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REPORT ON INVESTIGATIONS INTO THE

AFFAIRS OF

NATIONAL IRISH BANK LIMITED

AND

NATIONAL IRISH BANK FINANCIAL SERVICES


LIMITED

BY HIGH COURT INSPECTORS

MR JUSTICE BLAYNEY AND TOM GRACE FCA

APPOINTED 30 MARCH 1998 AND 15 JUNE 1998


SUMMARY AND INSPECTORS' OBSERVATIONS
SUMMARY AND INSPECTORS' OBSERVATIONS

Our work commenced on 30 March 1998, the date of our appointment to investigate
the affairs of the Bank, and its scope was broadened on 15 June 1998 on our
appointment to investigate also the affairs of National Irish Bank Financial Services
Limited. In the initial stages of the investigations, we requested and received a large
volume of documentation from the Bank. Preliminary review of this documentation,
in particular the reports of Internal Audit, indicated that the Bank had a case to answer
in each of the areas we were required to investigate.

We next initiated a programme of interviews, commencing with interviews of Bank


staff; this had to be suspended, however, almost immediately, when Bank employees
raised the issue of whether, when interviewed, they could refuse to answer our
questions if there was a risk that their answers might incriminate them. This issue
had to be determined in Court proceedings, which lasted until January 1999, and
concluded with a Supreme Court judgement to the effect that interviewees could not
refuse to answer our questions.

While these proceedings were pending we interviewed customers who had invested in
Clerical Medical Insurance ("CMI") policies and further considered the
documentation provided to us by the Bank.

Following resolution of the Court proceedings, we re-commenced interviews of Bank


personnel, meeting initially with branch managers and thereafter with senior
management, past and present, of the Bank.

Interviews with CMI policyholders and Bank personnel, together with review of
reports prepared by the Bank relating to interest and fee amendments and to the sale
of CMI policies, provided persuasive evidence of the existence of improper practices
in each of the areas we were investigating. Extensive further work was however
required to establish who was aware of, and responsible for, these practices.

Summary Conclusions - Improper Practices

Our conclusions on improper practices may be summarised as follows:

• Bogus non-resident accounts were opened and maintained in the branches,


enabling customers to evade tax through concealment of funds from the
Revenue Commissioners;
• Fictitiously named accounts were opened and maintained in the branches,
enabling customers to evade tax through concealment of funds from the
Revenue Commissioners;
• CMI policies were promoted as a secure investment for funds undisclosed to
the Revenue Commissioners;
• Special Savings Accounts 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.
At no time prior to our appointment did the Bank address the issue of a potential
retrospective liability to the Revenue Commissioners for tax arising from the
irregularities in the operation of DIRT.

Culture and Operational Environment

We consider it important to set the conclusions of our report in relation to tax evasion
in the context of the culture of the period the subject of our investigation. This was
highlighted in the report of the Committee of Public Accounts following their enquiry
into DIRT, published in December 1999. The problem of DIRT evasion was an
industry-wide phenomenon.

The operational environment in the Bank at the time has also to be taken into account
and the behaviour of individual branch managers and staff must be viewed in this
context. The branch network was target driven - there were, amongst others, targets
for fee income and deposits, but limited support by way of systems or training to
enable the achievement of these targets. Managers felt under pressure to meet these
targets, in the setting of which they had negligible participation and which many
considered unreasonable; they feared criticism and possible humiliation before their
fellow managers if they did not meet the targets set.

While many branch managers operated, or played a part in, the improper practices, we
have concluded that it would be inappropriate to find individual managers
responsible, as we believe that responsibility for the practices lay at a higher level in
the Bank. We must add also that we received no evidence that branch managers
personally derived any direct financial benefit from the operation of any of the
practices.

Summary Conclusions - Responsibility

We have concluded that responsibility for the improper practices which existed rests
with senior management 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 such
practices did not occur and, if they did, that they were stopped immediately.

We have also concluded that the Head of the Bank's Financial Advice and Services
Division, and a number of the financial services managers in that Division, were
responsible for the promotion of the CMI policies as a secure investment for funds
undisclosed to the Revenue.

We have also considered the discharge of their functions by the following:

• the Bank's internal audit;


• the external auditors to the Bank;
• the Audit Committee of the Board, and
• the Board of Directors.
We have concluded that, in respect of the matters under investigation, none of these
were responsible for the improper practices which pertained. We are however of the
opinion that both the external auditors and the Audit Committee were remiss in not
requesting that management quantify the potential retrospective liability to the
Revenue Commissioners arising from the high level of non-compliance by branch
staff with DIRT statutory requirements reported by Internal Audit in December 1994.

The Attitude of the Bank

We wish to record that in the first year of our investigations we believed that we did
not have the full co-operation of the Bank. The Bank's attitude during that period is
illustrated by the Bank's reaction to our December 1998 interim report to the Court, in
which we set out evidence received from investors in CMI policies, most of whom
were at the time customers of the Bank. We made it clear in our interim report that
we had reached no conclusion on this evidence, as we had not then heard any
evidence from the Bank. Notwithstanding this, we were heavily criticised by the
Bank, in correspondence conducted by the Bank's solicitors, for having prematurely
made up our minds on the matters we were investigating. The Bank's criticism was
described by Mr Justice Kelly, in a judgement delivered on 19 March 1999, as wholly
unjustified.

Subsequently, the working relationship with the Bank improved. We had a number
of helpful meetings with the Bank's Project Director, and with other members of the
Bank's senior management.

At the Bank's request, in October 2000 we attended a presentation from senior


executives of the Bank on changes in organisation, management and procedures since
our appointment. We were informed that many of these changes would have taken
place in any event as part of global developments in the National Australia Bank
Group, but that there had been special emphasis on compliance issues in Ireland as a
result of the news media reports of improper practices at NIB. The changes outlined
at this presentation are summarised at Appendix 18. This summary was subsequently
updated by the Bank as part of its response to our draft report - see below.

The Bank's Response to our Report

We delivered our draft report to the Bank on 1 August 2003. The Bank's response,
dated 24 March 2004, is a brief Reaction Paper, supplemented by documents set out
in 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, and
offers to discharge the Inspectors' reasonable taxed costs of the investigation.

The documents in the schedules set out the changes made by the Bank in the policies
and controls relating to the matters the subject of our investigation, and indicate how
customers deemed to have suffered loss as a result of the Bank's actions will be
refunded or compensated.
The Paper also sets out details of costs amounting to Euro 64 million incurred by the
Bank, or anticipated, in addressing the issues identified in the investigation. This
total includes Euro 23.3 million in respect of customer refunds and compensation
resulting from the investigation, and the Bank expects that there will be further
payments on top of this figure.

Closing Observation

In order to form a balanced view of our findings, the report, together with the
appendices, should be read in its entirety.
CONTENTS
REPORT ON INVESTIGATIONS INTO THE AFFAIRS OF NATIONAL
IRISH BANK LIMITED AND NATIONAL IRISH BANK FINANCIAL
SERVICES LIMITED BY HIGH COURT INSPECTORS MR JUSTICE
BLAYNEY AND TOM GRACE FCA APPOINTED 15 MARCH 1998 AND 30
JUNE 1998

Page
PART 1: INTRODUCTION

APPOINTMENT OF INSPECTORS 3

THE COMPANIES 4

National Irish Bank Limited 4


National Irish Bank Financial Services Limited 4

MANAGEMENT STRUCTURE OF THE COMPANIES 4

Summary 4
The Chief Executive 5
The General Manager - Banking 5
The Regional Managers 7
The Financial Advice and Services Division 8
The Internal Audit Function 8

BACKGROUND TO APPOINTMENT OF INSPECTORS 9

Sale of CMI Insurance Policies 9


Interest and Fee Charging Practices 9
Report of Authorised Officer 10

ORGANISATION OF THE REPORT 10

APPROACH TO RESPONSIBILITY 11

LEGAL ADVICE AND COURT ACTIONS 12

Court Action - Concerns of Prospective Interviewees 12


Court Action - Scope of Enquiry into DIRT-related Matters 14
Court Action - Access to Records of Isle of Man Branch 15

WORK DONE 16

Summary 16
The First Phase 16
The Second Phase 18

RECOMMENDATION ON COSTS 20
PART 2: EVASION OF REVENUE OBLIGATIONS:
INCORRECTLY CLASSIFIED NON-RESIDENT DEPOSIT ACCOUNTS

LEGISLATIVE REGIME 23

Position prior to the introduction of DIRT 23


Position after the introduction of DIRT 23
Non-Resident Declaration 24
Summary 25

N I B PROCEDURES 25

Inspectors' Criticism of the Special Circulars 27

BANK MANAGER EVIDENCE ON OPERATION OF PROCEDURES 28

ENQUIRIES OF BRANCH PERSONNEL BY SENIOR BANK MANAGEMENT 30

EXISTENCE OF BOGUS NON-RESIDENT ACCOUNTS IN THE BRANCH NETWORK 33

Bank Customer Interviews 33


Branch Manager Interviews 40
Interviews with Senior Bank Management 42
Interviews with former Heads of Internal Audit 42
Internal Bank Correspondence 43

INTERNAL AUDIT REPORTS 44

General 44
Use of Incorrect Forms 45
Use of Bank as Accommodation Address 45
Non-Resident Declarations at variance with other branch records 46
Non-Resident Deposits as Security for Resident Borrowings 47
Non-Resident Accounts in Fictitious Names 48

WHY DID BRANCH PERSONNEL OPERATE BOGUS NON-RESIDENT ACCOUNTS? 50

METHOD OF ACCOUNTING FOR DIRT 53

D I R T THEME AUDIT, DECEMBER 1 9 9 4 54

Follow-up Meeting to DIRT Theme Audit 56

THEME AUDIT - TAXATION OF CREDIT INTEREST, JANUARY 1 9 9 9 58

INSPECTORS' CONCLUSIONS 59
PART 3: EVASION OF REVENUE OBLIGATIONS:
FICTITIOUS AND INCORRECTLY NAMED ACCOUNTS

N I B PROCEDURES 63

Formal Guidance to Staff 63

EXISTENCE OF FICTITIOUS AND INCORRECTLY NAMED ACCOUNTS 64

Extracts from Letters from Bank Personnel 64


Bank Customer Interviews 65

SOURCE OF FUNDS FOR INVESTMENT IN C M I AND OTHER POLICIES 65

WHY WERE ACCOUNTS OPENED IN FICTITIOUS NAMES? 66

Branch Manager Interviews 66

EFFORTS TO ELIMINATE FICTITIOUS AND INCORRECTLY NAMED ACCOUNTS 67

Memorandum from General Manager - Banking, 1995 67


Memorandum from General Managers, 1996 and involvement
of Head of Audit 67
Review of Declarations from Bank Managers 68
The Board Audit Committee 68

INSPECTORS' CONCLUSIONS 68

PART 4: EVASION OF REVENUE OBLIGATIONS:


SPECIAL SAVINGS ACCOUNTS

LEGISLATIVE REGIME 73

RETURNS TO REVENUE COMMISSIONERS 74

N I B PROCEDURES 75

D I R T THEME AUDIT, DECEMBER 1994 76

Conclusion 76
Scope of Audit Testing 76
Findings 76
Interview with Head of Audit 77

BRANCH INTERNAL AUDIT REPORTS 77

THEME AUDIT - TAXATION OF CREDIT INTEREST, JANUARY 1 9 9 9 79


RETROSPECTIVE D I R T LIABILITY TO THE REVENUE COMMISSIONERS 80

INSPECTORS' CONCLUSIONS 80

PART 5: THE SALE OF CMI, SCOTTISH PROVIDENT INTERNATIONAL


AND OLD MUTUAL INTERNATIONAL POLICIES

THE BANK, THE COMPANY AND THE LIFE ASSURANCE COMPANIES 83

The Financial Advice and Services Division ("FASD") 83


Management and Personnel of the FASD 83
Role of National Irish Bank Financial Services Limited 84
Relationship of the Bank and the Company with CMI 85
Relationship of the Bank and the Company with Scottish Provident
International 86
Relationship of the Bank and the Company with Old Mutual
International 86
Authorisation of Insurers to carry on business in the State 87

THE LIFE ASSURANCE PRODUCTS 87

General 87
Nature of CMI Products sold by FASD 87
Investor Targeting and Assurances of Confidentiality 90
Obligation to make Returns to the Revenue Commissioners 94

THE PURPOSES FOR WHICH THE C M I PERSONAL PORTFOLIO WAS BEING USED 95

Evidence of Mr D'Arcy, Head of FASD 95


"Finding a safe haven for Revenue-sensitive funds" 95
"Regularising of bogus non-resident deposits" 100
"Retention of deposits" 104
"Securing new deposits for the Bank" 108
"Earning commission for the Bank" 109

THE ROLE OF THE BANK 110

General 110
Identifying Customers with Undeclared Funds 110
Promoting the Sale of CMI Policies 111

REASON FOR SUCCESS OF PRODUCT 114

Summary 114
Typical Investment 114

INSPECTORS' CONCLUSIONS 115


PART 6: THE PRACTICE OF IMPROPER CHARGING OF INTEREST

OUTLINE OF SYSTEM 119

General 119
Changes in Interest Rates 119

MANUAL INTEREST ADJUSTMENTS 120

The Charging Regime 120


Operation of the System 121
Branch Staff Evidence 126

ACTION TAKEN BY THE BANK ON FIRST DISCOVERY OF IMPROPER PRACTICE 130

The Chief Executive 130


The General Manager - Retail Banking 131
The Regional Managers 132
Impact on Customers 132

ACTION TAKEN BY THE BANK FOLLOWING NEWS MEDIA REPORTS 132

Interviews with Bank Staff 132


Bank Investigation Work: The Unauthorised Interest & Fee
Amendments Report 133
Customer Queries 136
Inspectors' Observations on Work Done by the Bank 137
Further Work proposed by the Bank 137

INSPECTORS' CONCLUSIONS 137

PART 7: THE PRACTICE OF IMPROPER CHARGING OF FEES

REGULATORY REGIME 141

Introduction 141
The Central Bank Act, 1971 141
The Central Bank Act, 1989 141
The Consumer Credit Act, 1995 142
Subsequent Changes in the Regulatory Regime 142

THE FEE CHARGING SYSTEM AND ITS DEVELOPMENT 143

Introduction and Overview 143


Fee Categories 143
The Fee Charging Process 144
Development of System 145
Summary 146
CHARGES FOR ADMINISTRATION AND MANAGEMENT TIME 146

The Charging Regime prior to 1996 146


Operation of the System prior to 1996 149
Pre-notification of Fees 155
Delay in Implementing new Time Recording System 157

ACTION TAKEN BY THE BANK ON FIRST DISCOVERY OF IMPROPER PRACTICE 159

No Action Taken prior to 1996 159

ACTION TAKEN BY THE BANK FOLLOWING NEWS MEDIA REPORTS 159

Interviews with Bank Staff 159


Bank Investigation Work: The Unauthorised Interest & Fee
Amendments Report 160
Customer Queries 163
Further Work proposed by the Bank 163

INSPECTORS' CONCLUSIONS 164

PART 8: KNOWLEDGE AND RESPONSIBILITY

INTRODUCTION 167

CONCLUSIONS CONCERNING ENTITIES OTHER THAN INDIVIDUALS 167

Internal Audit 167


The External Auditors 168
The Audit Committee of the Board 168
The Board of Directors 169

EVASION OF REVENUE OBLIGATIONS:


INCORRECTLY CLASSIFIED NON-RESIDENT DEPOSIT ACCOUNTS 169

Bogus Non-Resident Accounts 169


The Branch Managers 170
The Regional Managers 170
Area Managers Appointed February 1996 171
General Manager - Banking 171
Head of Finance 173
Chief Executive 175
Executive Director 175
Chief Operating Officer 176
EVASION OF REVENUE OBLIGATIONS:
FICTITIOUS AND INCORRECTLY NAMED ACCOUNTS 177

The Branch Managers 177


General Manager - Risk Management and Administration, General
Manager - Banking 177
Head of Audit 177
Chief Executive, Executive Director 178

EVASION OF REVENUE OBLIGATIONS:


SPECIAL SAVINGS ACCOUNTS 178

The Branch Managers 178


The Regional Managers 179
General Manager - Banking 179
Head of Finance 180
Chief Executive, Executive Director 180

THE SALE OF C M I , SCOTTISH PROVIDENT INTERNATIONAL AND OLD MUTUAL


INTERNATIONAL POLICIES 181

The Financial Advice and Services Division ("FASD") 181


Nigel D'Arcy, Head of FASD 181
The FASD Financial Services Managers, Investment Manager 182
The Branch Managers 185
Head of Retail/Regional Managers 185
General Manager - Administration 186
General Manager - Banking 186
Head of Audit 186
Chief Executive, Executive Director, Chief Operating Officer 186

THE PRACTICE OF IMPROPER CHARGING OF INTEREST 187

The Branch Managers 187


The Regional Managers 187
General Manager - Banking 188
Chief Executive 188

THE PRACTICE OF IMPROPER CHARGING OF FEES 189

The Branch Managers 189


The Regional and Area Managers 189
General Manager - Banking 190
Chief Executive, Executive Director 191
APPENDICES

Appendix 1: Order of the High Court dated 30 March 1998, appointing the
Inspectors to investigate the affairs of National Irish Bank
Limited.

Appendix 2: Order of the High Court dated 15 June 1998, appointing the
Inspectors to investigate the affairs of National Irish Bank
Financial Services Limited.

Appendix 3: Order of the High Court dated 31 July 2001, amending the
Order of 30 March 1998.

Appendix 4: Order of the High Court dated 31 July 2001, amending the
Order of 15 June 1998.

