENT OF INSPECTORS 9

Sale of CMI Insurance Policies 9Interest and Fee Charging P ractices 9Report of Authorised Officer 10ORGANISATION OF THE REPORT 10APPROAC H TO RESPONSIBILITY 11LEGA L ADVICE AND COURT ACTIONS 12

Court Action - Concern s of Prospective Interviewees 12Court Action - Scope of Enquiry into DIRT -related Ma tters 14Court Action - Access to Records of Isle of Man Branch 15W O R K D O N E 1 6

Summary 16The First Phase 16The Second Phase 18RECOMMENDATION ON COSTS 20


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PART 2: EVASION OF REVENUE OBLIGATIONS:INCORRECTLY CLASSIFIED NON-RESIDENT DEPOSIT ACCOUNTSLEGISLATIVE REGIME 2 3

Position prior to the introduction of DIRT 23 Position after the introduction of DIRT 23Non-Resident Declaration 24 Summary 25N I B P R OCED U RES 2 5

Inspectors' Criticism of the Special Circulars 27 BANK MANA GER EVIDENCE ON OPERATION OF PROCEDURES 28ENQUIRIES OF BRANCH PERSONNEL BY SENIOR BANK MANAGEM ENT 30EXISTENCE OF BOGUS NON-RESIDENT ACCOUNTS IN THE BRANCH NETWORK 3 3

Bank Customer Interviews 33 Branch M anager Interviews 40 Interviews with Senior Bank M anagement 42 Interviews with former Heads of Internal Audit 42 Internal Bank Correspondence 43INTERNAL AUDIT REPORTS 44

General 44Use of Incorrect Forms 45 Use of Bank as Accommodation Address 45 Non-Resident Declarations at variance with other branch records 46 Non-R esident Deposits as Security for Resident Borro wings 47 Non-Resident Accounts in Fictitious Names 48 W HY DID BRANCH PERSONNEL OPERATE BOGUS NON-RESIDENT ACCOU NTS? 50MET HOD OF ACCOUNTING FOR DIRT 5 3D I R T T H E M E A U D IT , D E CE M B ER 1 9 9 4 5 4

Follow-up Meeting to DIRT Theme Audit 56THEM E AUDIT - TAXATION OF CREDIT INTEREST, JANUARY 19 99 58INSPECTORS' CONCLUSIONS 5 9


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PART 3: EVASION OF REVENUE OBLIGATIONS:FICTITIOUS AND INCORRECTLY NAMED ACCOUNTSN I B P R OCED U RES 6 3

Formal Guidance to Staff 63EXISTENCE OF FICTITIOUS AND INCORRECTLY NAME D A CCOUNTS 64

Extracts from Letters from Bank Personnel 64Bank Customer Interviews 65SOURCE OF FUNDS FOR INVESTMENT IN C M I AND OTHER POLICIES 6 5W HY WERE ACCOUNTS OPENED IN FICTITIOUS NAM ES? 66

Branch Manager Interviews 66EFFORT S TO ELIMINATE FICTITIOUS AND INCORRECTLY NAM ED ACCOU NTS 6 7

Mem orandum from General Manager - Banking, 1995 67Mem orandum from General Managers, 1996 and involvementof Head of Audit 67Review of Declarations from Bank M anagers 68The Board A udit Comm ittee 68INSPECTORS' CONCLUSIONS 68

PART 4: EVASION OF REVENUE OBLIGATIONS:SPECIAL SAVINGS ACCOUNTSLEGISLATIVE REGIME 73RETURNS TO REVENUE COMMISSIONERS 7 4

N I B P R OC ED UR ES 7 5D I R T T H E M E A U D I T , D E CE M B ER 1 9 9 4 7 6

Conclusion 76Scope of Audit Testing 76Findings 76Interview with Head of Audit 77BRANCH INTERNAL AUDIT REPORTS 7 7

THEM E AUDIT - TAXATION OF CREDIT INTEREST, JANUARY 19 99 79


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RETROSPECTIVE D I R T LIABILITY TO THE REVENUE COMMISSIONERS 80INSPECTORS' CONCLUSIONS 80

PART 5: THE SALE OF CMI, SCOTTISH PROVIDENT INTERNATIONALAND OLD MUTUAL INTERNATIONAL POLICIESTHE BANK , THE COMPANY AND THE LIFE ASSURANCE COMPANIES 83

The Financial Advice and Services Division ("FASD") 83Managem ent and Personnel of the FASD 83Role of National Irish Bank Financial Services Limited 84Relationship of the Bank and the Company with CMI 85Relationship of the Bank and the Company with Scottish ProvidentInternational 86Relationship of the Bank and the Company with Old M utualInternational 86Authorisation of Insurers to carry on business in the State 87

THE LIFE ASSURANCE PRODUCTS 87General 87Nature of CM I Products sold by FASD 87Investor Targeting and Assurances of Confidentiality 90Obligation to make Returns to the Revenue Com missioners 94

TH E PURPOSES FOR WHICH THE C M I PERSONAL PORTFOLIO WAS BEING USED 9 5Evidence of Mr D'Arcy, Head of FASD 95"Finding a safe haven for Revenue-sensitive funds" 95"Regularising of bogus non-re sident deposits" 100"Retention of deposits" 104"Securing new deposits for the Bank" 108"Earning comm ission for the Bank" 109

THE R OLE OF THE BA N K 1 1 0General 110Identifying Customers with Undeclared Funds 110Promoting the Sale of CM I Policies 111

REASON FOR SUCCESS OF PRODUCT 11 4Summary 114Typical Investment 114

INSPECTORS' CONCLUSIONS 1 1 5


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PART 6: THE PRACTICE OF IMPROPER CHARGING O F INTERESTOUTLINE OF SYSTEM 11 9

General 119Changes in Interest Rates 119MAN UAL INTEREST ADJUSTMENTS 12 0

The Charging Regime 120Operation of the System 121Branch Staff Evidence 126ACTION TAKEN BY THE BAN K ON FIRST DISCOVERY OF IMPROPER PRACTICE 13 0

The Chief Executive 130The General M anager - Retail Banking 131The Regional M anagers 132Impact on Customers 132ACTION TAKEN BY THE BANK FOLLOWING NEW S MEDIA REPORTS 13 2

Interviews with Bank Staff 132Bank Investigation Work: The Unauthorised Interest & FeeAm endm ents Report 133Custom er Queries 136Inspectors' Observations on Work Done by the Bank 137Further W ork proposed by the Bank 137

INSPECTORS' CONCLUSIONS 13 7

PART 7: THE PRACTICE OF IMPROPER CHARGING OF FEESREGULATORY REGIME 14 1

Introduction 141The Central Ban k Act, 1971 141The Central Ban k Act, 1989 141The Consum er Credit Act, 1995 142Subsequent Changes in the Regulatory Regime 142

THE FEE CHARGING SYSTEM AND ITS DEVELOPMENT 14 3Introduction and Overview 143Fee Categ ories 143The Fee Charging Process 144Development of System 145Summary 146


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CHARGES FOR ADMINISTRATION AND MANAGEMENT TIME 14 6The Charging Regime prior to 1996 146Operation of the System prior to 1996 149Pre-notification of Fees 155 Delay in Implementing new Time Recording System 157

ACTION TAKEN BY THE BANK ON FIRST DISCOVERY OF IMPROPER PRACTICE 15 9No Action Taken prior to 1996 159

ACTION TAKEN BY THE BANK FOLLOWING NEW S MEDIA REPORTS 15 9Interviews with Bank Staff 159Bank Investigation Work: The Unauthorised Interest & Fee

Amendments Report 160Customer Queries 163 Further Work proposed by the Bank 163INSPECTORS' CONCLUSIONS 16 4

PART 8: KNOWLEDGE AND RESPONSIBILITYINTRODUCTION 167CONCLUSIONS CONCERNING ENTITIES OTHER THAN INDIVIDUALS 16 7

Internal Audit 167The External Auditors 168The Audit Com mittee of the Board 168 The Board of Directors 169EVASION OF REVENUE OBLIGATIONS:INCORRECTLY CLASSIFIED NON-RESIDENT DEPOSIT ACCOUNTS 16 9

Bogus Non-Resident Accounts 169The Branch M anagers 170The Regional M anagers 170Area Managers Appointed February 1996 171 General M anager - Banking 171Head of Finance 173Chief Executive 175Executive Director 175Chief Operating Officer 176