Appendix 5: Order of the High Court dated 13 July 1998 declaring that
persons called before the Inspectors were not entitled to refuse
to answer questions put by the Inspectors, nor to refuse to
produce documents, and that the procedures proposed by the
Inspectors for the conduct of their investigation were
consistent with the requirements of natural and constitutional
justice.

Appendix 6: Order of the Supreme Court dated 21 January 1999 upholding


the 13 July 1998 Order of the High Court, with the proviso that
confessions obtained by the Inspectors would not in general be
admissible at a subsequent criminal trial, unless the
confessions were voluntary.

Appendix 7: Order of the High Court dated 19 March 1999 refusing an


application by NIB that the Inspectors' DIRT compliance
investigation of the Bank should be limited.

Appendix 8: Copy memorandum dated 18 November 1993 from Gerry


Hunt, Head of Financial Control, to Frank Brennan, Michael
Keane and Dermott Boner titled "Non Resident Accounts".

Appendix 9: Copy Report on DIRT Theme Audit, December 1994.

Appendix 10: Copy Product Features Sheet used by some of the FASD
financial services managers in the promotion of the CMI
Personal Portfolio policy.

Appendix 11: Copy report dated 20 April 1993, prepared by Ms Patricia


Roche of the FASD for a prospective investor in the CMI
Personal Portfolio policy.
Appendix 12: Copy model Investment Checklist to be prepared by FASD
financial services managers in respect of single premium
investment recommendations, with accompanying note from
Patrick Cooney; copies, five completed Checklists.

Appendix 13: Copy letter dated 30 July 1990 from Patrick Cooney to FASD
financial services managers.

Appendix 14: Copy report: "National Irish Bank: Unauthorised Interest &
Fee Amendments", dated March 1999.

Appendix 15: Copy Bank letter to the Inspectors dated 10 April 2001,
outlining proposed further review of interest charges.

Appendix 16: Copy memorandum from Dermott Boner dated 24 July 1992,
with accompanying Form St 20 and guidelines for
Management Time.

Appendix 17: Copy Bank paper - Fees Review 2001.

Appendix 18: Summary, Bank presentation on changes since Inspectors'


appointment.

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


PART 1

INTRODUCTION
INTRODUCTION

APPOINTMENT OF INSPECTORS

On 30 March 1998, on the application of the Minister for Enterprise, Trade and
Employment, the Inspectors were appointed by the High Court under Section 8 of the
Companies Act, 1990 to investigate and report on the affairs of National Irish Bank
Limited ("the Bank", "NIB") relating to:

(i) the improper charging of interest to accounts of customers of the Bank


between 1988 and 30 March 1998;

(ii) the improper charging of fees to accounts of customers of the Bank between
1988 and 30 March 1998;

(iii) the improper removal of funds from accounts of customers of the Bank
between 1988 and 30 March 1998;

(iv) all steps and action taken by the Bank, its directors and officers, servants or
agents in relation to the charging of such fees or interest or the removal of any
funds without the consent of the account holders and their actions arising from
the issues when discovered;

(v) the manner in which the books, records and accounts of the Bank reflected the
foregoing matters;

(vi) the identity of the person or persons responsible for or aware of any of the
practices referred to above;

(vii) whether other unlawful or improper practices existed or exist in the Bank from
1988 to 30 March 1998 which served to encourage the evasion of any revenue
or other obligations on the part of the Bank or Third Parties or otherwise.

On 15 June 1998, again on the application of the Minister for Enterprise, Trade and
Employment, the Inspectors were similarly appointed to investigate and report on the
affairs of National Irish Bank Financial Services Limited ("the Company",
"NIBFSL") relating to:

(a) The effecting of insurance policies through NIBFSL with:

Clerical Medical Insurance Company Limited


Scottish Provident International Life Assurance Limited
Old Mutual International (Guernsey) Limited

(b) The role of NIBFSL, its officers, servants and employees in connection with
the effecting of the said policies of insurance.

(c) The purposes behind the execution of the aforesaid policies of insurance.
(d) The knowledge of the management and board of directors of NIBFSL of the
effecting 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 amendments was to
join the Bank in the Order of 15 June 1998 and make it, as well as the Company, the
subject of that Order. The amendments also extended the list of insurance companies
set out at (a) above to include CMI Insurance Company Limited, Clerical Medical and
General 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 COMPANIES

National Irish Bank Limited was incorporated as Midland Montague Leasing


(Ireland) Limited on 21 November 1978. It changed its name to Northern Bank
(Ireland) Limited on 25 March 1986 and was licensed to carry on banking business by
the Central Bank of Ireland on 28 April 1986, taking over the Republic of Ireland
business of Northern Bank Limited on 1 July 1986.

On 31 October 1987 the share capital of the company was acquired by National
Australia Finance (UK) Limited, now known as National Australia Group Europe
Limited, a subsidiary of National Australia Bank Limited. On 15 April 1988 the
company changed its name to National Irish Bank Limited.

National Irish Bank Financial Services Limited was incorporated as Northern Bank
Trustee Company Limited on 12 January 1970. It changed its name to Northern
Bank Trust Corporation Limited on 6 January 1976, to National Irish Bank Trust
Company Limited on 15 April 1988, and finally to National Irish Bank Financial
Services Limited on 3 November 1989.

National Irish Bank Financial Services Limited is a wholly owned subsidiary of


National Irish Bank Limited.

MANAGEMENT STRUCTURE OF THE COMPANIES

The management structure of the Bank changed on a number of occasions during the
period covered by the investigations. Organisational developments, insofar as they
are relevant to areas the subject of the Inspectors' investigations and this report, are
outlined below.

Summary

• The position of chief Dublin-based executive of the Bank was held by a number of
individuals during the period, with differing titles.
• Reporting to the chief executive was a General Manager in charge of banking
activities with responsibility for a number of areas including the retail branch
network 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 variable
number of regional or area managers reporting to him; the titles and reporting
lines of these individuals, to whom branch managers reported, changed on a
number of occasions during the period 1988 to 1998.

• Separate from the branch network was the Financial Advice and Services Division
of the Bank, set up in 1989 and headed by the same individual for the entire period
covered by the investigation. He reported to the chief executive up to 1 January
1995, to the General Manager - Banking until 23 May 1997, and thereafter, up to
the 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 directly
to the audit committee of the Board until April 1997, when responsibility for
internal audit was transferred to National Australia Bank's European Audit
function, based in Glasgow.

The Chief Executive

Jim Lacey was appointed Chief Executive of the Bank in February 1988, the
appointment taking effect from 1 April of that year, and he held that position until 22
April 1994. Mr Lacey oversaw a number of changes in organisational structure
during that period.

Barry Seymour was appointed Executive Director of the Bank on 22 April 1994 and
held that position until 15 July 1996. He too introduced a number of organisational
changes.

Philip Halpin became Chief Operating Officer of the Bank on 16 July 1996, holding
this 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, and
thereafter to Grahame Savage, Chief Executive at the date of the Inspectors'
appointment.

Each of the above-named was on the circulation list for internal audit reports on
branches while he held the position indicated.

The General Manager - Banking

Frank Brennan

Frank Brennan was appointed General Manager - Retail Banking in the management
structure put in place in May 1988, shortly after Mr Lacey became Chief Executive.
Mr Brennan had previously been General Manager (Operations). In both roles he had
charge of the branch network, reporting to the Chief Executive. Mr Brennan held this
title until 1 July 1991, but on 1 October 1990, Dermott Boner (see below) was
appointed Head of Retail, reporting directly to the Chief Executive in respect of the
branch network, so from that date Mr Brennan was no longer directly responsible for
the branches and from 30 September 1990 he ceased to be on the circulation list for
internal audit reports on branches.

Mr Brennan subsequently held a number of other positions in the Bank:

• From 1 July 1991 Mr Brennan became General Manager - Corporate Services,


retaining responsibility for Management Services (the Bank's information
technology function); Internal Audit also reported to him in relation to
administrative and operational matters in this role.

• Mr Brennan's title changed to General Manager - Administration 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 this
title and his duties remained largely unchanged in a reorganisation in December
1994.

• Mr Brennan's title changed to General Manager Risk Management and


Administration in March 1996 "to illustrate the emphasis we place on this element
of his responsibilities", according to Mr Seymour's memorandum to staff advising
the setting up of a Risk Policy Committee.

• A reorganisation implemented by Mr Halpin in May 1997 saw Mr Brennan's


duties unchanged, but his title amended to Head of Risk and Administration. Mr
Brennan held this title at the date of the Inspectors' appointment.

Basil Noone

The late Basil Noone was General Manager - Banking from 1 July 1991 to 30 April
1993. A transferee from the parent bank, Mr Noone held no other positions in the
Bank before or after his period as General Manager - Banking. During this time, Mr
Noone was responsible for the branch network, with Mr Boner reporting to him in this
regard. He was on the circulation list for internal audit reports on branches from
August 1991 to February 1993.

At the time the Inspectors were interviewing present and former senior management
of the Bank, they were informed by the Bank that Mr Noone, then retired and living in
Australia, was extremely ill. He has since died. Accordingly, he was not
interviewed by the Inspectors and because of this there is no finding in the report as to
his knowledge of, or responsibility for, any of the practices under investigation.

Michael Keane

Michael Keane, formerly Head of Marketing (from 1 June 1988) became General
Manager - Banking, with responsibility for Corporate and Retail Banking, on 3 May
1993 and held this position until 18 August 1996. There were several changes in the
persons reporting to him in relation to retail banking during this period (see below).
Mr Keane was on the circulation list for internal audit reports on branches from
March 1993 to July 1996.

• Mr Keane became General Manager - Marketing and Distribution on 19 August


1996. He left the Bank on 23 May 1997.

Ken Windeyer

Ken Windeyer joined the Bank as General Manager - Banking on 19 August 1996
and held this position until 31 July 1997.

• Mr Windeyer became Head of Operations and Projects on 1 August 1997, his title
subsequently being changed to Head of Operations and Programmes, a position he
held at the date of the Inspectors' appointment.

Brian O'Driscoll

Brian O'Driscoll became Head of Personal Markets on 1 August 1997, in which


position he became responsible for the branch network, the position of General
Manager - Banking having been effectively abolished and replaced by separate
executive positions in respect of personal and business markets. Mr O'Driscoll held
this position at the date of the Inspectors' appointment.

The Regional Managers (including Head of Retail Banking, Head of Retail)

The management structure and the titles of the personnel to whom branch managers
reported changed on a number of occasions during the period covered by the
investigations.

• With effect from 1 June 1988, Dermott Boner and Kevin Curran were appointed
Regional Managers, with responsibility for nineteen and twenty-two branches
respectively; both reported to Mr Brennan, appointed General Manager - Retail
Banking at the same time. Mr Brennan was assigned direct responsibility for five
branches.

• On 1 October 1990 Mr Boner was appointed Head of Retail, reporting directly to


the Chief Executive; to him reported Mr Curran and two newly appointed
Regional 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 be
heard and accordingly the Inspectors make no finding in this report in relation to
his knowledge and responsibility.

• From 1 July 1991, Mr Boner reported to Basil Noone, appointed General


Manager, Banking at that time, while the three Regional Managers identified
above continued to report to him.
• On 3 May 1993, Mr Boner became Chief Manager Retail. Mr McMenamin and
Barry Grogan (a secondee from National Australia Bank) reported to him as Area
Managers. Mr Curran retained his position as Regional Manager. Both Mr
Boner and Mr Curran reported to the newly appointed General Manager -
Banking, Michael Keane.

• A reorganisation effective from 1 January 1995 saw the retail business of the Bank
once more divided into three regions, headed by Messrs Boner, Curran and
McMenamin. They reported to Mr Keane.

• The retail business was again reorganised in February 1996, when following the
retirement of Mr Boner, Mr Curran was appointed Head of Retail Banking,
reporting to Mr Keane, and the retail business was divided into six areas, each the
responsibility 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 Mr
O'Driscoll. This was the regional/area management structure in place at the time
of the appointment of the Inspectors.

The Financial Advice and Services Division

Separate from the branch network was the Financial Advice and Services Division
("FASD") of the Bank, set up in 1989. This Division was responsible for the
marketing of financial products, including those the subject of the investigation
ordered 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 Seymour as Executive
Director until 1 January 1995. From the latter date until 23 May 1997 he reported to
the General Manager - Banking, and thereafter, up to the date of appointment of the
Inspectors, to the Chief Operating Officer.

The FASD comprised a number of financial services managers, an investment


manager and support staff, reporting to Mr D'Arcy.

While the financial results of the FASD were accounted for in NIBFSL, the FASD
personnel were at all times during the period covered by the investigation employed
by the Bank.

The Internal Audit Function

The position of Head of Audit was held by a number of individuals during the period
covered by the investigations - Hilary Flood, Tim McCormick, Enda Carberry and
Paul Harte.

The Head of Audit reported to the Chief Executive until 1 July 1991. From that date
he reported directly to the Audit Committee of the Board, with reporting to the
General Manager - Corporate Services in respect of operational and administrative
matters. Responsibility for internal audit was transferred to National Australia
Bank's European Audit function, based in Glasgow, in April 1997, at which time the
audit approach and form of audit report were also significantly changed.
Review of branch audit reports prepared by the Bank's internal audit function was a
significant element in the Inspectors' work; this is addressed in greater detail at page
17 below.

BACKGROUND TO APPOINTMENT OF INSPECTORS

Sale of CMI Insurance Policies

In January and February 1998 RTE television reported that NIB had been involved in
the effecting of policies of life assurance on behalf of its customers with a number of
companies in the Clerical Medical International Group ("CMI"), companies said not
to be authorised under EU insurance legislation to carry on the business of life
assurance in the State. It was later disclosed that in addition to CMI, policies were
effected on behalf of its customers with Scottish Provident International Life
Assurance Limited, with an address in the Isle of Man, and Old Mutual International
(Guernsey) Limited, with an address in Guernsey in the Channel Islands, both
similarly said to be unauthorised.

The key news media allegations were:

• Bank representatives gathered information on customers holding non-resident


accounts, accounts in false names and customers with funds that had not been
disclosed to the Revenue;

• The identified customers were invited to participate in an off-shore life assurance


linked investment scheme with CMI;

• Most of the monies invested were redeposited with the Bank; for the account
holders this had the effect that the nature of their original deposits, which in many
cases was at the risk of discovery by the Revenue, was transformed;

• Senior managers in the Bank were aware that the off-shore investment scheme
was being used to help customers evade tax, and

• Some senior managers of NIB encouraged customers to evade tax.

On 23 March 1998 the Minister for Enterprise, Trade and Employment, pursuant to
the provisions of the Insurance Acts, appointed an authorised officer to examine the
affairs of NIBFSL in light of these allegations.

Interest and Fee Charging Practices

On 25 March 1998 RTE television reported that employees of the Bank, under
pressure to increase profits, had operated two distinct practices whereby improper
charges were made to customer accounts.

The report claimed that interest charges had been increased, or "loaded", without
legitimate reason, and without customer knowledge, in four branches of the Bank - at
Carndonagh, Carrick-on-Shannon, Cork and Walkinstown. The report added that
although the Bank's internal auditors had identified the practice of interest loading at
two of these branches, no refunds had been made to customers.

It was also alleged in the programme that customers' fees had been uplifted in the
College Green branch of the Bank in November 1989 without customer knowledge or
underlying justification.

Concern at these allegations prompted the Minister for Enterprise, Trade and
Employment to apply for the appointment of inspectors to the Bank, under Section 8,
Companies Act, 1990, and the appointment of the Inspectors was ordered by the High
Court on 30 March 1998, as set out above.

Report of Authorised Officer

On 4 June 1998 the authorised officer appointed to investigate the affairs of NIBFSL
reported to the Minister on an interim basis. From his examination of policy files of
all persons who had purchased policies through NIBFSL in the period 1990 to 23
March 1998 from CMI, Scottish Provident International Life Assurance Limited, and
Old Mutual International (Guernsey) Limited it appeared to him that:

• 282 policy holders might be in breach of Section 9, Insurance Act, 1936, and that
the committal of these breaches appeared to have been assisted by persons
employed by NIBFSL;

• The CMI product was promoted, to some limited extent, as a tax avoidance
vehicle, and

• In the period prior to the removal of Exchange Controls in 1992, NIBFSL


facilitated the movement of funds of Irish residents out of the country.

The authorised officer recommended to the Minister that his interim report be passed
to the Director of Public Prosecutions for his consideration and that it be passed to the
inspectors investigating the affairs of the Bank, so that they might consider whether
they wished to broaden the scope of their investigations to encompass NIBFSL.

This did not become necessary as the Minister applied to the High Court on 15 June
1998 to have inspectors appointed to investigate the affairs of NIBFSL and, as set out
above, the Inspectors were appointed to carry out such investigation.

ORGANISATION OF THE REPORT

From the time the Inspectors were appointed to investigate the affairs of NIBFSL in
addition to investigating the affairs of NIB, both investigations were carried on in
conjunction. While a separate interim report relating to the Bank was furnished to
the High Court on 10 June 1998 and a similar report relating to the Company was
furnished to the High Court on 11 August 1998, all subsequent interim reports, dated
respectively 17 December 1998, 29 July 1999, 27 July 2000, 3 December 2001, 17
July 2002 and 28 July 2003 related to both investigations. In addition, the matter was
mentioned 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 affidavit
presented to the Court. The matter was further mentioned before Mr Justice Kelly on
2 April 2004.

Following the established practice, this report also deals with both investigations.

The report deals separately with the improper practices investigated and the
knowledge of, and responsibility for, these practices.

First addressed is the evasion of Revenue obligations, under three headings as


follows:

Non-Resident Deposit Accounts Part 2


Fictitious and Incorrectly Named Accounts Part 3
Special Savings Accounts Part 4

The 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 6


Improper Charging of Fees Part 7

Each of these parts, insofar as is appropriate, deals with the Banks' systems and
procedures, the development of the practice investigated, the evidence received by the
Inspectors, and the Inspectors' conclusions on the existence of the practice.

The related issues of knowledge and responsibility of Bank personnel in respect of


each of the practices are addressed in Part 8.

APPROACH TO RESPONSIBILITY

While the Inspectors are satisfied that many, but not all, branch managers engaged in
the practices being investigated, they are nonetheless of the opinion that senior
management in the Bank was responsible for the existence of those practices. Senior
management had the duty to ensure that the practices did not exist and it was senior
management that had the authority to put an end to them. The individual manager's
authority was restricted to what happened in his or her branch. He or she cannot be
held responsible for practices which existed across the branch network.

In the opinion of the Inspectors, the position of the financial services managers in the
FASD was different from that of the branch managers. They were few in number,
never exceeding six and mostly being only five, and they met regularly so that each
was aware of the practices and activities of the others. The Inspectors have found a
number of these financial services managers, together with certain members of the
senior management team, responsible for the promotion of the CMI policies as a
secure investment for funds undisclosed to the Revenue.

LEGAL ADVICE AND COURT ACTIONS

The Inspectors engaged William Fry as their legal advisors. Assisted by Counsel,
William Fry has advised on various issues arising in course of the Inspectors' work
and has represented them in the Court actions referred to below.

Court Action - Concerns of Prospective Interviewees

At the commencement of their investigation of the affairs of the Bank the Inspectors
wrote to all current or former employees of the Bank who had held positions at the
level of manager or above within the Bank during the period covered by the
investigation. The purpose of the letter was to request that they furnish to the
Inspectors all information or documentation in their possession that might be relevant
in any way to their enquiries.

Certain employees replied directly to the Inspectors. In addition the Inspectors


received responses from solicitors acting for individual employees or former
employees of the Bank who claimed that their clients, if interviewed by the
Inspectors, would be entitled to certain rights, the most important of which were:

• 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, the
Inspectors wrote to the solicitors who had made them setting out the procedures they
intended to follow in conducting the investigation. The following is an extract from
the letter sent by the Inspectors on 4 June 1998 to Mason Hayes & Curran, who
represented 75 employees or former employees of the Bank:

1. Right to refuse to answer questions on the ground of self incrimination

We have been advised that a person giving evidence to inspectors pursuant to


Section 10 of the Companies Act, 1990 is not entitled to refuse to answer any
question on the ground that the answer may tend to incriminate him or her. ...

2. Procedures to be followed

We have explained that we consider that the first phase of interviews with
witnesses will be an information gathering exercise. These interviews will be
conducted in private. A transcript of the witness's evidence will be available
to the witness from the stenographers on payment of the cost of the additional
copy. We have no objection to any witness being accompanied by a legal
advisor at such interview but, with respect, we consider that it would be
inappropriate, certainly premature and probably impossible to treat such
interviews as approximating to a trial with an entitlement to attend and cross
examine the evidence given by other witnesses.

There can be no question of our indemnifying your clients or any of them in


relation to costs, whether legal or otherwise. Section 13 of the Companies
Act, 1990 states that the expenses of and incidental to the investigation shall
be defrayed by the Minister for Justice. We have no role to play in this regard
and any question of costs which you may wish to pursue must be addressed to
the Minister.

We do not propose to circulate lists of questions in advance of the taking of


evidence from witnesses. Given the nature of our work, it will be impossible
to predict with certainty what questions will or will not arise at any particular
interview.

If, however, the outcome of the first phase of interviews indicates that it is
possible that adverse conclusions may be drawn in relation to certain
individuals dependent in whole or in part on the testimony of others, then it is
our intention that a hearing will be held at which such issues can be
addressed, and at which persons who may be at risk of an adverse finding will
be entitled to attend to hear the evidence, cross examine the witnesses and give
evidence themselves. In the light of these procedures, we consider it would be
inappropriate and inconsistent with the statutory procedure to provide copies
of 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 the
Inspectors. The Inspectors decided that the issues raised by the solicitors who had
written to them should be determined as rapidly as possible since, if left uncertain,
they would have resulted in continual delays. Accordingly, the Inspectors sought
directions from the High Court pursuant to Section 7 (4) of the Companies Act, 1990
as to whether a right to refuse to answer questions on the grounds of possible self
incrimination could be asserted by interviewees in the context of their investigations.

The Inspectors also sought a determination that the procedures which they proposed
to adopt, as outlined in their letter of 4 June 1998 to Mason Hayes & Curran, were
appropriate and proper for the purpose of the investigations.

The application for directions was heard on 10 July 1998 before Mr Justice Kelly
who, by his Order of 11 June 1998, directed that the firms of solicitors representing
employees and former employees be asked to agree amongst themselves on the
nomination of one named individual to represent all of their clients and to nominate
one 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 came
for hearing in the High Court before the late Mr Justice Shanley who, in his
judgement delivered on 13 July 1998, declared:

that persons (whether natural or legal) from whom information, documents or


evidence are sought by the Inspectors in the course of their investigation under
the Companies Act, 1990 are not entitled to refuse to answer questions put by
the Inspectors or to refuse to provide documents to the Inspectors on the
grounds that the answers or documents may tend to incriminate him, her or it.
and
that the procedures outlined by the Inspectors in their letters dated the 4th
June, 1998 [to Mason Hayes & Curran and others] are consistent with the
requirements of natural and constitutional justice.

A copy of the High Court Order is set out at Appendix 5.

The representative respondent lodged Notice of Appeal to the Supreme Court against
the entire of the judgement dated 13 July 1998.

The Judgement of the Supreme Court was delivered on 21 January 1999 by Mr Justice
Barrington, all of the other members of the Court concurring. The judgement upheld
the decision of the late Mr Justice Shanley with the added proviso that "a confession
of a Bank official obtained by the Inspectors as a result of the exercise by them of
their powers under Section 10 of the Companies Act, 1990 would not, in general, be
admissible at a subsequent criminal trial of such official unless, in any particular
case, the trial Judge was satisfied that the confession was voluntary". The appeal
against that part of the judgement of the late Mr Justice Shanley which approved the
procedures which the Inspectors proposed to adopt was withdrawn, leaving standing
his 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 Matters

On 17 December 1998 the Dail passed a resolution pursuant to the Comptroller and
Auditor General and Committees of the Houses of the Oireachtas (Special Provisions)
Act, 1998, which had been passed into law on 16 December 1998. This resolution
provided inter alia that the Comptroller and Auditor General be requested to carry out
an industry-wide investigation into the operation of Deposit Interest Retention Tax
("DIRT") by financial institutions and to furnish a report which would set out such
facts and evidence as he deemed appropriate and would facilitate the efficient,
effective and expeditious completion of the hearings by the Committee of Public
Accounts into such matters.

One of the consequences of this resolution was that the Comptroller and Auditor
General would be required to carry out an investigation into the operation of DIRT by
NIB.

The Bank contended that, if the Inspectors were also to investigate compliance by the
Bank with its DIRT obligations, this would result in a duplication of investigation and
that it was "unnecessary, wasteful and time consuming, both for the investigating
authorities and for the Bank and the Company, because the same issue is being
covered both by the Inspectors and by the Comptroller and Auditor General...
[when] both ... have all the necessary powers to conduct and complete a thorough
investigation ...". The Bank accordingly sought an Order directing that the
Inspectors should not engage in a DIRT compliance investigation of the Bank which
extended beyond effecting such investigation as they considered necessary to report
upon any issues of unlawful or improper practices that exist or existed in the Bank
from 1988 to 30 March 1998 which served to encourage the evasion of any Revenue
or other obligations on the part of the Bank or third parties or otherwise, and which
related to the effecting or selling or marketing, in any capacity whatsoever, of
insurance policies through the Bank and/or NIBFSL with the life assurance companies
referred to in the Order of 15 June 1998.

The Bank's application was refused by Mr Justice Kelly on 19 March 1999.

A copy of the High Court Order is set out at Appendix 7.

Court Action - Access to Records of Isle of Man Branch

In September 1991 the Bank obtained a licence to operate a branch in the Isle of Man
and this branch was available to receive deposits from 1 October 1991. On 1
December 1999, in the context of paragraph 2 (vii) of the Order dated 30 March 1998,
the Inspectors wrote to the Bank requesting that they be provided with a listing of the
deposit accounts at the Isle of Man branch of the Bank at 30 September 1992, such
listing to include the name(s) on the account, the address(es) of the depositor(s) and
the balance standing to the credit of each account at 30 September 1992.

The Bank responded that it had been advised by Isle of Man counsel that to supply the
information sought without the protection of an Order of the Isle of Man Courts
would expose the Bank to legal action in the Isle of Man Courts from account holders
at its Isle of Man branch, on the basis that confidential information was being released
by the Bank to a third party.

On 6 October 2000, the Inspectors brought a petition to the High Court of Justice of
the Isle of Man pursuant to the Bankers' Books Evidence Act 1935 for an Order
permitting inspection of the books of the Isle of Man branch of the Bank for the
purpose 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 was
refused on the basis that the investigation by the Inspectors into the affairs of the Bank
is not a legal proceeding for the purposes of the Bankers' Books Evidence Act 1935.
WORK DONE

Summary

The work in the investigations was carried out in two phases in accordance with the
procedures which were approved in the High Court by the late Mr Justice Shanley in
his judgement of 13 July 1998. The details of the procedures are set out above at
pages 12 and 13. While the entire of Judge Shanley's judgement was appealed to the
Supreme Court, the appeal against the part approving the Inspectors' procedures was
withdrawn, so Judge Shanley's approval of their procedures remained unaltered.

The details of the two phases are set out below.

The First Phase

In 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 the
Inspectors to be in possession of information concerning the affairs of the Bank or
the Company;

• Discussions with officials of the Bank, both of a substantive and facilitative


nature, and

• Evaluation of work which the Bank carried out in order to establish the factual
position in relation to the allegations and to effect appropriate action.

The Inspectors also:

• Advertised their appointment in national daily newspapers summarising the terms


of their appointment to investigate the Bank, seeking information relating to the
practices being investigated.

• Corresponded and met with representatives of various State Agencies including


the Revenue Commissioners, the Central Bank of Ireland and the Department of
Enterprise, 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 31
March 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 be
undertaken by its staff, the results of which were shared with the Inspectors.
The findings set out in this report therefore do not include listings of improper interest
or fee charges, bogus non-resident accounts, or branches ranked by reference to the
incidence of improper practice. Detailed investigations carried out by the Bank, and
the results thereof, are mentioned in the relevant sections of the report, but neither the
Inspectors nor their agents participated in this work.

Review of Documentation

The Inspectors were assisted in their examination and interpretation of documentation


by senior personnel from PricewaterhouseCoopers.

Particular emphasis was placed on review of internal audit reports on branch visits
carried out during the period covered by the investigation, as they represent a
contemporaneous record of the results of examination of branch procedures and
records over that time. The Bank advised the Inspectors that a total of 202 branch
audit reports had been prepared in the period 1988 to 1997, but that 38 of these were
no longer available (20 in respect of 1988, 17 in respect of 1989 and 1 in respect of
1995). The Inspectors' review was perforce limited to the 164 reports furnished.

Interviews

All sworn interviews were carried out by the Inspectors; PricewaterhouseCoopers


personnel assisted in preparing for interviews (particularly by way of identifying
relevant documentation), and in following up matters arising from interviews.

A total of 235 sworn interviews was conducted in the first phase of the investigations,
this total comprising 142 interviews with customers of the Bank (the majority of
whom were investors in CMI policies), 87 interviews with present or former Bank
staff, including senior executives and directors, 10 of whom were interviewed on
more than one occasion, and 6 interviews with individuals falling into neither of these
categories. A stenographer was present at each interview, and copy transcripts were
made available on request to interviewees. Due to a Court action initiated by the
Inspectors, required to clarify the position of interviewees and some ancillary matters
(see above), with three exceptions, interviews with Bank personnel did not commence
until February 1999.

Approximately 113 people held the position of branch manager during the period
covered by the investigations. After interviewing 35 of these managers, the
Inspectors were satisfied that they had received sufficient evidence to enable them to
conclude that the practices being investigated existed.

The Inspectors have concluded that it would not be fair to name in their report the
branch managers and Bank customers interviewed. Likewise, branch manager and
customer interviewees quoted in the report have not been identified.

Numerous discussions were held with Bank executives in the course of the
investigation. A number of these were of a formal nature, particularly in relation to
reports prepared, and action taken, by the Bank. There were many other meetings on
a less formal basis, directed at expediting progress in the Inspectors' work. In
addition to these direct contacts, there was extensive correspondence both with the
Bank and its legal advisors.

Review of Actions Taken by the Bank

Fieldwork in review of actions taken by the Bank was carried out by


PricewaterhouseCoopers personnel working to the Inspectors' direction. These
reviews were followed by formal meetings with senior Bank personnel and by
presentations from Bank executives in relation to actions taken by the Bank in the
period following the Inspectors' appointment.

Authorised Officer - Acknowledgement

In conducting their investigation into the affairs of NIBFSL, the Inspectors had the
benefit of sight of the report of the authorised officer Mr Cosgrove, and of discussions
with Mr Cosgrove, whose assistance in expediting the initial phase of their
investigation of the Company the Inspectors gratefully acknowledge.

The Second Phase

Individuals

After the conclusion of the first phase of the investigations, the Inspectors prepared
their provisional findings and then wrote to every individual who could be adversely
affected by them, setting out the provisional findings which affected the recipient and
details 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 of
making whatever submission or argument they might wish to present. In addition
they were informed that they could give evidence themselves, call witnesses, and
examine any witness if they so wished. They were requested to let the Inspectors
know within fourteen days whether they wished to attend before the Inspectors or
make a written submission.

Progress during this phase was very slow. It was not practical to impose strict time
limits.

The Inspectors received numerous requests for documentation and for transcripts of
the evidence of other persons interviewed by the Inspectors; consideration by the
parties of material furnished on foot of these requests proved time consuming.

There were significant delays while individuals were making up their mind if they
wished to cross-examine someone and, if they did, who it should be. Then, where
cross-examination of a witness was sought, adequate notice had to be given to the
witness, his or her availability confirmed, and a date fixed which suited all parties
and, since there were altogether twenty four separate cross-examinations of witnesses,
this part of the phase occupied a considerable amount of time. A number of
individuals introduced expert witnesses; several also offered further direct evidence.
In addition, the Inspectors and their legal advisors had to deal with a substantial
volume of correspondence from the lawyers of the persons involved.

Not all the parties to whom the Inspectors wrote in this phase of the investigations
sought to cross-examine witnesses. With one exception however, all made written
submissions, the majority supplementing these by oral submission through counsel.

As a result of the various matters referred to, this part of the second phase of the
investigation 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 testimony of
witnesses 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 in
respect of a number of persons were modified.

The submissions received on behalf of the different individuals were of such


substance and variety that it would not be possible for the Inspectors to give their
responses to each without inordinately increasing the volume of the report. The
Inspectors have, however, taken fully into consideration the submissions of each
individual before reaching a final conclusion as to their knowledge or responsibility.

In arriving at their conclusion in regard to any individual, the Inspectors relied solely
on evidence notified to such individual and on any additional evidence adduced by the
individual by way of examination or cross-examination of a witness or witnesses.

Where any conflict arose between the evidence of any individual and the evidence of
a witness or witnesses which would support an adverse finding, the individual was
given an opportunity to cross-examine such witness or witnesses, and the conflict was
resolved by the Inspectors having regard to their view of the credibility of the
individual and of the relevant witness or witnesses in the light of their cross-
examination.

The Bank

Following the completion of their provisional findings in respect of individuals, the


Inspectors, on 1 August 2003, furnished their draft report to the Bank. In their letter
accompanying the draft, the Inspectors informed the Bank, as they had informed each
individual to whom they had written at the commencement of the second phase, that
in addition to making submissions either written or oral, or both, the Bank would be
entitled to cross examine witnesses on whose evidence the Inspectors were relying,
and to call further evidence if it wished. The Bank did not take up the option of
calling or cross-examining any witnesses.

Following a number of preliminary meetings, on 24 March 2004, senior executives of


the Bank, accompanied by the Bank's lawyers, delivered to the Inspectors the Bank's
response to the draft report. The response is a document entitled "Reaction Paper"
containing four and a half pages of text and seven schedules, which is reproduced in
full at Appendix 19.
In this Reaction Paper the Bank does not take issue with anything contained in the
draft report and does not seek any change in it.

The text of this report, therefore, is unaltered from that passed to the Bank on 1
August 2003, apart from this account of the second phase of the investigation as it
relates to the Bank, the inclusion of the Reaction Paper as an additional Appendix and
a number of references thereto in the text, some minor textual amendments, and a
small number of deletions arising from the Inspectors' final review of the draft report.

In the Reaction Paper the Bank expresses its regret that during the period under
investigation events took place which fell short of the standards customers and third
parties dealing with the Bank were entitled to expect, and apologises to all those who
have been affected by the events. The Bank describes the terms of the draft report as
being of the utmost gravity and states that accordingly the Bank's view is that the
taxpayer should not be liable for the Inspectors' costs and the Bank will therefore
offer to discharge the Inspectors' reasonable taxed costs of the investigation, as
recommended in the draft report furnished (see below).

The Reaction Paper also sets out how the Bank has responded, and is responding, to
certain of the Inspectors' findings, and the changes the Bank has made to ensure that
events 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,
amounting to Euro 64 million, arising from the issues addressed in the investigations,
of which Eurol0.8 million relates to the Bank's ongoing "Offshore Investors'
Settlement Programme" and Eurol2.5 million represents refund and compensation
payments to customers in respect of fees and interest. This latter amount includes
anticipated additional refunds of Euro 10.6 million arising from a programme of work
and refunds devised in light of the Inspectors' views expressed in their draft report.
This programme is described at Schedule V to the Reaction Paper.