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EVASION OF REVENUE OBLIGATIONS:FICTITIOUS AND INCORRECTLY NAM ED ACCOUN TS 17 7

The Branch Ma nagers 177General Manager - Risk Management and Administration, GeneralManager - Banking 177Head of Audit 177Chief Executive, Executive Director 178EVASION OF REVENU E OB LIGATIONS:SPECIAL SAVINGS ACCOUNTS 17 8

The Branch Managers 178The Regional M anagers 179General Manag er - Banking 179Head of Finance 180Chief Executive, Executive Director 180TH E SALE OF C M I, SCOTTISH PROVIDENT INTERNATIONAL AND OLD MUT UALINTERNATIONAL POLICIES 18 1

The Financial Advice and Services Division ("FASD") 181Nigel D'Arcy, Head of FASD 181The FASD Financial Services Ma nagers, Investment Ma nager 182The Branch Managers 185Head of Retail/Regional Ma nagers 185General M anager - Adm inistration 186General M anager - Banking 186Head of Audit 186Chief Executive, Executive Director, Chief Operating Officer 186

THE PRACTICE OF IMPROPER CHARGING OF INTEREST 18 7The Branch M anagers 187The Regional M anagers 187General Ma nager - Banking 188Chief Executive 188

THE PRACTICE OF IMPROPER CHARGIN G OF F EES 1 8 9The Branch Managers 189The Regional and Area M anagers 189General Ma nager - Banking 190Chief Executive, Executive Director 191


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APPENDICESAppendix 1:

Appendix 2:

Appendix 3:

Appendix 4:

Appendix 5:

Appendix 6:

Appendix 7:

Appendix 8:

Appendix 9:Appendix 10:

Appendix 11:

Order of the High Court dated 30 March 1998, appointing theInspectors to investigate the affairs of National Irish B ankLimited.Order of the High Court dated 15 June 1998, appointing theInspectors to investigate the affairs of N ational Irish BankFinancial Services Limited.Order of the High Court dated 31 July 2001, amending theOrder of 30 March 1998.Order of the High Court dated 31 July 2001, amending theOrder of 15 June 1998.Order of the High Court dated 13 July 1998 declaring thatperson s called before the Inspectors were not en titled to refuseto answer questions put by the Inspectors, nor to refuse toproduce docum ents, and that the procedures proposed by theInspectors for the conduct of their investigation wereconsistent with the requirements of natural and constitutionaljustice.Order of the Supreme Court dated 21 January 1999 upholdingthe 13 July 1998 Order of the High Court, with the proviso thatconfessions obtained by the Inspectors w ould not in general beadmissible at a subsequent criminal trial, unless theconfessions were voluntary.Order of the High Court dated 19 March 1999 refusing anapplication by NIB that the Inspectors' DIRT complianceinvestigation of the Bank should be limited.Copy memorandum dated 18 November 1993 from GerryHunt, Head of Financial Co ntrol, to Frank Brennan, M ichaelKeane and Dermott Boner titled "Non Resident Accounts".Copy Report on DIRT Them e Audit, December 1994.Copy Product Features Sheet used by some of the FAS Dfinancial services managers in the promotion of the C MIPersonal Portfolio policy.Copy report dated 20 April 1993, prepared by M s PatriciaRoche of the FASD for a prospective investor in the CMIPersonal Portfolio policy.


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Appendix 12:

Appendix 13:

Appendix 14:

Appendix 15:

Appendix 16:

Appendix 17:Appendix 18:

Copy model Investment Checklist to be prepared by FAS Dfinancial services m anagers in respect of single premiuminvestment recomm endations, w ith accompanying note fromPatrick C ooney; copies, five completed Checklists.Copy letter dated 30 July 1990 from Patrick C ooney to FA SDfinancial services m anagers.Copy report: "National Irish Bank: Unauthorised Interest &Fee Amendments", dated March 1999.Copy Bank letter to the Inspectors dated 10 April 2001,outlining proposed further review of interest charges.

Copy memo randum from Dermott Boner dated 24 July 1992,with accom panying Form St 20 and guidelines forManagement Time.Copy Bank paper - Fees Review 2001.Summary, Bank presentation on changes since Inspectors'appointment.

Appendix 19: Copy Bank "Reaction Paper" dated 24 March 2004.


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PART 1

INTRODUCTION


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I N T R O D U C T I O NAPPOINTMENT OF INSPECTORSOn 30 M arch 1998, on the application of the M inister for Enterprise, Trade andEm ploymen t, the Inspectors were appointed by the High Court under Section 8 of theCom panies A ct, 1990 to investigate and report on the affairs of National Irish BankLimited ("the Bank", "NIB") relating to:(i) the improper charging of interest to accounts of customers of the Bankbetween 1988 and 30 March 1998;(ii) the improper charging of fees to accounts of customers of the Bank between1988 and 30 March 1998;(iii) the improper removal of funds from accounts of customers of the Bankbetween 1988 and 30 March 1998;(iv) all steps and action taken by the Bank, its directors and officers, servants oragents in relation to the charging of such fees or interest or the rem oval of an yfunds without the consent of the account holders and their actions arising fromthe issues when discovered;(v) the manner in which the books, records and accounts of the Bank reflected theforegoing matters;(vi) the identity of the person or persons responsible for or aware of any of thepractices referred to above;(vii) whether other unlawful or improper practices existed or exist in the Bank from1988 to 30 M arch 1998 which served to encourage the evasion of any revenueor other obligations on the part of the Bank or T hird Parties or o therwise.On 15 June 1998, again on the application of the Minister for Enterprise, T rade andEm ploym ent, the Inspectors were similarly appointed to investigate and report on theaffairs of National Irish Bank Financial Services Limited ("the C omp any","NIBFSL") relating to:(a) The effecting of insurance policies through NIB FSL with:

Clerical Medical Insurance Com pany Lim itedScottish Provident International Life Assurance LimitedOld Mutual International (Guernsey) L imited(b) The role of NIBFSL, its officers, servants and em ployees in connection withthe effecting of the said policies of insurance.(c) The purposes behind the execution of the aforesaid policies of insurance.


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(d) The knowledge of the management and board of directors of NIBFSL of theeffecting of the said policies of insurance.(e) The identity of the person or persons responsible for or aware of the effecting

of or purposes behind the said policies of insurance.Both Orders were amended on 31 July 2001. The effect of the amendm ents was tojoin the Bank in the Order of 15 June 1998 and make it, as well as the Co mpany, th esubject of that Order. The amendments also extended the list of insurance companiesset out at (a) above to include CMI Insurance C ompany Limited, Clerical M edical andGeneral Life Assurance Society and Clerical Medical Investment Group Limited.Copies of the four Orders are set out at Appendices 1 to 4 to this report.

THE COMPANIESNational Irish Bank Limited was incorporated as Midland Montague Leasing(Ireland) Limited on 21 Novem ber 1978. It changed its name to Northern Bank(Ireland) Limited on 25 M arch 1986 and was licensed to carry on banking busines s bythe Central Bank of Ireland on 28 April 1986, taking over the Republic of Irelandbusiness of N orthern Bank Limited on 1 July 1986.On 31 O ctober 1987 the share capital of the company was acquired by NationalAustralia Finance (UK) L imited, now known as National Au stralia Group EuropeLimited, a subsidiary of National Australia Bank Limited. On 15 April 1988 thecomp any changed its name to National Irish Bank Limited.National Irish Ba nk Financial Services Limited was incorporated as Northern BankTrustee Com pany Limited on 12 January 1970. It changed its name to NorthernBank Trust C orporation Limited on 6 January 1976, to National Irish Bank TrustCom pany Limited on 15 April 1988, and finally to National Irish Bank FinancialServices Limited on 3 November 1989.National Irish Bank Financial Services Limited is a wholly ow ned subsidiary ofNational Irish Bank Limited.

MANAG EMENT STRUCTURE OF THE COMPANIESThe m anagement structure of the Bank changed on a number of occasions during theperiod covered by the investigations. Organisational developments, insofar as theyare relevant to areas the su bject of the Inspectors' investigations and this report, areoutlined below.Summary The position of chief Dublin-based executive of the Bank was held by a num ber ofindividuals during the period, w ith differing titles.