RECOMMENDATION ON COSTS

Section 13 (3) of the Companies Act, 1990 provides that "The report of an inspector
may, if he thinks fit include a recommendation as to the directions (if any) which
he 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 the
investigation.

The Inspectors consider that their report should include a recommendation as to the
directions to be given under subsection (1).

The Inspectors' recommendation, in the light of their investigation, is that the Bank
should repay to the Minister for Justice, Equality and Law Reform the entire of the
expenses of and incidental to the investigation.
PART 2

EVASION OF REVENUE OBLIGATIONS:


INCORRECTLY CLASSIFIED
NON-RESIDENT DEPOSIT ACCOUNTS
EVASION OF REVENUE OBLIGATIONS:

INCORRECTLY CLASSIFIED NON-RESIDENT DEPOSIT ACCOUNTS

LEGISLATIVE REGIME

Position prior to the introduction of Deposit Interest Retention Tax

Deposit Interest Retention Tax ("DIRT") was introduced by the Finance Act, 1986.
Prior to the introduction of DIRT, under Section 175 of the Income Tax Act, 1967, a
bank was obliged, if required to do so by notice from an Inspector of Taxes, to make
and deliver to the Inspector a return of all interest paid or credited without deduction
of tax, giving the names and addresses of the persons to whom the interest was paid or
credited and stating in each case the amount of the interest. The statutory limit below
which there was no reporting requirement for gross interest paid or credited on a
deposit was IR£50.

However, if a person to whom any interest was paid or credited served a notice in
Form F, on the bank:

(i) declaring that the person beneficially entitled to the interest was not then
ordinarily resident in the State,

(ii) requesting that the interest not be included in any return under Section 175 of
the Income Tax Act, 1967, and

(iii) undertaking to advise the bank without delay in the event of the person
beneficially entitled for the time being to the interest becoming ordinarily
resident in the State,

no return under Section 175 was necessary in respect of that interest.

Where the bank was not satisfied that the person who had served the notice in Form F
was non-resident at the time the claim was made, it was obliged to request that that
person provide the bank with an affidavit stating the name, address and country of
residence of the depositor at the time the interest was paid or credited on the deposit
account the subject of the notice in Form F served on the bank and, if the depositor
was not the beneficial owner of the interest paid or credited on the account, giving
like particulars in respect of the beneficial owner. The declarations in Form F were
inspectable by the Inspector of Taxes on a named individual basis only.

Position after the introduction of DIRT

Following the introduction of DIRT, a bank, as a relevant deposit taker, is required


under Section 32 of the 1986 Act to treat every deposit made with it as a relevant
deposit and to deduct tax at the standard rate or, in the case of a relevant deposit held
in a Special Savings Account, at the reduced rate in force at the time, from all interest
paid or credited on the deposit, unless satisfied that the deposit is not a relevant
deposit.
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 person
"resident" in the State) and a non-resident declaration in a form prescribed or
authorised by the Revenue Commissioners has been made to the bank pursuant to
Section 37 of the Act by the person or persons to whom any interest on the deposit
is payable;

• A deposit by a charity the interest on which is exempt from income tax or, in the
case of a company, Corporation Tax, and in respect of which a declaration
pursuant 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 in
respect of which a declaration pursuant to Section 37B of the Act has been made
to the bank, and

• A deposit made on or after 1 January 1993 by, and the interest on which is
beneficially owned by, a pension scheme and in respect of which a declaration
pursuant to Section 37B of the Act has been made to the bank.

During the period the subject of the investigation, banks were obliged to make a
return to the Revenue Commissioners by 20 April each year detailing the interest paid
in the year to the previous 5 April on which DIRT was exigible, and the DIRT in
respect of that interest, and were obliged at the same time as the return was due to pay
to the Revenue Commissioners the balance of the DIRT deductible for the relevant tax
year, having taken account of any amount paid by way of interim payment on account
of the DIRT deductible.

Non-Resident Declaration

The non-resident declaration made to the bank must be made by a person to whom
interest is payable, must be signed by that person and must:

• Declare that the person or persons beneficially entitled to interest on the deposit
up to 5 April 1995 is not or are not "ordinarily resident" in the State or thereafter
is not or are not "resident" in the State;

• State the names, addresses of principal places of residence and the countries of
ordinary residence or residence, as applicable, of the person or persons entitled to
interest on the deposit at the time the declaration is made; and

• Contain an undertaking by the declarer that, if the non-residence conditions cease


to be satisfied, the bank will be advised accordingly.

Before November 1993, when the Revenue gave a concession that a non-resident
declaration would also serve to exempt interest on non-resident accounts from any
requirement to report it to the Revenue, it remained necessary for banks to hold a
Form F for this purpose.

Summary

The relevant provisions of the Finance Act, 1986 in relation to non-resident deposit
accounts held by individuals may be summarised as follows. If a non-resident Irish
Pound denominated deposit account (or a foreign currency deposit on or after 1
January 1993) is to be excluded from the definition of a relevant deposit, and
accordingly free from the obligation to have DIRT deducted, a bank must be satisfied
that in respect of such deposit up to 5 April 1995 no person "ordinarily resident" in
the State was beneficially entitled to any interest (and after 5 April 1995 that no
person "resident" in the State was so entitled) and in addition the bank must hold a
completed non-resident declaration form complying with the requirements indicated
in the preceding paragraph (subject to certain transitional provisions in relation to
foreign currency deposits).

N I B PROCEDURES

Prior to the introduction of DIRT, the Bank maintained accounts designated non-
resident.

The procedures laid down by the Bank for the introduction and operation of DIRT
were communicated to branch managers and other branch personnel in various ways,
principally by way of Special Circulars. A summary of the relevant sections of the
principal communications is set out below:

• Special Circular No. N13/86 was issued by Northern Bank Limited (to branches in
the Republic of Ireland only) on 18 March 1986. This circular advised the
introduction of DIRT with effect from 6 April 1986 and set out the manner in
which non-resident deposit accounts were to be "flagged" at account level for
DIRT purposes. It stated that the Bank's mainframe computer would examine all
accounts on the system and would set the appropriate retention tax flags for each
account category; retention flag "B" would be set on all accounts at that time
designated as non-resident, with the implication that interest earned or credited on
such accounts was to be paid without deduction of DIRT. Branch staff were
required to ensure that the correct flags were set for any accounts opened after 4
April 1986.

• Special Circular No. S5/86 was issued by the Bank to all branches on 24 July
1986. This circular gave notice of the availability of declaration forms for non-
resident deposit accounts to satisfy the declaration requirements of Section 37 of
the Finance Act, 1986 and advised that such forms must be completed by 5 April
1987 for all non-resident accounts which existed at 5 April 1986, in default of
which the account must revert to being liable to DIRT.
• Routine Circular No. R17/87 was issued to all branches on 1 April 1987, advising
that all branches were to receive a report as at 6 April 1987 indicating the DIRT
category of all deposit accounts. Branch staff were instructed to examine this
report carefully and to ensure that the appropriate new declaration forms were in
place for all accounts identified as not liable to DIRT, in default of which the
account must revert to being liable to DIRT.

• Special Circular No. S9/93, issued to all branches on 11 March 1993, advised the
branches of the introduction of branch Retention Tax Compliance Reports which,
insofar as they related to non-resident accounts, required the branch to:

o Examine all non-resident accounts flagged as exempt from DIRT to ensure


that they were valid non-resident accounts and that non-resident declarations
were held, and

o Amend the DIRT flag so as to make liable to tax at standard rate all interest on
any account where the requisite non-resident declaration was not held.

• In support of the implementation of the new LiveLink system (ie the Bank's main
system for maintaining customer account details and transactions) on 3 May 1994,
a LiveLink Reference Manual was issued to all branches. The introduction states
""It is imperative that all Branch staff read and familiarise themselves with the
contents of this manual prior to the implementation of the new system."

The reference manual introduced a new Non-Resident Monitoring Report to be


produced on the working day after a static amendment had been made to any non-
resident accounts at a branch. The purpose of the report was to highlight
amendments on non-resident accounts which, prima facie, were inconsistent with
the non-resident status afforded to the account and which therefore required
further 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, to
record his decision on the non-resident status of the customer and to attach both
records to the relevant non-resident declaration form.

• Following consideration of the results of the DIRT Theme Audit described at


pages 54 and 55 below, Special Circular No. SI 1/95 was prepared by the Bank's
Finance and Planning Department and issued to all branches on 8 March 1995
under the signature of Frank Brennan, General Manager. The circular, which
replaced all previous circulars in relation to DIRT, stated that "DIRT must be
deducted at the standard rate unless a valid declaration is held which has been
signed, dated and in all other respects fully completed by the customer." The
circular pointed to the responsibility of the staff member opening a non-resident
deposit account to have a thorough understanding of the procedures for the
opening of such accounts and to obtain fully and properly completed
documentation 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
other identification with details of the person's address and signature as evidence
of the entitlement to the non-resident status sought and that a photocopy of the
identification documentation 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 branch
manager and returned to the Bank's Finance and Planning Department. The
standard-form report declared that the branch manager understood the contents of
Special Circular No. SI 1/95 and either confirmed that the branch had proper
statutory declarations on file for all accounts classified as DIRT-exempt non-
resident accounts or, where a proper statutory declaration was not held, detailed
the action which the manager proposed to take to rectify the situation.

The circular also introduced a one page DIRT guide for use by cashiers and other
branch staff which sought to summarise the contents of Special Circular No.
SI 1/95 and included the following direction to branch staff:

The official who opens the account must be fully satisfied that the customer is
a non resident and I. D. must be produced before an account may be flagged
non resident.

• Special Circular No. S20/96 was issued to all branches on 24 April 1996. This
circular, while emphasising that it was not the role of the Bank to give tax advice
to prospective customers, set out the residency requirements for entitlement to
non-resident status for DIRT and directed that:

The bank should satisfy itself that the customer is a bona fide non-resident,
documentary evidence should be produced e.g. foreign driving licence,
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 non-resident
would shortly issue from Head Office. Each branch manager was required to
examine all non-resident declarations, and, where the declaration was dated after 8
March 1995, the attached identification documents introduced by Special Circular
No. SI 1/95, and certify by completing and signing a branch confirmation
certificate that he/she was completely satisfied that all customers on the list issued
from Head Office remained non-resident.

Inspectors' Criticism of the Special Circulars

The Circulars referred to above failed to inform branch staff expressly of the
provisions of Section 32 (2) of the Finance Act, 1986, which require that a "relevant
deposit taker shall treat every deposit with it as a relevant deposit unless satisfied that
it is not a relevant deposit" - ie in the context of non-resident deposit accounts the
Bank was obliged to treat every deposit account as an account in respect of which
DIRT was to be deducted from interest paid or credited on the account, unless the
Bank held a valid declaration from the depositor and was satisfied that the person
beneficially entitled to the interest was genuinely non-resident. It meant that the
Bank was obliged to look at all non-resident deposit accounts on its books, since the
provision applied both to existing and future accounts, and to deduct DIRT from the
interest paid or credited on any accounts in respect of which it was not satisfied that
the depositor was non-resident. This was never clearly explained to branch staff.

Because of this omission, managers seem to have believed, as appears from their
evidence to the Inspectors, that, provided they had the declaration from the customer
that he was non-resident, nothing further was required of them.

The first time that branch personnel were asked to concern themselves with the
validity 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 valid
Non-Resident accounts and that non-resident forms are held." While this Circular
required that non-resident accounts should be examined in order to ensure they were
valid, the Circular did not specify how their validity should be tested. The Circular
did not state, as it ought to have, that a non-resident account was not valid unless the
Bank was satisfied that the person beneficially entitled to the interest on the account
was non-resident. Furthermore, the only circumstance in which branch staff were
directed to take action was if a non-resident form was not held. In such a case the
non-resident flag was to be amended so that DIRT would be deducted.

Special Circular No. SI 1/95 introduced documentary requirements for the opening of
new non-resident accounts. It required that before any new non-resident account
could be opened, documentation had to be produced as evidence that the depositor
was resident outside the State (e.g. a driving licence or passport or other identification
with details of the person's address and signature). But there was still the same
omission as before. Branch staff were not instructed that DIRT had to be deducted
unless the Bank was satisfied that the depositor was non-resident. Because of this, an
individual who was resident, but happened to have a foreign passport, or a foreign
driving licence, would have been able to open a non-resident account. In regard to
existing non-resident accounts, the circular was also deficient. The only direction
given was that DIRT had to be deducted at the standard rate "unless a valid
declaration is held which has been signed, dated and in all other respects fully
completed by the customer".

Circular S22/95, issued on 15 May 1995, refers to a DIRT aide memoir prepared by
Finance and Planning Department as a guide for use by cashiers and other branch
staff. It is stated that it summarises the contents of Circular S11/95 but in fact it does
more than that. It contains for the first time in any Bank document relating to non-
resident accounts an instruction that" The official who opens the account must be fully
satisfied that the customer is a non-resident..." This instruction, however, concerns
the opening of new accounts only. The Guide does not deal with existing accounts.

BRANCH MANAGER EVIDENCE ON OPERATION OF PROCEDURES

Present and former branch managers interviewed by the Inspectors have indicated that
they did not believe there was any onus on them to check the veracity of the non-
resident declaration made by a customer when opening a non-resident account, and it
was not their practice to do so. The procedure followed was to have the depositor
sign the signature card, and complete and sign the form of declaration. The
declaration was taken at its face value. The managers were under pressure to get
deposits and did not question it. They considered the signature card and form of
declaration was all that was required, and this remained the position until May 1995
when the Bank introduced account opening procedures to assist compliance with the
money laundering provisions of the Criminal Justice Act, 1994.

Illustrative evidence from managers, which the Inspectors accept:

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

oooOooo

Inspector: When you were opening a non-resident account, what


procedure did you adopt to satisfy yourself that the person was
in fact a non-resident?

Manager: That they completed the form and signed it. I would say, being
honest, nothing more than that.

Prior to the Money Laundering Act there was no onus on the


bank at that stage to produce [proof of identity] ...we took the
word of the customer.

oooOooo

Inspector: ... did you feel that in regard to the form that you had to try and
satisfy yourself that the declaration was reasonably accurate
or, put in a more negative way, that you had no reason to
believe 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 Criminal


Justice Act 1994, all we needed at that time for a non-resident
account was the declaration and signature card.

Inspector: Yes. And what was the position in regard to checking whether
or not the person who was taking out the account was in fact a
non-resident?

Manager: There was no obligation on me.


oooOooo

We didn 't open a non-resident account unless the person had a non-resident
address and came in and said they were non-resident. Then, and this was
before we had to have documentary evidence for opening accounts, you didn't
query them to an extent because you were under pressure to get deposits.

oooOooo

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

oooOooo

The only time I saw pressure ... to do something with these accounts was in
1995 when Paul Harte in early 1995 [addressed the issue at an area meeting
of branch managers.] That's when the pressure came on to close these
accounts, up to that there wasn 't [any pressure],

oooOooo

... if you had a customer that presented himself or herself to you as being a
non-resident of the State, you were required to hold a non-resident declaration
form, and in practice that's basically all that happened. If a person was
completing a non-resident form, then generally speaking we didn't probe
beyond that.

oooOooo

[Up until a couple of years ago] if a customer came in and signed a non-
resident declaration generally that was sufficient.

oooOooo

As a manager I was delighted to see people coming in with over a hundred


thousand pounds. I wouldn 7 be running around the streets to check if they
were resident or otherwise but if he was a next door neighbour of yours or if
he was lodging money every day of the week, there would be an onus on you
then to do something about it.

ENQUIRIES OF BRANCH PERSONNEL BY SENIOR BANK MANAGEMENT

Just as the branch managers considered that what was required for the opening of a
non-resident deposit account was the obtaining of the appropriate declaration, senior
Bank management appear to have taken the view that the essential requirement for the
validity of a non-resident deposit account was that the branch held the appropriate
declaration in respect of it.
On a number of occasions between 1989 and 1993 Frank Brennan (the General
Manager - Retail Banking to 30 June 1991, and thereafter General Manager -
Corporate Services, and General Manager - Administration) wrote to branch
managers about DIRT-free deposit accounts, and in the case of non-resident deposit
accounts his request was always for confirmation that a non-resident declaration was
held in respect of each non-resident account. This request was sometimes phrased
slightly differently, being a request for confirmation that proper documentation was
held for all non-resident accounts.

On 7 August 1991 Mr Brennan also wrote to the three Regional Managers - Kevin
Curran, Regional Manager North West, Tom McMenamin, Regional Manager East,
and Michael O'Rourke, Regional Manager South (with copies to Basil Noone,
General Manager - Banking and Dermott Boner, Head of Retail) - on the subject of
DIRT-exempt accounts, and in particular bogus non-resident accounts. He referred
to the view of the Department of Finance that "a normal degree of care" is required of
a bank in assessing whether a deposit is a relevant deposit or not, and stated "7/ is vital
therefore that all DIRT exempt accounts are supported by a properly completed
declaration form"

On 11 November 1991, by way of follow-up to his letter of 7 August 1991, Mr


Brennan again wrote to the Regional Managers requesting that they confirm to him
"that all D.I.R. T. exempt accounts are correctly documented'.

On 26 November 1993 Mr Brennan wrote to each branch manager reminding him of


the procedures for opening non-resident accounts and advising him that he would
shortly thereafter receive a computer printout listing all accounts classified as DIRT-
exempt at his branch. Mr Brennan requested each manager to complete and return to
him a certificate in the following form:

I confirm that proper documentation is held in respect of all non-resident


accounts listed on print-out dated 2 December 1993.

As noted above, Special Circular No. S22/95 introduced standard-form semi-annual


DIRT compliance reports in which the branch manager declared he understood the
contents of Special Circular No. SI 1/95 and either confirmed that his branch had
proper statutory declarations onfile for all accounts classified as DIRT-exempt non-
resident accounts or, where a proper statutory declaration was not held, detailed the
action which the manager proposed to take to rectify the situation.

From the approach adopted by senior Bank management, there appears to be no doubt
that the emphasis was always on proper documentation being held in support of all
non-resident accounts and this clearly influenced how branch managers understood
their obligations in regard to these accounts. When branch managers were asked by
Mr Brennan, or their Regional Manager, to confirm that non-resident deposit accounts
were properly documented, or that they held the appropriate declaration in respect of
all of them, they considered they were entitled to reply in the affirmative provided
they held the relevant declarations, irrespective of the actual status of the account
holder. In confirming that they held the relevant forms they were not vouching the
validity of the information in those forms.
Evidence from branch managers to this effect, accepted by the Inspectors, includes:

Inspector: ... when you say "properly completed" does that... mean that
there was any effort made to authenticate the information on
the form at that stage?

Manager: No, not as I understand it.

Inspector: So if, so effectively if you had a non-resident account form ...


tick the box and move on to the next one?

Manager: I reckoned that was the end of my responsibility.

oooOooo

My view on that is very simple: you put the question to me to confirm that all
documentation was in order, that we held all documentation but was it that we
held all documentation or that all documentation was in order? ... I can have
every account in the place as a bogus non-resident account and so long as I
have a non-resident form for each of them my documents are in order and
held.

oooOooo

Inspector: ... what is it you believed that branch managers were being
asked to confirm?

Manager: That they held completed non-resident forms in respect to every


account.

oooOooo

The use of the phase "all documentation " was to me a cop out. Your
documentation might be right but that does not mean the account is right.

oooOooo

Manager: The emphasis was on, have you a declaration for the account.

Inspector: ... in relation to sending these back, once there was a


declaration you sent it back, saying you had the declaration, it
was not in anyway validating the authenticity of the
declaration?

Manager: No, I don't think so.

oooOooo
Inspector: And the confirmations that you would send back, what was it
that you were confirming? Was it that you held declaration
forms or was it that you were confirming you held the forms
and was (sic) vouching the validity of the information on those
forms?

Manager: No, just that we were holding declaration forms.

oooOooo

I would say it indicated we had a form for the actual account being there, the
accuracy of it would not have been examined in detail. ... At all.

oooOooo

Inspector: When you were signing that and saying that "proper
documentation ..." does that mean you have a form for each
non-resident account or that you have researched the facts as to
whether the account holder is actually non-resident?

Manager: To me it would have implied that the form was held.

oooOooo

My memory is that the focus at the time was purely on whether if you had X
number of non-resident accounts, did you have X number of non-resident
declarations to match those accounts.

... the bank's audit team and senior management focus purely on whether a
declaration existed for a particular account or not...

oooOooo

EXISTENCE OF BOGUS NON-RESIDENT ACCOUNTS IN THE BRANCH NETWORK

The Inspectors received evidence of the existence of bogus non-resident accounts in


the branch network through interviews with Bank customers, interviews with Bank
personnel at both branch manager and senior management levels, and from review of
internal Bank correspondence and branch audit reports.

Bank Customer Interviews

In the course of interviews with persons who invested in the Clerical Medical
Insurance ("CMI") Personal Portfolio policy (see Part 5), the Inspectors received a
substantial body of evidence in regard to the existence of bogus non-resident accounts
in the branch network. Most of the investors had been customers of the Bank and
had had such accounts before making their investment. In some cases they stated
they had opened the accounts on the advice of the branch manager, in others it had
been at their own request with a view to evading tax. In the case of most of the
investors, they stated that the manager was well aware that they were not non-
resident.

The Inspectors are satisfied that on this issue there is substantial agreement between
the evidence of the customers and that of the branch managers. Illustrative evidence
from customer interviews, accepted by the Inspectors, includes:

Inspector: Was the deposit account with a Northern Ireland address held
in [branch]?

Customer: It was in [different branch] first where [manager name] was


but subsequently when he moved to [branch] I moved the
account to there.

Inspector: So when [manager name] was in [different branch] you had the
deposit account with a Northern Ireland address and when he
transferred to [branch] you went with him?

Customer: Yes.

Inspector: When you had the deposit account in [branch] with a Northern
Ireland address who suggested that you should invest in CMI?

Customer: [manager name] was the first person to suggest that there were
advantages in meeting this financial advisor, Mr [name].

Inspector: Was it the position that the deposit account with the Northern
Ireland address would be closed and the account opened with
CMI?

Customer: Yes. I was anxious to get my money back. As a policeman I


was getting worried about it, I was not happy about it and they
were aware of that.

oooOooo

Inspector: What made you decide to put the money into [branch] and in a
non-resident account?

Customer: To avoid paying tax on it. In addition there was the fact that it
was money that was taken from the business which would be
hard to explain to the Revenue at the time ...

Inspector: Where were you living at the time you had the account?

Customer: In [town in Republic of Ireland, distant from branch],

oooOooo
Inspector: And what was the address on the account?

Customer: It was an address in England. When I opened the account I


was advised that this was the best way to put in the money and I
would not have to pay tax on it. I had a daughter living in
England and it was her address I used.

Inspector: When had you opened the account?

Customer: I had it for years.

oooOooo

Inspector: What address was on the account when you opened it, was it
your new address in [town in Republic of Ireland] or your
Australian address?

Customer: [named street], that is in Melbourne.

Inspector: Was that because people in the bank thought you were living in
Australia?

Customer: No, they were very aware of where I was.

Inspector: They were fully aware of where you were?

Customer: Yes.

Inspector: Effectively, at the time you opened the savings account which
was to earn interest you had a bogus non-resident account?

Yes.
Customer:
oooOooo

So in June '92 you came back home to the house that you
Inspector:
bought the previous year, so you took up residence here in
Ireland and you had an account in the National Irish Bank in
[town], OK, with "care of the branch" on it?

Customer: Yes.

Inspector: OK, but you didn 't have your own address on it?

Customer: No.

Inspector: But he [ie named manager] would have been aware you were
now living in Ireland?
Customer: Oh, yes.

Inspector: Why would that be, why would he just have "care of branch "?

Customer: To avoid the tax.

oooOooo

Inspector: And whose name was that deposit account in?

Customer: The deposit account was in my wife and my young son and
myself, ...

Inspector: And what address would have been on that account?

Customer: It was an English address.

Inspector: And so from a tax point of view, would you have been, at that
stage, an Irish resident?

Customer: Oh yes, very much so, very much so.

And later

Inspector: So at that stage then [in January 1987], what discussion took
place with the bank ... vis-a-vis opening a non-resident
account?

Customer: Yeah, well I am going to say this out straight. The manager, he
said, "why don't you open an English account, a non-
residential (sic) account".

Inspector: What benefit would he have put forward in relation to that?

Customer: Well, he says you don't have to reveal it to the tax people.

Inspector: And who was that manager?

Customer: [manager name] was his name.

oooOooo

Inspector: And then he [ie named Bank official] opened an account for you
in the [name] branch?

Customer: Yes.

Inspector: And he opened it as a non-resident account?


Customer: Yes.

Inspector: What was the address for that account?

Customer: It was [spouse's aunt] 's address when she was in America.

Inspector: How did he know that address?

Customer: We gave it to him, he asked us for the American address.

Inspector: Who did he think this money belonged to?

Customer: We told him the story, I would say he thought it was our money.

Inspector: So he knew it was your money?

Customer: Yes.

Inspector: What was the reason for his opening a non-resident account for
you?

Customer: The way you wouldn 't have to pay tax on it...

Inspector: In whose name was the account in [branch]?

Customer: It was in [spouse]'s parents' name with [spouse's aunt] 's


address in America.

oooOooo

Inspector: Would the bank have been aware you had accounts in different
names?

Customer: They would have set that up for me at the start for the simple
reason that I would say to the bank I could get better interest in
different places and they would say, we '11 sign a form - I think
it was an F17 where you declare you are non-resident - we will
get you that you will not be paying DIRT, you are not supposed
to be in the country. So that they set up that for me, it wasn 't a
matter of me going in and asking for it. I would just say that I
could get 1% interest rate better in some other bank and they
would say, no, hold on, sign this form.

Inspector: Who would have introduced that concept to you, who would
have said you could have a non-resident account?

Customer: [name], the bank manager.


oooOooo

Inspector: Now, Miss [customer name], do you know the particulars of


this account in the National Irish Bank in [named town]? Your
brother said it was a non-resident account.

Customer: Yes, and it was in both our names.

Inspector: In both your names?

Customer: Yes.

Inspector: And what address was given?

Customer: I think it was [named street]. Wait until I see.

Inspector: Where was it? Was it in England or the States or ...

Customer: Australia I think it was.

Inspector: And how was it that the address in Australia was given? Was
that on your suggestion or on someone else's suggestion?

Customer: It was their suggestion.

Inspector: When you say "their suggestion", who?

Customer: In the bank.

Inspector: In the bank?

Customer: Yes.

Inspector: And can you remember who it was that, who was it? Was it the
manager's suggestion or another official?

Customer: The Manager.

Inspector: Can you remember the name of the Manager?

Customer: [mispronounced, but identifiable, manager name].

Inspector: Was he there at the time?

Customer: I think it was [mispronounced, but identifiable, manager name].

oooOooo
Inspector: Whose address is that UK address?

Customer: It was the address of an uncle of mine who is now dead.

Inspector: So it is an address you would have supplied to the bank


yourself?

Customer: That is correct.

Inspector: I take it you did not live there?

Customer: No, apart from going there on holidays.

Inspector: At the time you supplied that address you would have been
resident in the Republic of Ireland?

Customer: Correct.

Inspector: Would you know, in relation to that account, if DIRT was


deducted, that is, the deposit account with a foreign address?

Customer: I couldn 't honestly say that.

Inspector: Can you tell me why there was a foreign address on the
account?

Customer: I suppose it was avoiding paying tax on it.

oooOooo

Inspector: Was the money you used to invest in the CMI in an account in
the names of yourself and your sister?

Customer: Yes, but it was my money.

Inspector: And what was the address for the account?

Customer: It was an American address. I was in America and I had


money there a few years before I came back. I came back in
'84 so they had my American address, they just kept it under
that address.

Inspector: Was this money you had brought back with you from America?

Customer: Most of it.

Inspector: Had it been in that account then in the names of yourself and
your sister from 1984?
Customer: Yes.

Inspector: And with the American address?

Customer: Yes.

Branch Manager Interviews

Branch managers indicated at interview that the practice of having bogus non-resident
deposit accounts existed throughout the Bank.

Illustrative evidence, accepted by the Inspectors:

...I would say around '92, '93, the first rumblings were probably starting that
there had to be something done about the non-resident situation in the banks,

oooOooo

Inspector: In relation to bogus non-resident accounts, you have said


clearly that there was an industry-wide problem and it existed
on a reasonably extensive scale within NIB. Is that not right?

Manager: Yes.

Inspector: ... is that something that was just in the awareness of the
branch manager network or would everyone have known about
it?

Manager: I would say everybody had to know.

oooOooo

Inspector: In your view did the practice of what could loosely be described
as bogus non-resident accounts exist within the bank?

Manager: Yes.

Inspector: Did it exist within those branches where you were manager?

Manager: Yes.

Inspector: ... have you reason to believe that practice was widespread
within the network?

Manager: Without question.

40
Inspector: Would people at a senior level within the bank, people at a level
above branch manager, have been aware of the existence of
that practice?

Manager: They would because most of these people, certainly under the
Northern Bank regime, worked their way up from postage clerk
to senior position ...

oooOooo

Manager: ... I think when you went in [ie on transfer to a different


branch] you inherited and you stayed with them.

Inspector: The first time that you felt there would have been any
significant pressure in relation to this was when Mr Harte
tackled the matter in 1995?

Manager: Correct.

oooOooo

Inspector: Was it something that was available at the branches where you
were manager, were they within the branch, regardless of
whether you opened some or whether you inherited some?

Manager: I would have thought there would have been a certain few in
each branch.

oooOooo

Inspector: At that stage what would have happened once you discovered
they were not genuine non-resident?

Manager: In a lot of cases nothing. We would have tried to tidy them up


and tell them that is not non-resident, we want them to become
resident and attract DIRT. If they disagreed we would
eventually say to them that we would get the financial services
to talk to them.

oooOooo

Inspector: Did they exist, from your knowledge, right across the branch
network?

Manager: Yes, I would have to say it would be widescale.

oooOooo
Interviews with Senior Bank Management

Senior Bank management were questioned on their knowledge of the existence of the
practice. Responses included:

Dermott Boner

Inspector: ... would that have given rise to suspicion on your behalf that
there may have been in existence in the branch network bogus
non-resident accounts?

Mr Boner: Yes.

And at a later interview:

I'm saying we had suspicions that a lot of managers hadn 't shown their hand.

There was no test to ensure that there were no bogus non-resident accounts.
What the branches were told was that the bank did not want [bogus] non-
resident accounts ...

Kevin Curran

There were some mavericks [in the branches] there is no question or doubt
about it.

[Revenue evasion] was a national sport in the eighties and early nineties.

Frank Brennan

I was blue in the face writing to branches about the requirements under the
Finance Act, 1986 ... I do not think I could put my hand on my heart and say
we were perfect at any stage.

I recall writing on a number of occasions giving instructions to close down


such accounts and saying that we were not in the business of bogus non-
resident accounts.

Interviews with former Heads of Internal Audit

Former heads of the Bank's internal audit function made observations as follows:

Enda Carberry

As far as I recall it came up in a number of audits ... which in itself would tend
to support the view that there was a culture.
Paul Harte

I believed it was a practice that had been there for quite a while, both in
National Irish Bank and in the industry.

And at a later interview:

Inspector: Do you believe that certain of the managers within the branch
network deliberately tried to conceal the maintenance of these
accounts from the internal auditors by use of fictitiously named
accounts, or whatever?

Mr Harte: Yes, Yes.

Internal Bank Correspondence

Gerry Hunt, Head of Financial Control, in November 1993 addressed a memorandum


titled "Non Resident Accounts" to Mr Brennan, Mr Keane and Mr Boner, with a copy
to Mr Lacey, noting concerns expressed to him by senior officials in the Department
of Finance and in the Office of the Revenue Commissioners regarding "the alleged
actions of a number of bank officials ". He expressed the view that a Revenue audit
focussing on non-resident documentation was likely and noted a difficulty in
explaining the significant increase in the level of non-resident deposits held at
branches of the Bank in the year ended 30 September 1993. He stated that he had
spoken with the Group Tax Manager and the Head of Audit and reported that both
shared his concerns that the Bank's documentation might be "weak" in the following
areas:

1. c/o branch addresses.

2. Non resident declaration forms missing, incomplete or inaccurate.

3. Unusual addresses that clearly warrant closer scrutiny eg Main St., Swansey,
(sic) Wales.

4. Obvious errors eg non res. deposit and resident loan in same name.

Mr Hunt was interviewed by the Inspectors:

Inspector: Can you recall whether you would have had a genuine concern
at the time?

Mr Hunt: I would not have written that note [of 18 November 1993] if I
did not have some concerns.

The full text of Mr Hunt's memorandum is reproduced at Appendix 8.

On 7 November 1994, prior to the commencement of the DIRT Theme Audit


discussed at pages 54 and 55 below, Paul Harte, Head of Audit, sent a memorandum
to Mr Brennan, Mr Keane and Nigel D'Arcy, Head of the Bank's Financial Advice
and Services Division, stating, inter alia:

Non-Residents

(a) Branches again need to be reminded of the requirements in relation to


non-residents. It is not sufficient to simply have a non-resident form -
where branches are aware that customers are resident DIRT must be
deducted.

(b) the whole area of DIRT needs to be reviewed. Audit Department will
soon carry out a theme audit of the area and this will cover all areas
including instructions issued to branches, forms, staff knowledge,
withdrawal notice requirements etc.

On 9 February 1995, on the completion of the DIRT Theme Audit, Mr Brennan


addressed a memorandum to the Executive Director of the Bank, Barry Seymour,
which included the following:

Having wrestled with DIRT for a number of years, I do believe that we must
introduce a change of attitude by our management staff to the legal
requirements. It is an Irish failing that there is considered little harm in
closing ones eyes to tax evasion and to confusing evasion with avoidance.

INTERNAL AUDIT REPORTS

General

Branch audit reports are consistently critical of the standard of compliance with the
legislative provisions and Bank procedures pertaining to the operation of non-resident
deposit accounts. With regard to the Bank's obligation to hold a non-resident
declaration in a form prescribed or authorised by the Revenue Commissioners
pursuant to Section 37 of the Finance Act, 1986 for each account designated by the
Bank as a non-resident account, the deficiencies most commonly reported were:

• Failure to produce non-resident declaration form at time of audit;


• Holding a "Charities" declaration form instead of a non-resident declaration form;
• Relying on "obsolete" non-resident declaration forms in use prior to the Finance
Act, 1986;
• Non-resident declaration forms not dated, (eg Dungloe, July 1995: 39% of sample
undated);
• Non-resident declaration forms not fully completed, and
• Incorrect account number on non-resident declaration form.
Use of Incorrect Forms

As a transitional measure, the Finance Act, 1986 provided that existing non-resident
declarations given to a bank under Section 175 (4) of the Income Tax Act, 1967
would continue to have effect up to 5 April 1987 as if they were declarations made
under Section 37 of the 1986 Act. After that date declarations under the 1967 Act
ceased to have effect and thereafter declarations in the new format are necessary for
all non-resident accounts. Special Circular No. S5/86 and Routine Circular No.
R17/87 issued by the Bank to all branches on 24 July 1986 and 1 April 1987
respectively advised branches of this requirement.