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Reporting to the chief executive was a General Manager in charge of b ankingactivities with responsibility for a number of areas including the retail branchnetwork of the Bank; the title of this position also changed during the period. The executive in charge of the branch network had over the period a variablenum ber of regional or area managers reporting to him; the titles and reportinglines of these individuals, to whom b ranch managers reported, changed on anumber of occasions during the period 1988 to 1998. Separate from the branch network was the Financial Advice and Services D ivisionof the Bank, set up in 1989 and headed by the same individual for the entire periodcovered by the investigation. He reported to the chief executive up to 1 January1995, to the General Manager - Banking until 23 May 1997, and thereafter, up tothe date of appointment of the Inspectors, to the Chief Operating Officer (see

below). The Head of Audit reported to the chief executive up to 1 July 1991, then directlyto the audit com mittee of the Board until April 1997, when responsibility forinternal audit was transferred to National Au stralia Ba nk's European Auditfunction, based in G lasgow.The C hief ExecutiveJim Lacey was appointed Chief Executive of the B ank in February 1988, theappointment taking effect from 1 April of that year, and he held that position until 22April 1994. Mr Lacey oversaw a number of changes in organisational structureduring that period.Barry Seymour was appointed Executive Director of the Bank on 22 April 1994 andheld that position until 15 July 1996. He too introduced a number of organisationalchanges.Philip Halpin became Chief Operating Officer of the Bank on 16 July 1996, holdingthis position at the date of the Inspectors' appointment. He reported to a Belfast-based Chief Executive - to John Wright from 16 July 1996 to 5 March 1997, andthereafter to Grahame Savage, Chief Executive at the date of the Inspectors'appointment.Each of the above-nam ed w as on the circulation list for internal audit reports onbranches while he held the position indicated.The General Manager - BankingFrank BrennanFrank Brennan w as appointed General Manager - Retail Banking in the manag ementstructure put in place in May 1988, shortly after Mr Lacey becam e Chief Executive.Mr Brennan had previously been General Manager (Operations). In both roles he had


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charge of the branch network, reporting to the Chief Executive. Mr Brennan held thistitle until 1 July 1991, but on 1 October 1990, Dermott Boner (see below) w asappointed H ead of Retail, reporting directly to the Chief Executive in respect of thebranch network, so from that date Mr B rennan was no longer directly responsible forthe branches and from 30 September 1990 he ceased to be on the circulation list forinternal audit reports on b ranches.Mr Brennan subsequently held a number of other positions in the B ank: From 1 July 1991 Mr Brennan became General Manager - Corporate S ervices,retaining responsibility for Managem ent Services (the Bank 's informationtechnology function); Internal Audit also reported to him in relation toadministrative and operational matters in this role. Mr Brenna n's title changed to General Manager - Adm inistration on 3 May 1993,when he assumed responsibility for the Treasury and International Department(then headed by Philip Halpin) in addition to his existing duties. He retained thistitle and h is duties remained largely unchanged in a reorganisation in Decem ber1994. Mr Bre nna n's title changed to General Manager Risk Managem ent andAdministration in March 1996 "to illustrate the emphasis we place on this elementof his responsibilities", according to Mr Seym our's memorandum to staff advisingthe setting up of a Risk Policy Com mittee. A reorganisation implemented by Mr Halpin in May 1997 saw Mr Bren nan 'sduties unchanged, b ut his title amended to Head of Risk and Adm inistration. MrBrennan h eld this title at the date of the Inspectors' appointment.Basil NooneThe late Basil Noo ne was General Manager - Banking from 1 July 1991 to 30 April1993. A transferee from the parent bank, Mr Noon e held no other positions in theBank before or after h is period as General Manager - Banking. During this time, MrNoone was responsible for the branch network, with Mr B oner reporting to him in thisregard. He was on the circulation list for internal aud it reports on bra nches fromAugust 1991 to February 1993.At the time the Inspectors were interviewing present and former senior managem entof the Bank, they were informed by the Bank that Mr Noo ne, then retired and living inAustralia, was extremely ill. He has since died. Accordingly, he was notinterviewed by the Inspectors and because of this there is no finding in the report as tohis know ledge of, or responsibility for, any of the practices under investigation.Michael KeaneMichael Keane, formerly Head of Marketing (from 1 June 1988) became GeneralManager - Banking, with responsibility for Corporate and Retail Banking, on 3 May


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1993 and held this position until 18 August 1996. There were several changes in thepersons reporting to him in relation to retail banking during this period (see below).Mr K eane was on the circulation list for internal audit reports on branches fromMarch 1993 to July 1996. Mr Keane became General Manager - M arketing and Distribution on 19 Augu st1996. He left the Bank on 23 May 1997.Ken WindeyerKen W indeyer joined the Bank as General Manager - Banking on 19 Aug ust 1996and held this position until 31 July 1997. Mr Windeyer became Head of Operations and Projects on 1 August 1997, his titlesubsequently being changed to Head of Operations and Programmes, a position heheld at the date of the Inspectors' appointment.Brian O'DriscollBrian O'Driscoll became Head of Personal Markets on 1 August 1997, in whichposition he became responsible for the branch network, the position of GeneralManag er - Banking having been effectively abolished and replaced by separateexecutive positions in respect of personal and business markets. Mr O'D riscoll heldthis position at the date of the Inspectors' appointment.

The Regional Managers (including Head of Retail Banking, Head of Retail)The man agemen t structure and the titles of the personnel to whom branch m anagersreported changed on a number of occasions during the period covered by theinvestigations. With effect from 1 June 1988, Dermott Boner and Kevin Curran were appointedRegional Managers, with responsibility for nineteen and twenty-two branchesrespectively; bo th reported to Mr Brennan, appointed General Manager - RetailBanking at the same time. Mr Brennan was assigned direct responsibility for fivebranches. On 1 October 1990 Mr B oner was appointed H ead of Retail, reporting directly tothe Chief Executive; to him reported Mr Curran and two newly appo intedRegional Managers, Tom McMenamin and the late Michael O'Rourke.

By reason of the death of Mr O 'Rourke, it has not been possible for him to beheard and accordingly the Inspectors make no finding in this report in relation tohis knowledge and responsibility. From 1 July 1991, Mr B oner reported to Basil Noone, appointed G eneralManag er, B anking at that time, while the three R egional M anagers identified

above con tinued to report to him.


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On 3 May 1993, Mr Boner became Chief Manager Retail. Mr McM enamin andBarry Grogan (a secondee from National Australia Bank) reported to him as AreaManag ers. Mr Curran retained his position as Regional Manag er. Both MrBoner and M r Curran reported to the newly appointed General Manager -Banking, Michael Keane. A reorganisation effective from 1 January 1995 saw the retail business of the B ankonce more divided into three regions, headed by M essrs Boner, Curran andMcM enamin. They reported to Mr Keane. The retail business was again reorganised in February 1996, when following theretirement of M r Boner, Mr Curran was appointed Head of Retail Banking,reporting to M r Keane, and the retail business was divided into six areas, each theresponsibility of an Area Manager. The Area Managers reported to Mr Curran up

to the date of his retirement from the Bank on 4 July 1997, and thereafter to MrO'D riscoll. This was the regional/area managem ent structure in place at the timeof the appointment of the Inspectors.The Finan cial Advice and Services DivisionSeparate from the branch network was the Financial Advice and Services Division("FA SD") of the Bank, set up in 1989. This Division was responsible for th emarketing of financial products, including those the subject of the investigationordered on 15 June 1998. The executive in charge of this division, Nigel D 'Arcy ,reported to Mr Lacey as Chief Executive, and thereafter to Mr Seym our as ExecutiveDirector until 1 January 1995. From the latter date until 23 M ay 1997 he reported tothe General Manager - Banking, and thereafter, up to the date of appointment of theInspectors, to the Chief Operating Officer.The FASD comprised a number of financial services m anagers, an investmentmanager and support staff, reporting to Mr D'Arcy.W hile the financial results of the FASD were accounted for in NIBFSL, the FASDpersonnel were at all times during the period covered by the investigation employedby the Bank.The Internal Audit FunctionThe position of Head of Audit was held by a number of individuals during the periodcovered by the investigations - Hilary Flood, Tim McCorm ick, Enda Carberry andPaul Harte.The Head of Audit reported to the Chief Executive until 1 July 1991. From that datehe reported d irectly to the A udit Com mittee of the Board, with reporting to theGeneral Manag er - Corporate Services in respect of operational and administrativematters. Responsibility for internal audit was transferred to National AustraliaBa nk 's Eu ropean A udit function, based in Glasgow, in April 1997, at which time theaudit approach and form of audit report were also significantly changed.


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Review of branch audit reports prepared by the Ban k's internal audit function was asignificant element in the Insp ectors' work; this is addressed in greater detail at page17 below.