Notwithstanding what was advised in these circulars, it was noted in internal audit
reports on 27 branches between 1988 and 1996 that obsolete non-resident declaration
forms were still in use. In addition, audit reports on 18 branches between 1991 and
1996 noted that "Charities" declaration forms were being used instead of non-resident
declaration forms.

Use of Bank as Accommodation Address

Internal audit reports for branches in May 1992 and November 1992 noted the use of
branch as an accommodation address and stated that such use was not to occur in the
future. In his letter of 26 November 1993, Mr Brennan advised each branch manager
that use of the branch as an accommodation address was strictly forbidden when
opening non-resident accounts.

As noted at page 26 above, the new LiveLink system became operational in all
branches on 3 May 1994. This system required input of a customer address for each
deposit account. Internal Audit subsequently reported that notwithstanding the clear
instruction in Mr Brennan's letter, "care of branch" addresses and Irish addresses
were being input to LiveLink for non-resident deposit accounts. Between September
1995 and October 1996 one or other or both of these irregularities were noted by
Internal Audit as having occurred in 17 branches.

In course of interview with Mr Boner, the Inspectors referred to a memorandum dated


23 November 1993 sent by him as Head of Retail to all branch managers.

Inspector: In particular I refer to the following:

1. Care-of branch addresses. What's the problem with car e-


of branch addresses?

Mr Boner: Well, care-of branch addresses would obviously lead to


conclude (sic), rightly or wrongly, that there's some reason why
the person can't give a proper address; and, therefore, that they
may not be a legitimate non-resident. I mean, if they were a
legitimate non-resident, why wouldn 't they give a non-resident
address?
Non-Resident Declarations at variance with other branch records

Internal audit reports at the dates listed below noted instances where non-resident
declarations were at variance with other branch records. Examples include:

August 1991 (circulated to J Lacey, B Noone, D Boner, K Curran)

A number of completed forms were at variance with other branch records.

March 1992 (circulated to J Lacey, B Noone, D Boner, T McMenamin)

It would appear that some accounts designated 'Non-Resident' are connected


to other resident accounts at Branch.

May 1992 (circulated to J Lacey, B Noone, D Boner, M O'Rourke)

A few instances were noted where the residential status quoted on the non-
resident declaration forms were at variance with other Branch records.

July 1992 (circulated to J Lacey, B Noone, D Boner, K Curran)

Instances were noted where the residential status quoted on the declaration
was at variance with other Branch records.

Recommended Action

The Manager must be satisfied that all Non-Resident accounts are bona fide
and comply fully with the requirements of the Finance Act 1986.

September 1992 (circulated to J Lacey, B Noone, D Boner, K Curran)

Instances were noted where the residential status on Non-Resident


Declaration forms was at variance with other Branch records.

April 1993 (circulated to J Lacey, M Keane)

One instance was noted where the residential status quoted on a Non-Resident
declaration form was at variance with other Branch records. (The account
has since been correctly designated Resident).

May 1993 (circulated to J Lacey, M Keane, D Boner)

Instances were noted where the residential status on Non-Resident deposit


accounts was at variance with other Branch records.

July 1993 (circulated to J Lacey, M Keane, D Boner)

Three instances were noted where the residential status on a Non-Resident


savings account was at variance with other branch records.
October 1993 (circulated to J Lacey, M Keane, K Curran)

Eleven instances were noted where the address on the non-resident savings
account was at variance with other branch records.

August 1994 (circulated to B Seymour, MKeane, D Boner)

Three instances were noted where the address on Non-Resident accounts was
at variance with other branch records.

Recommended action

The Manager/Assistant Manager is asked to ensure that all non-resident


accounts at Branch are bona fide.

September 1995 (circulated to B Seymour, M Keane, K Curran)

During the course of the Audit, Management gave written confirmation that all
Non-Resident accounts were genuine. Despite this confirmation, it was noted
on five occasions (3%) that Non-Resident addresses were at variance with
other branch records.

Non-Resident Deposits as Security for Resident Borrowings

Internal Audit also identified instances where non-resident deposits were held as
security for resident borrowings, among which were:

March 1992 (circulated to J Lacey, B Noone, D Boner, K Curran)

It was noted that two Bonus Saver accounts were classified non-resident
where Letters of Lien were held supporting lending on resident accounts in the
same names.

November 1992 (circulated to J Lacey, B Noone, D Boner, K Curran)

Advances made to Branch customers [name] are partly secured by a letter of


lien over deposits held in the same name. These deposits are designated non-
resident (exempted from Retention Tax) on the basis that correspondence for
administrative purposes is to a United Kingdom address. The account should
immediately be redesignated to collect Deposit Interest Retention Tax.

February 1993 (circulated to J Lacey, B Noone, D Boner, M O'Rourke)

One instance was noted where a Bonus Saver account was exempt from
Deposit Interest Retention Tax and the beneficial owners were Irish residents.
It was further noted that these deposits were held in support of a letter of
guarantee for lending at Branch. The funds have now been transferred in to
an account which is subject to DIRT in future.
July 1993 (circulated to J Lacey, M Keane, D Boner)

Three instances were noted where lending to resident customers was secured
by Letters of Set-Off over Non-Resident deposits at Branch.

Branch Response

A full review of all L. O.L. security will now take place and above incidences
(long standing) will be addressed.

August 1995 (circulated to B Seymour, MKeane, TMcMenamin)

Two instances were noted where lending to resident customers was secured by
Letters of Set Off over deposits with Non Resident status. The deposits in both
cases related to the principals of the companies in question.

Recommended Action

Management are asked to ensure that this practice ceases immediately. Non
Resident accounts must not be opened in future unless they are genuine.

April 1996 (circulated to B Seymour, M Keane, K Curran)

A non-resident savings account with a present balance of £10,780 in the name


of [two names] was opened in September 1994. These deposits belong to
[two different names] (IR residents). It is further noted that a letter of set-off
is held over these deposits.

Non-Resident Accounts in Fictitious Names

Internal Audit also reported instances where non-resident savings accounts were
maintained at branches in fictitious or incorrect names, including:

October 1993 (circulated to J Lacey, M Keane, K Curran)

Seven instances were noted where there was a mismatch between the name on
the account and the exact name of the customer.

A deposit receipt account is held in a fictitious name.

April 1994 (circulated to B Seymour, M Keane, D Boner)

1. A Non Resident Super Saver account is held in the name of [two names]
and the account details are at variance with other Branch records.
2. It was also noted that the customer details on Livelink relating to [two
names as above] are in the name of [two different names, incorporating
the same first names but different surname].

Further examination of transactions which passed over the account revealed


that [second surname as above] & [first surname as above] are one and the
same persons. Retention Tax is not collected on this Super Saver account,

June 1995 (circulated to B Seymour, M Keane, T McMenamin)

Four other instances were recorded where Non-Resident savings accounts


were opened in fictitious or incorrect customer names.

September 1995 (circulated to B Seymour, M Keane, K Curran)

1. A non-resident savings account with a balance of £210,000 is held in the


name of [two names]. These deposits belong to Branch customers [two
different names] (IR residents). This particular account was
highlighted in the October 1993 audit when at that time the funds were
held on Deposit Receipt.

2. A non-resident savings account with a balance of £27,900 is held in the


name of [name] (IR resident). These deposits belong to Branch
customer [different name].

Branch Response

These accounts have had a long association with NIB. In the case of item
one, every effort has been made to have the account regularised. If it is the
Bank's desire to instruct Branch to have these accounts closed, then proper
procedures will be implemented in future. ... These accounts have been in
existence prior to my arrival in June 1993.

January 1996 (circulated to B Seymour, M Keane, K Curran)

Both the Manager and the Assistant Manager signed a declaration confirming
that fictitious/incorrectly named accounts do not exist and that all non-
resident accounts are genuine. Despite this confirmation the following
irregularities were found:

1. A non resident savings account, which currently has a balance of £23Ok,


in the name of [two names] was opened in November 1992. These
deposits belong to [two different names, comprising the same first names
but different surname] T/A [name] (IR residents).

2. A non-resident savings account with the present balance of £100k in the


name of [two names] was opened in August 1995. These deposits
belong to [two different names] (IR residents).

3. A non-resident savings account with a present balance of £205k in the


name of [name] was opened in May 1994. These deposits were
previously in the name of [different name]. These deposits belong to
[name differing from both noted above] (IR resident).

The irregularity noted at 1. above had been noted on the previous Internal Audit visit

to this branch (see April 1994 extract above).

February 1996 (circulated to B Seymour, M Keane, K Curran)

Audit were made aware of the following irregularities:


1. A non resident savings account, which currently has a balance of
£78000 in the name of [two names] was opened in January 1993. These
deposits belong to [different name] (IR resident).

2. A non-resident savings account in the name of [two names/initials,


single surname] was opened in June 1995. Present balance £58000.
These deposits belong to [two different names/initials, with the same
surname as above], (IR residents).

3. A non-resident savings account in the name of [two names/initials] was


opened in December 1992. Present balance £32000. These deposits
belong to [two similar names, incorporating one different initial], (IR
residents).

4. Deposit accounts in the names of [name] & [name] (Total balances


£148000) are incorrectly designated as Non Residents.

It should be noted that present management did not open these accounts and
they are presently endeavouring to make contact with the relevant customers
to have the irregularities rectified.

WHY DID BRANCH PERSONNEL OPERATE BOGUS NON-RESIDENT DEPOSIT


ACCOUNTS?

Branch managers have indicated that they opened and maintained bogus non-resident
deposit accounts for the following reasons:

• To gain or retain deposits - the branches were under pressure to increase deposits,
and were struggling to do so. Because of competition from other banks,
frequently the only way to gain or keep a deposit was to agree it should be DIRT
free.

• To preserve a business relationship - if a valuable customer threatened to


withdraw his business, unless facilitated, the account might have been lost.

• In the culture of the time, closing an account because it was bogus would not have
been accepted as a good reason for losing the deposit.
Illustrative evidence received from branch managers and accepted by the Inspectors
includes:

I am aware that I did facilitate a couple of customers with non-resident status,


which, in hindsight, I was not totally comfortable with but it was to protect a
deposit that Ifelt would have been lost to one of my competitors ...

I was regularly faced with the challenge that if I did not do it, it would be done
by [named other banks] or whoever.

There may well have been a wider business connection that would have been
valuable to me.

oooOooo

Manager: ... you didn't query them to an extent because you were under
pressure to get deposits.
And later

Inspector: If you had said that the reason for losing the account was
because you would not facilitate the operation of a [bogus]
non-resident account - would you not have regarded that as a
justifiable reason?

Manager: No, because of the pressure you were under, either directly or
indirectly, to get business.

oooOooo

Inspector: ... why at that stage would you just not tell them you were going
to close the account?

Manager: First, we would be losing the money out of the deposits for the
branch and we were struggling to reach the deposits.
Certainly if it was a big amount there would be a lot of
gathering to make it up and make our target for that year ...

oooOooo

On the one hand they 're telling me to get it sorted out, on the other hand
they 're telling me to get the resources up.

oooOooo

Under the pressure to increase the business I was happy to do it.

oooOooo
... going back to the pressure element, or the threat of losing business to
[named bank], I mean, I think we were scared, I would say, of losing business.

I think possibly the overriding ambition to increase your deposit base may
have taken precedence over the strict interpretation of the non-resident rule.
I suppose if you reclassified those accounts, the chances are you would lose
the business and the deposits, as you can see, would plummet.

It would be a very brave man in the regime that was in the bank at that time
that would have stood up and be (sic) counted, and say the deposits are
actually going down by 20 percent overnight, the reason being, X, Y, Z. I
don't think anyone was brave enough to stand up and do that.

oooOooo

Inspector: [Why] would you have facilitated the maintenance of bogus


non-resident accounts within the branch?

Manager: Possibly from the fear of losing the business.

oooOooo

As a branch manager you tried to protect your base as best you could and I
would reckon that most people, if they saw someone approaching and saying,
"I am closing that account, I can get a better rate down the street, I won't
have to pay any tax on it, " it was possibly done to retain the business.

oooOooo

... they were big customers in [branch] that had successful operations, they
had bank accounts elsewhere ... and I was trying to get my foot in the door.

And as well as that, I was heavily targeted for deposits on the other side. ...
and the best way I could get my foot in the door at the time as Ifelt at the time
was to facilitate them in whatever way I could.

It was pressure that I needed these accounts to achieve my targets and if I rock
the boat anyway that the accounts would leave me.

I was a bit more than flexible regarding the rules and maybe I bent the rules
or turned a blind eye on occasions to achieve my targets ... the deposits would
have been lost to the opposition. And deposits at that time were very hard to
replace.

oooOooo

In the course of interview, evidence, which they accept, was given to the Inspectors
by the Head of Audit to the effect that the failure to address the issue of bogus non-
resident deposit accounts in the Bank resulted from management inaction due to the
potential effect on the Bank's deposit base of addressing this issue.

Paul Harte

Inspector: Can you tell me why it took time to sort out the accounts?

Mr Harte: In my view it was because of management inaction. ...I think


there was a reluctance on management's behalf to lose that sort
of money from the network.

Inspector: Because it was quite significant?

Mr Harte: Yes.

METHOD OF ACCOUNTING FOR D I R T

Where the Bank affords non-resident status to a deposit account, the deposit account
is flagged as being exempt from DIRT - ie interest on the account is to be paid gross
of DIRT. The onus is placed on branches to ensure that the correct DIRT flags are
set at account level. Thereafter the amount of DIRT deducted on the payment or
crediting of interest on deposit accounts is processed automatically by the
computerised accounting systems of the Bank.

Accordingly, if the DIRT flags set at account level by branch personnel are incorrect,
an incorrect return of DIRT to the Revenue Commissioners will result.

Extract from interview with John O'Brien of the Bank's Finance Department:

Inspector: And if they had told you [the conclusions of the DIRT Theme
Audit report] ...or made the report available to you, would it in
any way have influenced the way you would have gone about
preparing and submitting the return?

Mr O 'Brien: Not really because it was very much a mechanical exercise


completing the return. You really took the figures that were
provided ... for you from the financial reports. The only
analysis that went into it was really kind of checking that what
was the reason for maybe a large increase in the amount of
DIRT paid or whatever because we wanted to kind of make sure
we weren 't paying too much to the Government. And we would
have been looking at say the balances of deposits and whether
they had increased significantly or whether interest rates had
increased or whatever.
Extract from interview with Gerry Hunt, former Head of Finance:

Inspector: I am puzzled by the fact that insofar as your returns are


concerned you were acting separately from what was going on
in the bank. In other words, you were accepting the
information you were given and there was no way your
department could check the accuracy of that information.

Mr Hunt: By and large that is true. There was very little way, we
inherited systems and those systems were tried and tested over
the years. They accumulated information and there were
literally millions and millions of transactions going on.

Inspector: At what stage, when the tax return was put in front of you and
you were signing on behalf of the bank, would you say, better
check these out?

Mr Hunt: We would have checked the authenticity of the numbers. There


were procedures there to be gone through ... if a procedure did
not happen properly at a branch, there was no realistic way we
could find out. There were internal controls and checks and
others would have had the responsibility to ensure that those
things were done properly ...

Inspector: And you are clear from your perspective nobody ever raised
any issue in relation to taxation matters with you coming from
the internal audit of the branches?

Mr Hunt: I can't recall anyone raising such issues.

D I R T THEME AUDIT, DECEMBER 1994

On the initiative of Paul Harte, Head of Audit, the Bank selected the area of DIRT
compliance for its first Theme Audit, a concept whereby a particular theme or area is
selected for review on a Bank-wide basis. The Bank's stated reason for the selection
of DIRT for the first Theme Audit was:

DIRT compliance issues (principally missing and incomplete documentation)


continue to be reported in branch and other audits on a regular basis. For
this reason, it was decided to select DIRTfor our first theme audit to gain an
understanding of the extent of DIRT compliance problems.

The results of the DIRT Theme Audit, carried out in December 1994, were rated as
unsatisfactory with the following overall conclusion recorded:

Results of this audit are very disappointing and management must take
immediate steps to improve the situation. The structure of the whole area can
be improved but the level of non-compliance is too high. It appears that there
needs to be an organisation-wide change in attitude to the whole area. This is
a risk area and the penalties for non-compliance at the level shown in this
report would be very significant.

In the course of the audit, internal audit staff visited twelve branches in total. Each
branch sample included 30 non-resident accounts and the report states that testing in
that category "concentrated for the most part on the following areas":

Ensure that properly completed non resident declaration forms were held for
the 30 non-resident accounts. Briefly check that address on declaration form
is not at variance with other branch records.

The report's major findings on the main issues affecting all aspects of DIRT
compliance were:

1. Lack of clear and concise guidelines. Procedures do not clearly


differentiate between the different types of DIRT.

2. Lack of understanding regarding documentation required for each account


category e.g. we identified instances where charity form was used for a
non-resident account.

3. There has been no co-ordinated review of all DIRT documentation on a


regular basis. In late 1993, Administration Department conducted a
review of non resident and DIRT exempt accounts whereby all branches
were required to sign off on DIRT documentation held. This type of sign
off does not guarantee that all DIRT documentation is in order as branch
audits have continued to reveal problems in this area.

Major findings in relation to non-resident accounts included:

• Approximately 40% of declarations selected contain some


errors/omissions.

• Our examination of non-resident accounts showed:

1. Non-resident declaration forms were not sighted for 12% of accounts.

2. 21% of the declarations had an incorrect account number.

3. 13% of the declarations were not dated.