BACKGROUND TO APPOINTMENT OF INSPECTORSSale of CMI Insurance PoliciesIn January and February 1998 RTE television reported that NIB had been involved inthe effecting of policies of life assurance on behalf of its customers with a number ofcomp anies in the Clerical Medical International Group ("C MI"), com panies said notto be authorised un der EU insurance legislation to carry on the b usiness of lifeassura nce in the State. It was later disclosed that in addition to CMI, policies w ereeffected on behalf of its customers with Scottish Provident International LifeAssurance Limited, with an address in the Isle of Man, and Old M utual International(Guernsey) Limited, with an address in Guernsey in the Channel Islands, bothsimilarly said to be unauthorised.The key news m edia allegations were: Bank representatives gathered information on customers holding non-residentaccounts, accounts in false names and customers with funds that had not beendisclosed to the Revenue;

The identified customers were invited to participate in an off-shore life assurancelinked investment scheme with CMI; Most of the mo nies invested were redeposited with the Bank; for the accountholders this had the effect that the nature of their original deposits, which in m anycases was at the risk of discovery by the Revenue, was transformed; Senior managers in the Bank were aware that the off-shore investment schemewas being used to help customers evade tax, and Some senior managers of NIB encouraged customers to evade tax.On 23 M arch 1998 the Minister for Enterprise, Trade and Em ployment, pursuant tothe provisions of the Insurance Acts, appointed an authorised officer to examine theaffairs of NIBFSL in light of these allegations.Interest and Fee Charging PracticesOn 25 M arch 1998 RTE television reported that employees of the Bank, underpressure to increase profits, had operated two distinct practices whereby impropercharges were mad e to customer accounts.The report claimed that interest charges had been increased, or "loaded", without


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legitimate reason, and without customer knowledge, in four b ranches of the Bank - atCarndonagh, Carrick-on-Shannon, Cork and Walkinstown. The report added thatalthough the B ank 's internal auditors had identified the practice of interest loading attw o of these branches, no refunds had been made to customers.It was also alleged in the programme that customers' fees had been uplifted in theCollege Green branch of the Bank in November 1989 without customer knowledge orunderlying justification.Concern at these allegations prompted the Minister for Enterprise, Trade andEmploym ent to apply for the appointment of inspectors to the Bank, un der Section 8,Com panies Act, 1990, and the appointment of the Inspectors was ordered by the HighCourt on 30 M arch 1998, as set out above.Report of Au thorised OfficerOn 4 June 1998 the authorised officer appointed to investigate the affairs of NIBFSLreported to the Minister on an interim basis. From his examination of policy files o fall persons w ho had purchased policies through NIBFSL in the period 1990 to 23March 1998 from CM I, Scottish Provident International Life Assurance Limited, andOld M utual International (Guernsey) Limited it appeared to him that: 282 policy holders might be in breach of Section 9, Insurance Act, 1936, and thatthe comm ittal of these breaches appeared to have been assisted by p ersonsemployed by NIBFSL; The CMI product was promoted, to some limited extent, as a tax avoidancevehicle, and In the period prior to the removal of Exchange Controls in 1992, NIBFSLfacilitated the movem ent of funds of Irish residents out of the country.The authorised officer recommended to the Minister that his interim report be passedto the D irector of Public Prosecutions for his consideration and that it be passed to theinspectors investigating the affairs of the B ank, so that they might consider wh etherthey wished to broaden the scope of their investigations to encompass NIBF SL.This did not becom e necessary as the Minister applied to the High Court on 15 June1998 to have inspectors appointed to investigate the affairs of NIBFSL and, as set outabove, the Inspectors w ere appointed to carry out such investigation.

ORGANISATION OF THE REPORTFrom the time the Inspectors w ere appointed to investigate the affairs of NIBFSL inaddition to investigating the affairs of N IB, both investigations w ere carried on inconjunction. Wh ile a separate interim report relating to the Bank was furnished tothe High Court on 10 June 1998 and a similar report relating to the Com pany was


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furnished to the High C ourt on 11 August 1998, all subsequent interim reports, datedrespectively 17 Decem ber 1998, 29 July 1999, 27 July 2000, 3 December 2001, 17July 2002 and 28 July 2003 related to both investigations. In addition, the matter wasmentioned before Mr Justice Kelly on 4 November 2003 and on 4 February 2004,when the position in the two investigations at that stage was the subject of an affidavitpresented to the Court. The matter was further mentioned before Mr Justice Kelly on2 April 2004.Following the established practice, this report also deals w ith both investigations.The report d eals separately with the improper practices investigated and theknowledge of, and responsibility for, these practices.First addressed is the evasion of Revenue obligations, under three headings asfollows:

Non-R esident Deposit Accounts Part 2Fictitious and Incorrectly Nam ed Accounts Part 3Special Savings Accoun ts Part 4The sale of CMI and other policies is addressed in Part 5.Improper practices relating to interest and fees are dealt with in the succeeding parts:

Improper Charging of Interest Part 6Improper Charging of Fees Part 7

Each of these parts, insofar as is appropriate, deals with the Ba nks' systems andprocedures, the developm ent of the practice investigated, the evidence received by theInspectors, and the Inspectors' conclusions on the existence of the practice.The related issues of knowledge and responsibility of Bank personnel in respect ofeach of the practices are addressed in Part 8.

APPROACH TO RESPONSIBILITYW hile the Inspectors are satisfied that many, but not all, branch managers engaged inthe practices being investigated, they are nonetheless of the opinion that seniormanagement in the Bank was responsible for the existence of those practices. Seniormanag ement had the duty to ensure that the practices did not exist and it was seniormanag ement that had the authority to put an end to them. The individual m anag er'sauthority w as restricted to what happened in his or her branch. He or she cannot beheld responsible for practices which existed across the branch network.In the opinion of the Inspectors, the position of the financial services managers in theFASD was different from that of the branch managers. They were few in number,never exceeding six and mostly being only five, and they m et regularly so that each


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was aware of the practices and activities of the others. The Inspectors have found anum ber of these financial services managers, together with certain mem bers of thesenior management team, responsible for the promotion of the CMI policies as asecure investment for funds undisclosed to the Revenue.

LEGAL ADV ICE AND COURT ACTIONSThe Inspectors engaged W illiam Fry as their legal advisors. Assisted by Counsel,W illiam Fry has advised on various issues arising in course of the Ins pectors' workand has represented them in the Court actions referred to below.Court Action - Concerns of Prospective IntervieweesAt the comm encement of their investigation of the affairs of the Bank the Inspectorswrote to all current or former employees of the Bank who had held positions at thelevel of m anager or above within the Bank during the period covered by theinvestigation. The purpose of the letter was to request that they furnish to theInspectors all information or documentation in their possession that might be relevantin any way to their enq uiries.Certain em ployees replied directly to the Inspectors. In addition the Inspectorsreceived responses from solicitors acting for individual em ployees or formeremploy ees of the Bank w ho claimed that their clients, if interviewed by theInspectors, would be entitled to certain rights, the m ost important of which w ere: the right to be legally represented, the right to advance notice of all questions to be put to them, the right to receive all documents concerning them, and the right to refuse to answer questions if the answers might incriminate them.In view of the claims being made on behalf of the proposed interviewees, theInspectors w rote to the solicitors who had m ade them setting out the procedures theyintended to follow in conducting the investigation. The following is an extract fromthe letter sent by the Inspectors on 4 June 1998 to Mason Hayes & Curran, w horepresented 75 em ployees or former employees of the Bank:1. Right to refuse to answer quest ions on the ground of self incrimination

We have been advised that a person giving evidence to inspectors pursuant toSection 10 of the Companies Act, 1990 is not entitled to refuse to answer anyquestion on the ground that the answer may tend to incriminate him or her. . ..

2. Procedures to be followedWe have explained that we consider that the irst phase of interviews withwitnesses will be an information gathering exercise. These interviews will beconducted in private. A transcript of the witness's evidence will be available


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to the witness from the stenographers on payment of the cost of the addit ionalcopy. We have no objection to any witness being accompanied by a legaladvisor at such interview but, with respect, we consider that it would beinappropriate, certainly premature and probably impossible to treat suchinterviews as approximating to a trial with an entitlement to attend and crossexamine the evidence given by other witnesses.There can be no quest ion of our indemnifying your clients or any of them inrelation to costs, whether legal or otherwise. Section 13 of the CompaniesAct, 1990 states that the expenses of and incidental to the investigation shallbe defrayed by the Minister for Justice. We have no role to play in this regardand any question of costs which you may wish to pursue must be addressed tothe Minister.We do not propose to circulate l is ts of questions in advance of the taking ofevidence from witnesses. Given the nature of our work, it will be impossibleto predict with certainty what questions will or will not arise at any particularinterview.If, however, the outcome of the irst phase of interviews indicates that it ispossible that adverse conclusions may be drawn in relation to certainindividuals dependent in whole or in part on the testimony of others, then it isour intention that a hearing will be held at which such issues can beaddressed, and at which persons who may be at r isk of an adverse finding willbe entitled to attend to hear the evidence, cross examine the witnesses and giveevidence themselves. In the l ight of these procedures, we consider i t would beinappropriate and inconsistent with the statutory procedure to provide copiesof the draft Report to witnesses and invite comments on it.

A letter in similar form was sent to the other solicitors who had written to theInspectors. The Inspectors decided that the issues raised by the solicitors who hadwritten to them should be determined as rapidly as possible since, if left uncertain,they would have resulted in continual delays. Accordingly, the Inspectors soughtdirections from the High Court pursuant to Section 7 (4) of the C omp anies Act, 1990as to whether a right to refuse to answer questions on the grounds of possible selfincrimination could be asserted by interviewees in the context of their investigations.The Inspectors also sought a determination that the procedures w hich they propo sedto adopt, as outlined in their letter of 4 June 1998 to Mason Hayes & C urran, wereappropriate and proper for the purpose of the investigations.The application for directions was heard on 10 July 1998 before Mr Justice K ellywho, by his Order of 11 June 1998, directed that the firms of solicitors representingemployees and former employees be asked to agree amongst themselves on thenomination of one named individual to represent all of their clients and to n ominateone firm of solicitors and one team of Counsel to appear on the hearing of the above-noted issues. A representative respondent was duly nominated and the matter camefor hearing in the H igh Court before the late Mr Justice Shanley who, in his


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judgem ent delivered on 13 July 1998, declared:that persons (whether natural or legal) from whom information, documents orevidence are sought by the Inspectors in the course of their investigation underthe Companies Act, 1990 are not entitled to refuse to answer qu estions put bythe Inspectors or to refuse to provide documents to the Inspectors on thegrounds that the answers or documents may tend to incriminate him, her or it.andthat the procedures outlined by the Inspectors in their letters dated the 4thJune, 1998 [to Mason Hayes & Curran and others] are consistent with therequirements of natural and constitutional justice.

A copy of the H igh Court Order is set out at Appendix 5.The representative respondent lodged Notice of Appeal to the Supreme C ourt againstthe entire of the judge men t dated 13 July 1998.The Judgem ent of the Supreme Court was delivered on 21 January 1999 by Mr JusticeBarrington, all of the other members of the Court concurring. The judgem ent upheldthe decision of the late Mr Justice Shanley with the added proviso that " a confessiono f a B ank official obtained by the Inspectors as a result of the exercise by them oftheir powers under Section 10 of the Companies Act, 1990 would not, in general, beadmissible at a subsequent criminal trial of such official unless, in any particularcase, the trial Judge was satisfied that the confession was voluntary". The appealagainst that part of the judgem ent of the late Mr Justice Shanley w hich approved theprocedures which the Inspectors proposed to adopt was withdrawn, leaving standinghis decision on this issue.A copy of the Order of the Supreme Court is set out at Appendix 6.Court Action - Scope of Enquiry into DIRT-related MattersOn 17 Decem ber 1998 the Dail passed a resolution pu rsuant to the Com ptroller andAuditor G eneral and Comm ittees of the Houses of the Oireachtas (Special Provisions)Act, 1998, which had been passed into law on 16 December 1998. This resolutionprovided inter alia that the Comptroller and Auditor G eneral be requested to carry outan industry-wide investigation into the operation of Deposit Interest Retention Tax("DIR T") by financial institutions and to furnish a report which w ould set out suchfacts and e vidence as he deem ed ap propriate and wo uld facilitate the efficient,effective and expeditious completion of the hearings by the Comm ittee of PublicAccounts into such matters.One of the consequences of this resolution was that the Com ptroller and Au ditorGeneral w ould be required to carry out an investigation into the operation of DIRT byNIB.The B ank contended that, if the Inspectors were also to investigate com pliance by theBank with its DIRT obligations, this would result in a duplication of investigation andthat it was " unneces sary , wasteful and time consuming, both for the investigating


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authorities and or the Bank and the Company, because the same issue is beingcovered both by the Inspectors and by the Comptroller and Auditor General...[when] both ... have all the necessary powers to conduct and complete a thoroughinvestigation ...". The Bank accordingly sought an Order directing that theInspectors should not engage in a DIRT comp liance investigation of the Bank whichextended beyond effecting such investigation as they considered necessary to reportupon any issues of unlawful or improper practices that exist or existed in the B ankfrom 1988 to 30 March 1998 which served to encourage the evasion of any Revenueor other obligations on the part of the Bank or third parties or otherwise, and w hichrelated to the effecting or selling or m arketing, in any capacity whatsoever, ofinsurance policies through the Bank and/or NIBF SL w ith the life assurance comp aniesreferred to in the Order of 15 June 1998.The B ank 's application was refused by Mr Justice Kelly on 19 March 1999.A copy of the High C ourt Order is set out at Appendix 7.Court Action - Access to Records of Isle of Man BranchIn September 1991 the Bank obtained a licence to operate a branch in the Isle of M anand this branch was available to receive deposits from 1 October 1991. On 1Decem ber 1999, in the context of paragraph 2 (vii) of the Order dated 30 M arch 1998,the Inspectors w rote to the Bank requesting that they be provided w ith a listing of thedeposit accounts at the Isle of M an branch of the Bank at 30 September 1992, suchlisting to include the name(s) on the account, the address(es) of the depositor(s) andthe balance standing to the credit of each account at 30 September 1992.The Bank responded that it had been advised by Isle of Man coun sel that to supp ly theinformation sought without the protection of an Order of the Isle of Man Courtswould expose the B ank to legal action in the Isle of Man Courts from account holdersat its Isle of Man branch, on the basis that confidential information was being releasedby the B ank to a third party.On 6 October 2000, the Inspectors brought a petition to the High Court of Justice ofthe Isle of Man pursuant to the Bankers' Books Evidence Act 1935 for an Orderpermitting inspection of the books of the Isle of Man branch of the Bank for th epurpose of preparing a list of deposit accounts at that branch as at 30 September 1992,giving the details requested in the letter of 1 December 1999.The Bank opposed the Inspectors' petition and on 27 April 2001 the petition wasrefused on the basis that the investigation by the Inspectors into the affairs of the Bankis not a legal proceeding for the purposes of the Bankers' Books Evidence Act 1935.


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W O R K D O N ESummaryThe wo rk in the investigations was carried out in two ph ases in accordance w ith theprocedures which w ere approved in the High Court by the late Mr Justice Shanley inhis judgem ent of 13 July 1998. The details of the procedures are set out above atpag es 12 and 13. W hile the entire of Judge Shanley's judgement was appealed to theSupreme C ourt, the appeal against the part approving the Inspectors' procedures waswithdrawn, so Judge S hanley 's approval of their procedures remained unaltered.The details of the two ph ases are set out below.The First PhaseIn the first phase, the Inspectors' work broadly comprised four principal elements: Examination of documents furnished to the Inspectors by the Bank on request and,to a lesser extent, documentation provided by other parties; Sworn oral evidence taken from present and former Bank staff and executives,customers of the Bank, and a number of other individuals considered by theInspectors to be in possession of information concerning the affairs of the Bank orthe Company;

Discussions with officials of the Bank, both of a substantive and facilitativenature, and Evaluation of w ork which the Bank carried out in order to establish the factualposition in relation to the allegations and to effect appropriate action.The Inspectors also: Advertised their appointment in national daily newspapers summ arising the termsof their appointment to investigate the Bank, seeking information relating to thepractices being investigated. Corresponded and met with representatives of various State Agencies includingthe Revenue Commissioners, the Central Bank of Ireland and the Department ofEnterprise, Trade and Employment.The Inspectors did not investigate individual customer accounts, as: they were advised that the Bank had some 317,000 customer accounts as of 31March 1998; such work would have been extremely time consuming and costly, and would have replicated work which the Bank had advised the Inspectors was to beundertaken by its staff, the results of which were shared with the Inspectors.