• Details at variance with other branch records

Instances have been reported in branch audits where non resident details
were at variance with other branch records. Some branches appear to be
of the opinion that once a non resident declaration form is held there is no
obligation on the branch to confirm the residency of the account holder.
The DIRT Theme Audit report is reproduced in full at Appendix 9.

Follow-up Meeting to DIRT Theme Audit

On 20 January 1995, following completion of the DIRT Theme Audit report, Michael
Keane, General Manager - Banking, sent a memorandum to Barry Seymour,
Executive Director, noting that the "recent theme Audit gives serious cause for
concern" and suggesting that a meeting take place "to define the extent of the problem
and to produce an action plan (including definition of responsibilities)." This
meeting, chaired by Mr Keane, took place on 9 February 1995 and was attended by
Mr Seymour, Mr Brennan, General Manager - Administration, Mr Boner and Mr
McMenamin, Regional Managers, Mr Harte, Head of Audit, Patrick Byrne, Head of
Finance, and others. The minutes of the meeting record that the following action
steps were agreed:

• Issue of a circular to contain clarification of the rules in relation to DIRT and


simple instructions to be followed at branch level. The responsibility for drafting
this circular was assigned to the Finance Department.

• Ongoing control and enforcement to be effected by issuing to branches on a


quarterly basis lists of accounts designated as non-resident, and requesting
compliance checking at branches.

• Audit staff to examine these lists as part of audit of compliance testing in future to
ensure that DIRT documentation checking is complete.

• Branch Business Meetings to be devoted for a period of time to DIRT issues, in


relation to compliance with the procedures laid out in the circular for DIRT-
free/SSA accounts to be issued to branches, noting that non-compliance would
result in immediate reversion to standard rate DIRT deduction status on the
account.

The minutes note that, for future reference, responsibility for monitoring and
enforcement of DIRT/tax compliance in relation to savings and deposit accounts
rested with Retail and Administration. The summary timetable of agreed actions
resulting from the meeting however records no action points for Administration.

The minutes do not evidence any consideration of the question of a potential


retrospective liability to the Revenue Commissioners for DIRT resulting from the
findings of the Theme Audit. This was confirmed to the Inspectors by a number of
those who attended the meeting:

Barry Seymour

Inspector: ... did anybody attempt at the time to quantify the amount of
money that may have been due to the Revenue?

Mr Seymour: Not to my recollection, Tom, no. I can't say that. But whether
or not Patrick Byrne did it in Finance, I don 7 know. But not to
my recollection.

Inspector: But it isn 't something that was discussed?

Mr Seymour: Not to my recollection, no.

Patrick Byrne

Inspector: Would you be aware ... if there was any effort to retrospectively
quantify the tax that would have been due?

Mr Byrne: ...my recollection is ... there was no talk when it came to tax or
financial statements as of September, at putting a figure in for a
liability. So the only deduction I have from that is there wasn 't
a figure calculated.

Michael Keane

Inspector: One thing that puzzles me, but after the date, the DIRT issue, ...
[whether there] was liability for DIRT in arrears, was that ever
raised or discussed within the bank?

Mr Keane: No, insofar as I can recall it was looking forward to fixing it is


what my recollection was as separate (sic) to look back and to
see was there any liability.

Frank Brennan

Inspector: ... who would you have regarded had the responsibility in the
bank to quantify any liability that may have existed to the
Revenue?

Mr Brennan: I don't remember that specific question being asked of anybody


but the Finance Department were the people responsible for
returning the tax deducted to the Revenue and I would see it as
their responsibility ...

The Bank's external auditors, KPMG, received a copy of the DIRT Theme Audit
report and it was considered by them when conducting their audit of the Bank's
financial statements for the year ending 30 September 1995. When conducting their
audit KPMG were, accordingly, aware of the conclusion in the DIRT Theme Audit
report that "this is a risk area and the penalties for non-compliance at the level shown
in this report would be very significant'' and this put them on notice of a potentially
material liability. This should have led to KPMG asking management to quantify the
potential retrospective liability to the Revenue Commissioners for DIRT resulting
from the findings of the Theme Audit. KPMG did not seek to have this done. The
Inspectors are of the opinion that, if KPMG had requested that the potentially material
liability be quantified, this would have emphasised its importance to senior
management and it is unlikely that they could have ignored it, as they did.

The Bank has confirmed to the Inspectors that it has found no evidence that, on
discovering irregularities in the operation of non-resident accounts either as a result of
the DIRT Theme Audit of December 1994 or otherwise, the Bank calculated the
DIRT liability resulting from the deficiencies noted or, prior to the Inspectors'
appointment, remitted any payment to the Revenue Commissioners in discharge of
such liability.

THEME AUDIT - TAXATION OF CREDIT INTEREST, JANUARY 1999

During August and September 1998 the European Audit Division of National
Australia Bank conducted an audit of compliance with tax legislation and internal
procedures of the Bank. Ten non-resident deposit accounts were selected for review
in each of ten randomly selected branches; no stratification by value took place.

The overall conclusion of the report on this Theme Audit, issued January 1999,
includes the following:

• We have assessed the standard of compliance in National Irish Bank as


UNSATISFACTORY. A high level of errors has been identified in ...
Overseas Resident Accounts (NOR) ...

• 18% of sampled NOR accounts have been found to be erroneous when


tested against current legislative requirements. These errors do not in
themselves suggest that the customers were ineligible for the payment of
interest without deduction of tax but do indicate a need for immediate
remedial action.

• Controls at branch level have not been effective despite confirmations to


the contrary from branch management through the Bank's six-monthly
declaration process. Increased centralisation of the overview and control
processes should be considered as the key element of any future control
framework.

"Significant Audit Issues" identified relating to non-resident accounts included:

• It was evident that in some cases blank declarations had been signed by
customers and branch staff had not subsequently ensured that the
declarations were fully completed.

• Procedures for ensuring that customer's identity was verified did not
provide evidence that this, in fact, had occurred.

• The six-monthly branch declaration process, to confirm that D.I.R.T.


requirements were being met on an ongoing basis, was not robust and
gave a false picture of compliance in the Bank.
The 18% error rate noted above was analysed as follows:

7% no declaration held

5% not signed by all parties

3% address missing or incorrect for at least one party to the account

3% account records suggested that advice had been received indicating the
customer was now resident in the Republic of Ireland. However, the
account status had not been changed and it therefore remained in
operation as a non resident account.

Referring to the six-monthly declaration confirming compliance with DIRT


regulations, the report noted:

• 9 of the 10 branches sampled had erroneously certified full compliance or


had failed to identify accounts which were invalid;

• there is no process in Finance Department to ensure all declarations are


held or to follow up those branches where full compliance has not been
achieved;

• the wording of the existing declaration form is ambiguous and does not
support the objective of ensuring full compliance with DIRT regulations.

INSPECTORS' CONCLUSIONS

The Inspectors find:

1. Bogus non-resident deposit accounts were opened and maintained by the Bank
and were widespread in the branch network during the period the subject of
the investigation.

2. The opening and maintenance of such accounts by the Bank constituted an


unlawful and improper practice which served to encourage the evasion of
Revenue obligations by third parties, both on the funds deposited and on
interest earned.

3. Up until May 1995 senior Bank management failed to inform branch staff in
clear terms of the relevant provisions of the Finance Act, 1986 - that non-
resident deposits had to be treated as deposits in respect of which DIRT had to
be deducted from the interest unless the Bank was satisfied that the person
beneficially entitled to the deposit was non-resident. In addition, senior Bank
management failed to have a review conducted at that time to ensure that all
existing non-resident accounts were genuine.
4. At branch level the Bank failed to deduct DIRT from bogus non-resident
accounts and from non-resident accounts where a properly completed
declaration in a form prescribed or authorised by the Revenue Commissioners
was not held by the branch.

5. Although senior management was aware of the existence of bogus non-


resident accounts, the Bank failed to account to the Revenue Commissioners
for the DIRT properly payable on the interest paid or credited on such
accounts.

6. The Bank failed to account to the Revenue Commissioners for DIRT payable
on the interest paid or credited on non-resident accounts where the Bank did
not hold a properly completed declaration in a form prescribed or authorised
by the Revenue Commissioners.
PART 3

EVASION OF REVENUE OBLIGATIONS:


FICTITIOUS AND INCORRECTLY NAMED
ACCOUNTS
EVASION OF REVENUE OBLIGATIONS:
FICTITIOUS AND INCORRECTLY NAMED ACCOUNTS

N I B PROCEDURES

Formal Guidance to Staff

The position at 1 January 1988 was governed by the account opening procedures set
out in the Branch Procedures Manual of 1976. These provided that as regards current
accounts the manager had "to satisfy himself as to the identity, respectability and
suitability of the proposed customer" but as regards deposit accounts all that was
required was that "a specimen signature" be obtained on a special signature card.

Subsequent guidance to staff is summarised below:

• The provisions of the 1976 Manual relating to current accounts were repeated in
the Branch Procedures Manual of 1992 and were for the first time also applied to
deposit accounts.

• The first mention of accounts in fictitious names in any Bank document occurs in
the Code of Conduct/Policy and Staff Guidelines of February 1993. Section 3 of
this document, at paragraph 3.2 under the heading "Prevention of Fraud", provides
as follows:

The Bank can at any time be a target for fraud. The sophistication of
criminals is such, that fraud can sometimes be difficult to detect. Staff should
be continually alert where unusual activities or requests are made by
customers, non-customers and colleagues, irrespective of that colleague's
rank or position. Procedures are in force to protect both the Bank and staff
and should be adhered to at all times. These procedures are detailed in the
various procedural manuals, circulars and management instructions.

Accounts must not be opened or operated in fictitious names. Where any


doubt exists, consult your immediate superior.

• On 21 April 1995 Special Circular No. SI9/95 on money laundering was issued to
all staff members prior to the coming into effect on 2 May 1995 of the money
laundering provisions of the Criminal Justice Act, 1994 affecting the Bank. This
circular states:

This Act now adds the full rigour of criminal law to the prohibition on
opening/conduct of accounts in fictitious names referred to at Para. 3.2 in the
Bank's Booklet "Code of Conduct/Policy and Staff Guidelines " of February
1993.

• In September 1996 the Bank issued a Human Resources Policy & Procedures
Manual. Section 3 set out the Code of Conduct for Bank employees and at
paragraph 3.6 under the heading "Prevention of Fraud" states:

Our bank can at any time be the target of fraud. Your actions and decisions
can help prevent these attempts being successful. Staff should be continually
alert where unusual activities or requests are made by customers, non-
customers and colleagues, irrespective of that colleague's rank or position.
Accounts must not be opened or operated in fictitious names. This can be
avoided by ensuring that the correct procedures for identifying customers are
adhered to at all times. In particular the Money Laundering Provisions of the
Criminal Justice Act must be adhered to at all times.

Poor adherence to procedures which permit fraud to occur will result in


disciplinary action, which may include dismissal, against any employee.

• The prohibition on opening accounts in fictitious names is again reiterated in Part


B of the 1996 Branch Procedures Manual (the relevant section was issued in
January 1997). At paragraph 2.2, captioned "Outline of Requirements re Money
Laundering", it states:

Officials must always be alert to the possibility of accounts being used for
Money Laundering purposes. Do not permit accounts to be opened in
fictitious names or where any associated business cannot be seen to conform
with ethical and legal standards.

EXISTENCE OF FICTITIOUS AND INCORRECTLY NAMED ACCOUNTS

In the light of the evidence received from Bank personnel and from customers of the
Bank, the Inspectors are satisfied that fictitious and incorrectly named accounts
existed in the Bank during the period the subject of the investigation, up until the end
of 1996.

Illustrative evidence, which the Inspectors accept, is set out hereunder.

Extracts from Letters from Bank Personnel

At the outset of the investigation the Inspectors wrote to present and former
employees of the Bank who, in the period from 1 January 1988 to 30 March 1998,
held positions at the rank of manager or above, reciting the terms of the Order under
which they were appointed, and requesting they furnish all information or
documentation that might be relevant to the investigation. The following extracts
from replies are relevant to the opening and maintenance of fictitious or incorrectly
named accounts:

During my period as Deputy Manager, [named] Branch (1993 - to date) a


small number of accounts (three or four) were brought to my attention by
cashiers etc as being in incorrect names. At my request they have all since
been closed. All attracted DIRT tax at the normal rate prior to closure.

oooOooo

There were a few irregular non-resident accounts and fictitious accounts at


this office ([named]) when I arrived here and these have either been closed or
regularised to the proper name/status.

oooOooo

Prior to the requirement to seek proper identification, under the Money


Laundering Act 1995 (sic), it may have been that accounts were opened on the
basis of incorrect information from customers.

Bank Customer Interviews

Inspector: And who would have known about the existence of that account
[in incorrect name]?

Customer: Myself and the manager.

oooOooo

Inspector: There was money used [for investment in CMI] from an account
in [correct names], the [branch name] account?

Customer: Yeah.

Inspector: And there was one in [incorrect names] in [different branch]?

Customer: Yeah.

Inspector: Who actually owned the account in the [different] branch?

Customer: We owned it, yeah.

SOURCE OF FUNDS FOR INVESTMENT IN C M I , SCOTTISH PROVIDENT


INTERNATIONAL AND OLD MUTUAL INTERNATIONAL POLICIES

Data provided by the Bank disclosed that many investments in CMI, Scottish
Provident International and Old Mutual International policies were funded, in whole
or in part, from funds in fictitious or incorrectly named deposit accounts in the Bank's
branch network, certain of which had DIRT deducted from interest earned.
WHY WERE ACCOUNTS OPENED IN FICTITIOUS NAMES?

In the light of the evidence received, the Inspectors are satisfied that the main reason
customers had accounts in fictitious names was to keep undeclared funds hidden from
the Revenue and that branch managers were aware of this.

Illustrative evidence, which the Inspectors accept, is set out hereunder.

Branch Manager Interviews

Inspector: ... where people had accounts in the incorrect name what would
you have thought the reason for that was?

Manager: I can surmise ... that there was probably a Revenue


background.

oooOooo

Inspector: What would your view be as to why somebody would have a


fictitious account?

Manager: Well, my view would be to conceal money from ... maybe even
from a family member or it could be from the Revenue
Commissioners.

oooOooo

Inspector: What would you have thought yourself as to why people chose
to have the accounts in a second, in their second initial; would
that relate to sensitivity?

Manager: We would have to take that as being a reason.

oooOooo

Inspector: I would like to know whether or not you were aware of a


practice in the bank of facilitating the opening up of fictitiously
named accounts or bogus non-resident accounts?

Manager: Well, in my limited experience as a manager, I would say I have


come across the issues.

Inspector: And in relation to people like Mr [incorrect customer name], or


who had bogus non-resident accounts, would it be reasonable
to assume that the Revenue didn 't know about that money?

Manager: I would imagine in some of the cases it would be reasonable.

oooOooo
Inspector: What would have been the purpose of these [fictitious or
incorrectly named] accounts?

Manager: Obviously they didn 7 want the Revenue to know about it.

EFFORTS TO ELIMINATE FICTITIOUS AND INCORRECTLY NAMED ACCOUNTS

Memorandum from General Manager - Banking, 1995

On 7 December 1995 Michael Keane, General Manager - Banking, issued to all


branch management a memorandum titled "Account Names/Descriptions". The
essence of the memorandum was that it informed branches that:

• Opening or operating accounts in fictitious names is expressly forbidden


in our Code of Conduct.

• Operating accounts in this manner does not fulfil our "Professionalism in


our actions and ethics " value.

and managers were asked to 'fulfil [their] personal responsibility" in regard to such
accounts

Memorandum from General Managers, 1996 and involvement of Head of Audit

The next step towards eliminating fictitious and incorrectly named accounts was
initiated by Paul Harte, Head of Audit. This was a meeting held to discuss such
accounts on 15 May 1996, attended by Frank Brennan, General Manager
Administration, Michael Keane, General Manager Banking and Kevin Curran, Head
of Retail Banking

Following this meeting, on 30 May 1996, Mr Keane and Mr Brennan issued a


memorandum to all branch management titled "Fictitious/Incorrectly Named
Accounts". This memorandum informed the branches that "all fictitious or
incorrectly named accounts must be regularised and/or closed, even where there is a
possibility that the business will be lost. "

Mr Harte's involvement with the issue continued as the memorandum required branch
management to complete and return to the Audit Department by 15 June 1996 a
declaration to the effect that:

• there were no fictitious or incorrectly named accounts at the branch,


• the branch manager had not instructed or authorised any other member of staff to
open fictitious or incorrectly named accounts, and
• no fictitious or incorrectly named accounts had been closed in the previous three
months.
In the event that any fictitious or incorrectly named accounts existed in the branch or
had been closed in the previous three months, the memorandum required that these
accounts be listed on the declaration, noting the account name, the customer's name
and "Comments/Action Plan".

Review of Declarations from Branch Managers

On 22 July 1996 Mr Harte furnished to Mr Keane and Mr Brennan, with a copy to Mr


Curran, a summary of the declarations returned and his recommendations arising
therefrom. Mr Harte's report noted that 24 branches had disclosed fictitious
accounts, and that the highest number of fictitious accounts in any one branch was 13.

Following receipt of the declarations, Mr Harte received from branch managers


progress reports on their efforts to regularise these accounts. These reports indicate
that included in the steps taken by the managers to resolve the problem of fictitious
and incorrectly named accounts were:

• The funds in the account were transferred to CMI.

• The account was relocated in another branch of the Bank in the customer's correct
name.

In the opinion of the Inspectors these proposed solutions were improper as they served
to encourage the continued evasion of tax by the Bank's customers.

The Board Audit Committee

The Board Audit Committee of the Bank, meeting on 24 February 1997, "noted that
all falsely designated accounts have now been cleared ".