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The findings set out in this report therefore do not include listings of improper interestor fee charges, bogus non-resident accounts, or branches ranked by reference to theincidence of improper practice. Detailed investigations carried out by the Bank, andthe results thereof, are mentioned in the relevant sections of the report, but neither theInspectors nor their agents participated in this work.Review of DocumentationThe Inspectors were assisted in their examination and interpretation of documentationby senior personnel from PricewaterhouseCoopers.Particular em phasis was p laced on review of internal audit reports on branch visitscarried out during the period covered b y the investigation, as they represent acontemporaneous record of the results of examination of branch procedures andrecords over that time. The Bank advised the Inspectors that a total of 202 branchaudit reports had been prepared in the period 1988 to 1997, but that 38 of these wereno longer available (20 in respect of 1988, 17 in respect of 1989 and 1 in respect of1995). The Insp ectors' review was perforce limited to the 164 reports furnished.InterviewsAll sworn interviews w ere carried out by the Inspectors; PricewaterhouseCooperspersonnel assisted in preparing for interviews (particularly by way of identifyingrelevant docum entation), and in following up matters arising from interviews.

A total of 235 sworn interviews w as conducted in the first phase of the investigations,this total comprising 142 interviews w ith customers of the Bank (the majority ofwho m were investors in CM I policies), 87 interviews w ith present or former Bankstaff, including senior executives and directors, 10 of whom were interviewed onmore than one occasion, and 6 interviews with individuals falling into neither of thesecategories. A stenographer was present at each interview, and copy transcripts w eremade av ailable on request to interviewees. Due to a Court action initiated by theInspectors, required to clarify the position of interviewees and some ancillary m atters(see above), with three exceptions, interviews w ith Bank personnel did not com menceuntil February 1999.Approx imately 113 people held the position of branch manager during the periodcovered by the investigations. After interviewing 35 of these managers, theInspectors w ere satisfied that they had received sufficient evidence to enable them toconclude that the practices being investigated existed.The Inspectors have concluded that it would not be fair to name in their report thebranch managers and Bank customers interviewed. Likewise, branch manager andcustomer interviewees quoted in the report have n ot been identified.Num erous discussions were held with Bank executives in the course of theinvestigation. A numb er of these were of a formal nature, particularly in relation toreports prepared, and action taken, by the Bank. There were many other meetings ona less formal basis, directed at expediting progress in the Inspectors' wo rk. In


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addition to these direct contacts, there was extensive correspondence both with theBank and its legal advisors.Review of Actions Taken by the BankFieldwork in review of actions taken by the Bank was carried out byPricewaterhouseCoopers personnel working to the Inspectors' direction. Thesereviews were followed by formal meetings with senior Bank personnel and bypresentations from Bank executives in relation to actions taken by the Bank in theperiod following the Inspectors' appointment.Authorised Officer - AcknowledgementIn conducting their investigation into the affairs of NIBFSL, the Inspectors had thebenefit of sight of the report of the authorised officer Mr Cosgrove, and of discussionswith Mr Cosgrove, w hose assistance in expediting the initial phase of theirinvestigation of the Com pany the Inspectors gratefully acknowledge.The Second PhaseIndividualsAfter the conclusion of the first phase of the investigations, the Inspectors preparedtheir provisional findings and then wrote to every individual who could be ad verselyaffected by them , setting out the provisional findings which affected the recipient anddetails of the evidence relevant to his or her knowledge and responsibility.In this letter each person was invited to attend before the Inspectors for the purpose ofmaking w hatever submission or argument they might wish to present. In additionthey were informed that they could give evidence themselves, call witnesses, andexamine any witness if they so wished. They were requested to let the Inspectorsknow within fourteen days whether they wished to attend before the Inspectors ormake a written submission.Progress during this phase was very slow. It was not practical to impose strict timelimits.The Inspectors received numerous requests for documentation and for transcripts ofthe evidence of other persons interviewed by the Inspectors; consideration by theparties of material furnished on foot of these requests proved time consuming.There were significant delays while individuals were making up their mind if theywished to cross-examine someone and, if they did, who it should be. Then, wherecross-examination of a witness was sought, adequate notice had to be given to thewitness, his or her availability confirmed, and a date fixed which suited all partiesand, since there were altogether twenty four separate cross-exam inations of witnesses,this part of the phase occupied a considerable amount of time. A number ofindividuals introduced expert witnesses; several also offered further direct evidence.


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In addition, the Inspectors and their legal advisors had to deal with a substantialvolume of correspondence from the lawyers of the persons involved.Not all the parties to whom the Inspectors w rote in this phase of the investigationssought to cross-examine witnesses. With one exception however, all made w rittensubm issions, the majority supplementing these by oral submission through co unsel.As a result of the v arious matters referred to, this part of the second phase of theinvestigation took approximately eighteen months.The Inspectors considered, at length and in detail, all matters arising during this phase- the points raised by the legal advisors of the individuals concerned, the testimon y ofwitnesses cross examined, the evidence of expert witnesses, and the submissions,written and oral, made on behalf of the party. As a result, the provisional findings inrespect of a number of persons were modified.The submissions received on behalf of the different individuals were of suchsubstance and variety that it would not be possible for the Inspectors to give theirresponses to each without inordinately increasing the volume of the report. TheInspectors have, how ever, taken fully into consideration the subm issions of eachindividual before reaching a final con clusion as to their know ledge or responsibility.In arriving at their conclusion in regard to any individual, the Inspectors relied solelyon evidence notified to such individual and on any additional evidence adduced by theindividual by way of examination or cross-examination of a witness or witnesses.W here any conflict arose between the evidence of any individual and the evidence ofa witness or w itnesses which would support an adverse finding, the individual wasgiven an opportunity to cross-examine such witness or witnesses, and the conflict wasresolved by the Inspectors having regard to their view of the credibility of theindividual and of the relevant witness or witnesses in the light of their cross-examination.The BankFollowing the completion of their provisional findings in respect of individuals, theInspectors, on 1 August 2003, furnished their draft report to the Bank. In their letteraccom panying the draft, the Inspectors informed the Bank, as they had informed eachindividual to whom they had written at the commencem ent of the second phase, thatin addition to making submissions either written or oral, or both, the Bank would beentitled to cross exam ine witnesses on whose evidence the Inspectors were relying,and to call further evidence if it wished. The Bank did not take up the option ofcalling or cross-examining any witnesses.Following a numb er of preliminary m eetings, on 24 March 2004, senior executives ofthe Bank, accompanied by the Bank's lawyers, delivered to the Inspectors the Bank'sresponse to the draft report. The response is a document entitled "Reaction Pap er"containing four and a half pages of text and seven schedules, which is reproduced infull at Appendix 19.


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In this Reaction Paper the Bank does not take issue with anything contained in thedraft report and does not seek any change in it.The text of this report, therefore, is unaltered from that passed to the Bank on 1August 200 3, apart from this account of the second phase of the investigation as itrelates to the Bank, the inclusion of the Reaction Paper as an additional Appendix anda num ber of references thereto in the text, some m inor textual amendm ents, and asmall number of deletions arising from the Inspectors' final review of the draft report.In the Reaction P aper the Bank expresses its regret that during the period underinvestigation events took place which fell short of the standards custom ers and thirdparties dealing w ith the Bank were entitled to expect, and apologises to all those whohave been affected by the events. The Bank describes the terms of the draft report asbeing of the utmo st gravity and states that accordingly the B ank 's view is that thetaxpayer should not be liable for the Inspectors' costs and the Bank will thereforeoffer to discharge the Inspec tors' reasonable taxed costs of the investigation, asrecomm ended in the draft report furnished (see below).The Reaction Paper also sets out how the Bank has responded, and is responding, tocertain of the Inspectors' findings, and the changes the Bank has made to ensure thatevents of the type suggested in the original allegations could not recur.At page 4 of the Reaction Paper, the Bank lists payments, incurred and anticipated,amou nting to Euro 64 million, arising from the issues addressed in the investigations,of which Eu rol0.8 million relates to the Bank's ongoing "Offshore Investors'Settlement Program me" and Eu rol2 .5 million represents refund and com pensationpayments to customers in respect of fees and interest. This latter amo unt include santicipated additional refunds of Euro 10.6 million arising from a programm e of workand refunds devised in light of the Inspectors' views expressed in their draft report.This programm e is described at Schedule V to the Reaction Paper.

RECOMMENDATION ON COSTSSection 13 (3) of the Com panies Act, 1990 provides that "The report of an inspectormay, i f he thinks f it include a recommendation as to the direct ions ( if any) whichhe thinks appropriate in the light of his investigation, to be given under subsection(1)" by the Court in regard to the payment of the expenses of and incidental to theinvestigation.The Inspectors consider that their report should include a recomm endation as to thedirections to be given under subsection (1).The Insp ectors' recomm endation, in the light of their investigation, is that the Bankshould repay to the M inister for Justice, Equality and Law Reform the entire of theexpenses of and incidental to the investigation.


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P ART 2

E V A S I O N O F R E V E N U E O B L I G A T I O N S :I N C O R R E C T L Y C L A S S I F I E DN O N - R E S I D E N T D E P O S I T A C C O U N T S


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EVASION OF REVENUE OBLIGATIONS:I N C O R R E C T L Y C L A S S I F I E D N O N - R E S I D E N T D E P O S I T A C C O U N T SLEGISLATIVE REG IMEPosition p rior to the introduction of Deposit Interest Retention TaxDeposit Interest Retention T ax ("DIRT ") was introduced by the Finance Act, 1986.Prior to the introduction of DIRT, under Section 175 of the Income Tax A ct, 1967, abank w as obliged, if required to do so by notice from an Inspector of Taxes, to makeand deliver to the Inspector a return of all interest paid or credited without deductionof tax, giving the names and addresses of the persons to whom the interest was paid orcredited and stating in each case the amount of the interest. The statutory limit belowwhich there w as no reporting requirement for gross interest paid or credited on adeposit was IR50.However, if a person to whom any interest was paid or credited served a notice inForm F, on the bank:(i) declaring that the perso n beneficially entitled to the interest was not thenordinarily resident in the State,(ii) requesting that the interest not be included in any return under Section 175 ofthe Income T ax Act, 1967, and(iii) undertaking to advise the bank without delay in the event of the personbeneficially entitled for the time being to the interest becom ing ordinarilyresident in the State,no return under Section 175 was necessary in respect of that interest.W here the bank w as not satisfied that the person w ho had served the notice in Form Fwas no n-resident at the time the claim was m ade, it was obliged to request that thatperson provide the bank with an affidavit stating the name, address and country ofresidence of the depositor at the time the interest was paid or credited on the dep ositaccount the subject of the notice in Form F served on the bank and, if the depositorwas no t the beneficial owner of the interest paid or credited on the account, givinglike particulars in respect of the beneficial owner. The declarations in Form F wereinspectable by the Inspector of Taxes on a named individual basis only.Position after the introduction of DIRTFollowing the introduction of DIRT, a bank, as a relevant deposit taker, is requiredunder Section 32 of the 1986 Act to treat every deposit made with it as a relevantdeposit and to deduct tax at the standard rate or, in the case of a relevant deposit heldin a Special Savings A ccount, at the reduced rate in force at the time, from all interestpaid or credited on the deposit, unless satisfied that the deposit is not a relevantdeposit.


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Excluded from the definition of a relevant deposit are, inter alia: A deposit in respect of which, up to 5 April 1995, no person "ordinarily resident"in the State is beneficially entitled to any interest (or after 5 April 1995 no perso n

"resident" in the State) and a non-resident declaration in a form prescribed orauthorised by the Revenue C omm issioners has been made to the bank pursuant toSection 37 of the Act by the person or persons to whom any interest on the depo sitis payable; A deposit by a charity the interest on which is exempt from income tax or, in thecase of a company, Corporation Tax, and in respect of which a declarationpursuant to Section 38 of the Act has been made to the bank; A deposit made on or after 1 January 1993 by, and the interest on which is

beneficially owned by, a company within the charge to Corporation Tax and inrespect of which a declaration pursuant to Section 37B of the Act has been m adeto the bank, and A depos it mad e on or after 1 January 1993 by, and the interest on which isbeneficially owned by, a pension scheme and in respect of w hich a declarationpursuant to Section 37B of the Act has been made to the bank.During the period the su bject of the investigation, banks were obliged to make areturn to the Revenue Com missioners by 20 April each year detailing the interest paidin the year to the previous 5 April on which DIRT w as exigible, and the DIRT inrespect of that interest, and were obliged at the same time as the return was due to payto the Revenue Com missioners the balance of the DIRT deductible for the relevant taxyear, having taken account of any amount paid by way of interim payment on accountof the DIRT deductible.Non-Resident DeclarationThe no n-resident declaration made to the bank m ust be made by a person to w hominterest is payable, mu st be signed by that person and m ust: Declare that the person or persons beneficially entitled to interest on the deposit

up to 5 Ap ril 1995 is not or are not "ordinarily residen t" in the State or thereafteris not or are not "resident" in the State; State the names, addresses of principal places of residence and the countries ofordinary residence or residence, as applicable, of the person or persons entitled tointerest on the deposit at the time the declaration is made; and Contain an undertaking by the declarer that, if the non-residence conditions ceaseto be satisfied, the bank will be advised accordingly.Before Nov emb er 1993, when the Revenue gave a concession that a non-residentdeclaration would also serve to exempt interest on non-resident accounts from any


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requirement to report it to the R evenue, it remained necessary for banks to hold aForm F for this purpose.S u m m a r yThe relevant provisions of the Finance Act, 1986 in relation to non-resident depositaccounts held by individuals may be sum marised as follows. If a non-resident IrishPound denominated deposit account (or a foreign currency deposit on or after 1January 1993) is to be excluded from the definition of a relevant deposit, andaccordingly free from the obligation to have D IRT deducted, a bank must be satisfiedthat in respect of such deposit up to 5 April 1995 no person "ordinarily resident" inthe S tate w as beneficially entitled to any interest (and after 5 April 1995 that noperson "resident" in the State was so entitled) and in addition the bank m ust hold acomp leted non-resident declaration form complying with the requirements indicatedin the preceding paragraph (subject to certain transitional provisions in relation toforeign currency deposits).

N I B P R OC ED UR ESPrior to the introduction of DIRT, the Bank maintained accounts designated non-resident.The procedures laid dow n by the Bank for the introduction and operation of DIRTwere communicated to branch managers and other branch personnel in various ways,principally by way of Special Circulars. A summary of the relevant sections of theprincipal com mun ications is set out below: Special Circular No. N13/86 was issued by Northern Bank Limited (to branches inthe Republic of Ireland only) on 18 March 1986. This circular advised theintroduction of DIRT w ith effect from 6 April 1986 and set out the manner inwhich n on-resident depo sit accounts were to be "flagged" at account level forDIRT purposes. It stated that the Ba nk's mainframe computer would examine allaccounts on the system and would set the appropriate retention tax flags for eachaccount category; retention flag "B " would be set on all accounts at that timedesignated as non-resident, with the implication that interest earned or credited on

such accounts w as to be paid without deduction of DIRT. Branch staff wererequired to ensure that the correct flags were set for any accounts opened after 4April 1986. Special Circular No. S5/86 was issued by the Bank to all branches on 24 July1986. This circular gave notice of the availability of declaration forms for non-resident deposit accounts to satisfy the declaration requirements of Section 37 ofthe Finance Act, 1986 and advised that such forms must be com pleted by 5 April1987 for all non-resident accounts which existed at 5 April 1986, in default ofwhich the account mu st revert to being liable to DIRT.


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Routine Circular No. R17/87 was issued to all branches on 1 April 1987, advisingthat all branches were to receive a report as at 6 April 1987 indicating the DIRTcategory of all deposit accounts. Branch staff were instructed to examine thisreport carefully and to ensure that the appropriate new declaration forms were inplace for all accounts identified as not liable to DIRT, in default of which theaccount m ust revert to being liable to DIRT. Special Circular No . S9/93, issued to all branches on 11 March 1993, advised thebranches of the introduction of branch Retention Tax Co mpliance Reports which,insofar as they related to non-resident accou nts, required the branch to:

o Exam ine all non-resident accounts flagged as exempt from D IRT to ensurethat they were valid non-resident accounts and that non-resident declarationswere held, ando Am end the DIRT flag so as to mak e liable to tax at standard rate all interest onany account w here the requisite non-resident d eclaration w as not held.

In support of the implementation of the new LiveLink system (ie the Ba nk's m ainsystem for maintaining customer account details and transactions) on 3 M ay 1994,a LiveLink Reference Manual was issued to all branches. The introduction states""It is imperative that all Branch staf f read and amil iarise themselves with thecontents of this manual prior to the implementation of the new system."The reference manu al introduced a new Non-Resident M onitoring R eport to beproduced on the working day after a static amendm ent had been m ade to any non-resident accounts at a branch. The purpose of the report was to highlightamendments on non-resident accounts which, prima facie, were inconsistent withthe non-resident status afforded to the account and w hich therefore requiredfurther investigation by or under the control of a managerial official at the branch.This official was obliged to identify and record the reason for the amendment, torecord his decision on the non-resident status of the customer and to attach bothrecords to the relevant non-resident declaration form.

Following consideration of the results of the DIRT Theme Audit described atpages 54 and 55 below, Special Circular No. SI 1/95 was prepared by the Ba nk 'sFinance and Planning D epartment and issued to all branches on 8 March 1995under the signature of Frank Brennan, General Manager. The circular, whichreplaced all previous circulars in relation to DIRT, stated that "DIRT must bededucted at the standard rate unless a valid declaration is held which has beensigned, dated and in all other respects fully completed by the customer. " Thecircular pointed to the responsibility of the staff mem ber opening a non-residentdeposit account to have a thorough understanding of the procedures for th eopening of such accounts and to obtain fully and properly completeddocumentation on their opening.The circular also required that a person who wished to avail of DIRT-exempt non-resident status must produce documentation such as a driving licence, passport or


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other identification with details of the person 's address and signature as ev idenceof the entitlement to the non-resident status sought and that a photocopy of theidentification documen tation be retained on file by the branch. Special Circular No. S22/95, which was issued to all branches on 15 May 1995,introduced semi-annual DIRT compliance reports, to be completed by each branchmanager and returned to the Ba nk's Finance and Planning Department. Thestandard-form report declared that the branch m anager understood the co ntents ofSpecial Circular No. SI 1/95 and either confirmed that the branch had properstatutory declarations on file for all accounts classified as DIRT-exempt non-resident accounts or, where a proper statutory declaration was not held, detailedthe action which the m anager proposed to take to rectify the situation.

The circular also introduced a one page DIRT guide for use by cashiers and o therbranch staff which sought to summarise the contents of Special Circular No .SI 1/95 and included the following direction to bran ch staff:The official who opens the account m ust be fully satisfied that the customer isa non resident and I. D. m ust be produced before an account may be flaggednon resident.

Special Circular No. S20/96 was issued to all branches on 24 April 1996. Thiscircular, while em phasising that it was not the role of the Bank to give tax adviceto prospective customers, set out the residency requirements for entitlement tonon-resident status for DIRT and directed that:The bank should satisfy i tsel f that the customer is a bona fide non-resident,documentary evidence should be produced e.g. foreign driving l icence,passport, etc.

Special Circular No. S22/98 was issued to all branches on 7 December 1998,advising that a listing of all accounts at the branch designated as n on-residentwould shortly issue from Head Office. Each branch manager was required toexamine all non-resident declarations, and, where the declaration w as dated after 8March 1995, the attached identification documents introduced b y Special C ircularNo . S I 1/95, and certify by com pleting and signing a branch confirmationcertificate that he/she w as com pletely satisfied that all customers o n the list issuedfrom Head Office remained non-resident.

Inspectors ' Cri t ic i sm of the Spec ia l CircularsThe Circulars referred to above failed to inform branch staff expressly of theprovisions of Section 32 (2) of the Finance A ct, 1986, which require that a "relevantdeposit taker shall treat every deposit with it as a relevant deposit unless satisfied thatit is not a relevant deposit" - ie in the context of non-resident deposit accounts theBank was obliged to treat every deposit account as an account in respect of whichDIRT was to be deducted from interest paid or credited on the account, unless theBank held a valid declaration from the depositor and was satisfied that the person


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beneficially entitled to the interest was genuinely non-resident. It mea nt that theBank w as obliged to look at all non-resident deposit accounts on its books, since theprovision applied both to existing and future accounts, and to deduct D IRT from theinterest paid or credited on any accounts in respect of w hich it was not satisfied thatthe depositor was non-resident. This was never clearly explained to branch staff.Because of this omission, managers seem to have believed, as appears from theirevidence to the Inspectors, that, provided they had the declaration from the customerthat he was non-resident, nothing further was required of them.The first time that branch personnel w ere asked to concern themselves with thevalidity of non-resident deposit accounts was when they received Special Circular No.S9/93, which required them to examine such accounts "to ensure that they are validNon-Resident accounts and that non-resident forms are held." While this Circularrequired that non-resident accounts should be examined in order to ensure they werevalid, the Circular did not specify how their validity should be tested. The Circulardid not state, as it ought to have, that a non-resident a ccount was not valid unless theBank w as satisfied that the person beneficially entitled to the interest on the ac countwas non-resident. Furthermore, the only circumstance in which branch staff weredirected to take action was if a non-resident form was not held. In such a case thenon-resident flag w as to be amended so that DIRT w ould be deducted.Special Circular No. S I 1/95 introduced docum entary requiremen ts for the opening ofnew non-resident accounts. It required that before any new non-resident accou ntcould be opened, documentation had to be produced as evidence that the depositorwas resident outside the State (e.g. a driving licence or passport or other identificationwith details of the pers on's address and signature). But there was still the sameomission as before. Branch staff were not instructed that DIRT had to be deductedunless the Bank was satisfied that the depositor was non-resident. Because of this, anindividual w ho wa s resident, but happened to have a foreign passport, or a foreigndriving licence, would have been able to open a non-resident account. In regard toexisting non-resident accounts, the circular was also deficient. The only directiongiven was that DIRT ha d to be deducted at the standard rate "unless a validdeclaration is held which has been signed, dated and in all other respects fullycompleted by the customer".

Circular S22 /95, issued on 15 May 1995, refers to a DIRT aide memo ir prepared byFinance and Planning Department as a guide for use by cashiers and other branchstaff. It is stated that it summ arises the contents of Circular S11/95 but in fact it doesmore than that. It contains for the first time in any Bank d ocum ent relating to non-res ident accounts an ins truct ion th a t " The official who opens the account must be fullysatisfied that the customer is a non-resident..." This instruction, howe ver, concernsthe opening of new accounts only. The Guide does not deal with existing accounts.

BRANCH MANAG ER EVIDENCE ON OPERATION OF PROCEDURES

Present and former branch m anagers interviewed by the Inspectors have indicated thatthey did not believe there was any onus on them to check the veracity of the non-


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resident declarat ion made by a customer when opening a non-resident account, and i twa s not their practice to do so. The procedure followed was to have the depositorsign the signature card, and complete and sign the form of declarat ion. Thedeclarat ion was taken at i ts face value. The managers we re under pressure to getdeposits and did not question it . They considered the signature card and form ofdeclarat ion w as al l that was required, and this remained the posit ion unti l Ma y 1995when the Bank introduced account opening procedures to assist compliance with themon ey launder ing provis ions of the Criminal Justice Act, 1994.Il lustrat ive evidence from m anagers, which the Inspectors accep t:

[Prior to the Money Laundering Act] i f the customer came in and stated thathe was from wherever he was from, . ..we wouldn 't have carried out checks toauthenticate his address.

oooOoooInspector:

Manager:

When you were opening a non-resident account, whatprocedure did you adopt to satisfy yourself that the person wasin fact a non-resident?That they comple ted the form and s igned it. I would say, beinghonest, nothing more than that.Prior to the Money Laundering Act there was no onus on thebank at that stage to produce [proof o f identi ty] . ..we took theword o f the cus tomer .

oooOoooInspector: . .. did you feel that in regard to the form that you had to try and

satisfy yourself that the declaration was reasonably accurateor, put in a more negative way, that you had no reason tobelieve that it wasn 't accurate?

Manager: No . .. They were signing the form, not you.oooOooo

Manager: Just a signature card was all we required. Pre CriminalJust ice Act 1994, all we needed at that t ime for a non-residentaccount was the declaration and signature card.

Inspector: Yes. And what was the position in regard to checking whetheror not the person who was taking out the account was in fact anon-resident?

Manager: There was no obligation on me.


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oooOoooWe didn 't open a non-resident account unless the person had a non-residentaddress and came in and said they were non-resident. Then, and this wasbefore we had to have documentary evidence for opening accounts, you didn'tquery them to an extent because you were under pressure to get d eposits.

oooOoooI f somebody came in to open an account and said they were non-resident andthey signed the declaration, we accepted that. We didn't question them

further.oooOooo

The only t ime I saw pressure ... to do something with these accounts was in1995 when Paul Harte in early 1995 [addressed the issue at

Documents

National Irish Bank Report