INSPECTORS' CONCLUSIONS

The Inspectors find:

1. Fictitious and incorrectly named accounts were opened and maintained by the
Bank and existed throughout the branch network during the period of the
investigation up until the end of 1996.

2. The opening and maintenance of such accounts by the Bank served to


encourage the evasion of tax as it concealed the true ownership of the funds in
the accounts.

3. Bank personnel were aware or ought to have been aware of the reason for the
opening of such accounts.

4. In 1995 and 1996, when branch managers were directed that all fictitious and
incorrectly named accounts must be regularised and/or closed, even where
there was a possibility that the business might be lost, managers sought to
retain for the Bank the funds on deposit in such accounts by proposing to the
customers that they invest in CMI, or by suggesting that they deposit the funds
in another branch of the Bank in their correct names.

In the opinion of the Inspectors these "solutions" were improper because they
served to encourage customers to continue to evade tax.
PART 4

EVASION OF REVENUE OBLIGATIONS:


SPECIAL SAVINGS ACCOUNTS
EVASION OF REVENUE OBLIGATIONS:
SPECIAL SAVINGS ACCOUNTS

LEGISLATIVE REGIME

On or after 1 January 1993, Section 37A of the Finance Act, 1986 as introduced by
Section 22 of the Finance Act, 1992 permitted the opening by individuals of bank
accounts designated as Special Savings Accounts ("SSA's"), the interest on which
benefited from a reduced rate of Deposit Interest Retention Tax ("DIRT"), being 10%
up to 5 April 1995 and 15% from 6 April 1995 to 5 April 1998, provided certain
conditions were met and a declaration confirming compliance with those conditions,
in a form prescribed or authorised by the Revenue Commissioners, was made by the
deposit holder to the bank.

The conditions attaching to such accounts in the period from 1 January 1993 to 30
March 1998 are detailed in Section 37A of the Finance Act, 1986, now Section 264 of
the Taxes Consolidation Act, 1997. These conditions, in addition to the requirement
that the completed declaration referred to above was held by the bank, were:

• The account shall be opened and held in the name of the individual beneficially
entitled to the interest;

• The account shall not be opened or held in the name of an individual who is not at
least 18 years of age or married;

• The balance in the account shall not at any time exceed IR£50,000 including
relevant interest;

• Except in the case of a couple married to each other, the account shall not be a
joint account;

• An individual may have only one SSA at any time except that a couple married to
each other may have two joint accounts with a maximum balance of IR£50,000,
each opened and held jointly by them;

• No withdrawal of money shall be made from the account within the period of
three months commencing with the date on which it is opened, and

• The terms on which the account is opened shall require the individual to give a
minimum of 30 days' notice to the relevant deposit taker in relation to the
withdrawal of any money from the account.

Interest on SSA's is not returnable by the account holder as income for the purposes
of the Income Tax Acts and accordingly the reduced rate of DIRT deducted from
interest payable on SSA's is regarded as satisfying the individual's full liability to tax
in respect of that interest and furthermore the interest payable is ignored for the
purposes of PRSI, Health Contribution and Employment Levy.
An account ceases to be an SSA if any of the conditions attaching to such accounts
cease to be satisfied with the effect that:

• The bank must deduct tax at the standard rate then in force from all interest paid
or credited on the deposit on or after the date the account ceases to be an SSA, and

• The individual is liable for PRSI, Health Contribution and Employment Levy on
such interest.

If a withdrawal is effected in the period of three months from the date of opening of
the account then the account has never satisfied the conditions for its operation as an
SSA and the bank is therefore required to deduct DIRT at standard rate from all
interest paid or credited from the date of opening of the account.

RETURNS TO REVENUE COMMISSIONERS

In the annual returns which a bank is required to make to the Revenue Commissioners
(see page 24 above) are included details of the DIRT appropriate to the interest paid
or credited on SSA's in the year of assessment. Set out below is a summary of
information based on the annual returns of NIB to the Revenue Commissioners
pursuant to Section 33 (2) of the Finance Act, 1986:

Interest on DIRT on
Year of SSA's DIRT Rate SSA's
Assessment IR£ on SSA's IR£

1992/1993 2,685,229 10% 268,523

1993/1994 6,602,412 10% 660,241

1994/1995 8,612,682 10% 861,268

1995/1996 5,912,505 15% 886,876

1996/1997 6,291,738 15% 943,761

1997/1998 11,498,842 15% 1,724,826

5.345.495

This table shows the amount of the reduced DIRT paid by the Bank on the total of the
SSA's in each of the six years between 1992 and 1998 As it is clear from the
findings of the DIRT Theme Audit of December 1994, summarised at pages 76 and
77 below, that the samples of SSA's tested in the branches showed that 20% of the
declarations were missing or incomplete, and that there was a high rate of failure in
observing the requirement to give a minimum of thirty days' notice for every
withdrawal, it follows that a significant proportion of the SSA's were not entitled to
benefit from DIRT at the reduced rate.
N I B PROCEDURES

The procedures laid down by the Bank for the opening and operation of SSA's were
communicated to Bank personnel principally by the issue of Special Circulars. The
undernoted Special Circulars deal with the qualifying criteria for the operation of
deposit accounts as SSA's and each of them clearly refers to the prohibition on
withdrawals from SSA's within the first three months following their opening and to
the requirement for a minimum of 30 days' notice of withdrawals:

• Special Circular No. S26/92 dated 15 December 1992, addressed to branch


managers and heads of departments.

• Special Circular No. Sl/93 dated 6 January 1993, addressed to branch managers
and heads of departments.

• Special Circular No. S4/93 dated 22 February 1993, addressed to all staff.

• Special Circular No. S27/93 dated 9 June 1993, addressed to branch managers and
heads of departments.

Special Circular No. S9/93, issued to all branches on 11 March 1993, introduced a
Retention Tax Compliance Report which, inter alia, required branch staff to examine
all accounts designated as SSA's to ensure that they met the qualifying criteria and
that an appropriate declaration was held for each such account, in default of which
interest paid or credited was to be subject to DIRT at the standard rate.

As noted in Part 2, Special Circular No. SI 1/95, which was issued to all branches on 8
March 1995 following the DIRT Theme Audit of December 1994, replaced all
previous circulars in relation to DIRT. It clearly sets out the rules applicable to the
operation of deposit accounts as SSA's and a DIRT guide summarising the contents of
this Circular was issued for use by cashiers and other branch staff on 15 May 1995.
The Circular also advised branch personnel of the availability of Notice of
Withdrawal of Funds forms which were to be attached to the withdrawal slip when the
withdrawal had been effected. This was the first time such forms were made
available to the branches.

As also noted in Part 2, 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 branch manager and returned to the Bank's Finance and Planning
Department. The standard-form report declared that the branch manager understood
the contents of Special Circular No. SI 1/95 and either confirmed that the branch had
proper statutory declarations on file for all accounts classified as SSA's or, where a
proper statutory declaration was not held, detailed the action which the branch
manager proposed to take to rectify the situation.
D I R T THEME AUDIT, DECEMBER 1 9 9 4

Conclusion

The results of the DIRT Theme Audit of December 1994 were rated as unsatisfactory.
As noted in Part 2 the following overall conclusion was recorded:

Results of this audit are very disappointing and management must take
immediate steps to improve the situation. The structure of the whole area can
be improved but the level of non-compliance is too high. It appears that there
needs to be an organisation-wide change in attitude to the whole area. This
is a risk area and the penalties for non-compliance at the level shown in this
report would be very significant.

Scope of Audit Testing

Twelve branches were selected for the Theme Audit. In the area of SSA's, internal
audit staff were directed to carry out the following work at each branch:

• Ensure that properly completed SSA declaration forms were held for [each
of a sample of] 30 SSA's.
• Briefly review the listing of branch SSA 's for apparent inconsistencies
(e.g. sole and joint accounts held by same person, joint account held by
persons not married to each other).
• Discuss understanding of SSA notice requirements with two members of
branch staff.
• Review withdrawal notices for selected SSA withdrawals (e.g. notice
period, amount of withdrawal and signature of account holder (s)).

Findings

The major findings of the Theme Audit on the main issues affecting all aspects of
DIRT compliance are set out in Part 2 at page 55. In relation to the operation of
SSA's the report's major findings were:

• ... an unacceptably high proportion of declarations were (sic) missing or


incomplete — approximately 20% of SSAs.

• SSA notice requirements are not being properly imposed -91% of


withdrawals reviewed breached the notice requirements. The profile of
this issue needs to be raised again; a number of initiatives should be
undertaken including use of standard documentation.

• Our review of 136 SSA withdrawal notices showed:

1. Notices were not sighted for 79%> of withdrawals.

2. 55% of notices found were invalid e.g. no notice date, notice < 30
days.
3. None of the accounts in breach of the notice requirements had been
subject to 27% DIRT from the date the requirements were breached.

• Many branches are finding it difficult to impose SSA notice requirements


due to:

(a) Fear of losing deposits.

(b) No standard procedure/documentation for implementing notice


requirements.

(c) Lack of understanding of notice requirements.

• Approximately 20% of SSA declarations selected contained some


errors/omissions.

• Our review of372 SSA declarations showed:

1. SSA declaration forms were not sighted for 7% of accounts.

2. 9% of the declarations were not dated.

3. 5% of the declarations were not properly completed (e.g. no address,


no account name).

• A high level review of SSAs in the selected branches showed that 29 SSAs
did not comply with SSA qualifying conditions (e.g. sole and joint accounts
held by same person, joint account held by persons not married to each
other). It should be noted that this was a high level review which would
only highlight very obvious inconsistencies.

The DIRT Theme Audit report is reproduced in full at Appendix 9.

Interview with Head of Audit

Asked whether any consideration was given to expanding the scope of the DIRT
Theme Audit to encompass all branches, Paul Harte, Head of Audit at the time the
Theme Audit was carried out, stated:

If the business needed more assurance and needed more work on that, then
they should have done it themselves; as far as I was concerned I had done a
proper sample, I had identified these issues and nobody questioned the
veracity of those issues.

BRANCH INTERNAL AUDIT REPORTS

Branch audit reports, both in the period prior to the DIRT Theme Audit and thereafter,
were consistently critical of the level of branches' compliance with the requirement to
hold a properly completed declaration form for each account designated as an SSA.
Deficiencies noted included:

• Forms not sighted for a number of accounts;


• Forms not fully completed;
• Incorrect forms used;
• Forms not dated;
• Amended or incorrect account numbers noted on declaration;
• In the case of joint accounts, declarations signed by one party only.

In addition, audit reports noted instances where account holders were not entitled to
avail of Special Savings Account status.

In the period after the DIRT Theme Audit and after the issue of Special Circular No.
SI 1/95 to all branches on 8 March 1995, branch audit reports at the dates listed below
noted breaches of notice requirement provisions:

January 1996 (circulated to Barry Seymour, Michael Keane, Kevin Curran)

1. Several instances were noted where withdrawals were permitted within the
initial ninety day period and the tax deduction status code on the relevant
accounts was not amended to "C" i.e. standard 27% DIRT.

2. A few instances were noted where withdrawals were processed and the
required written thirty day notice of withdrawal was not obtained.

January 1996 (circulated to Barry Seymour, Michael Keane, Kevin Curran)

1. From an examination of the Tax Deduction Compliance section of the


Managers Morning report since 4th January 1996, eleven instances were
noted where withdrawals were permitted on "SP " accounts within the
initial ninety day period and the tax deduction status code on the relevant
accounts was not amended to "C" i.e. standard 27% DIRT.

2. A number of instances were noted where withdrawals were processed and


the required written thirty day notice of withdrawal was not obtained.

May 1996 (circulated to Barry Seymour, Michael Keane, Kevin Curran)

From an examination of the Tax Deduction Compliance section of the


Managers Morning report, a small number of instances were noted where
withdrawals were permitted on SSA accounts within the initial ninety day
period and the tax deduction status code on the relevant accounts was not
amended to "C" i.e. standard 27%> DIRT.

July 1996 (circulated to Philip Halpin, Michael Keane, Kevin Curran)

By enquiry, it was established that on a small number of occasions,


withdrawals were permitted on SSA accounts within the initial ninety day
period and the tax deduction status code on the relevant accounts were (sic)
not amended to "C" i.e. standard 27% DIRT.

In each of the four above-noted reports, branches were reminded of the statutory
provisions relating to the withdrawal of funds from SSA's.

THEME AUDIT - TAXATION OF CREDIT INTEREST, JANUARY 1999

As noted in Part 2, during August and September 1998 the European Audit Division
of National Australia Bank undertook an audit of compliance with tax legislation and
internal procedures at the Bank. Testing was carried out on a sample of ten SSA's in
each of ten randomly selected branches; no stratification by value took place.

The overall conclusion of the audit was that the standard of compliance in the Bank
was rated as unsatisfactory. In relation to SSA's it was noted that:

• 21%o of sampled SSA accounts were in error against legislative


requirements and in this instance there is the possibility that up to 4% of
the customers may be ineligible for these accounts.

• The major weaknesses identified were lack of understanding by branch


staff of the eligibility requirement for joint accounts; failure to evidence
that the identification of customers had been verified and in 79% [39 of
the 49 withdrawals made in 1998from the accounts reviewed during the
audit] of the sample tested withdrawals from accounts being allowed
without the required notice period being given.

• The branch declaration process [to confirm that DIRT requirements were
being met on an ongoing basis] was ... inaccurately reporting the level of
compliance with D.I.R. T. regulations across the sample of declarations
tested.

The 21% error rate noted above was analysed as follows:

5% no declaration held

3% joint account for unmarried customers

1% 2 accounts for the same customer

2% declaration unsigned

10% full customer name not on declaration


RETROSPECTIVE D I R T LIABILITY TO THE REVENUE COMMISSIONERS

The Bank has confirmed to the Inspectors that it has found no evidence that, on
discovering breaches of the conditions applicable to the operation of deposit accounts
as SSA's, either as a result of the DIRT Theme Audit of December 1994 or otherwise,
the Bank calculated the DIRT liability resulting from the deficiencies noted or, prior
to the Inspectors' appointment, remitted any payment to the Revenue Commissioners
in discharge of such liability.

INSPECTORS' CONCLUSIONS

The Inspectors find:

1. The Bank failed to deduct Deposit Interest Retention Tax ("DIRT") at the
standard rate from interest paid or credited on accounts designated as Special
Savings Accounts where the branch did not hold a properly completed
declaration in a form prescribed or authorised by the Revenue Commissioners
or where there had been a breach of the statutory requirements relating to
withdrawals.

2. Although senior management was aware of the breaches of the relevant


statutory requirements, the Bank took no steps to calculate and remit to the
Revenue Commissioners arrears of DIRT due, being the difference between
tax at the standard rate, which ought to have been deducted, and tax at the
reduced rate actually applied.
PART 5

EVASION OF REVENUE OBLIGATIONS:


THE SALE OF CMI, SCOTTISH PROVIDENT
INTERNATIONAL AND OLD MUTUAL
INTERNATIONAL POLICIES
THE SALE OF CMI, SCOTTISH PROVIDENT INTERNATIONAL AND
OLD MUTUAL INTERNATIONAL POLICIES

THE BANK, THE COMPANY AND THE LIFE ASSURANCE COMPANIES

The Financial Advice and Services Division

On 1 May 1989, Nigel D'Arcy commenced employment with the Bank, having been
recruited by the then Chief Executive, Jim Lacey, to establish the Financial Advice
and Services Division ("FASD") of the Bank to provide a range of independent
financial services, primarily in the insurance and investment-related sector, to Bank
customers and others. Prior to the establishment of the FASD, such products were
sold to Bank customers through managers' insurance agencies. The Bank acquired
the interest in the managers' insurance agencies with effect from 1 January 1990.

The role of the FASD was to generate income for the Bank from:

• The sale of high value insurance products used for tax planning, business planning
and personal financial planning.

• The development through the Bank's branch network of sales of high volume
insurance products such as endowment policies, regular premium savings and
protection plans.

Management and Personnel of the FASD

Throughout the period from 1 May 1989 Mr D'Arcy held the position of Head of
FASD.

The Bank employed financial services managers whose responsibilities were to obtain
referrals for high value insurance products from the Bank's retail branches and to deal
with direct enquiries from the public with respect to such products. The financial
services managers reported directly to Mr D'Arcy.

Each financial services manager dealt with a specified group of branches and had a
specific sales target of initial commission entitlements on insurance products sold.
The remuneration of the financial services managers was by way of basic salary and a
performance-related bonus based on the initial commission entitlements earned for the
Division by each of them. The financial services managers therefore had a direct and
individual potential financial benefit from sales effected by them or attributed to them.

The first three financial services managers commenced employment with the Bank on
1 September 1989 and a further six persons held positions as financial services
managers in the period covered by the investigation. The names of the financial
services managers and the periods throughout which they filled that role are:

Beverley Cooper-Flynn 1 September 1989 to 5 June 1997

Michael Fitzgerald 1 September 1989 to 31 July 1997

Alistair Stewart 1 September 1989 to 25 June 1994

Charlie McCarthy 4 December 1989 to 15 June 1998*

Patricia Roche 1 October 1991 to 19 September 1994

Bob Wynne 15 August 1994 to 15 June 1998*

Frank Lynch 15 March 1995 to 15 June 1998*

Gerry Stewart 20 June 1997 to 15 June 1998*

John Bailey 25 August 1997 to 15 June 1998*

* Employed as financial services manager at the date of the Inspectors' appointment.

Both Ms Cooper-Flynn and Ms Roche were granted leave of absence from the dates
noted above and were still employed by the Bank at 15 June 1998.

Patrick Cooney was recruited as investment analyst on 4 December 1989 and was
appointed investment manager on 1 January 1991, a position he held until 12 July
1996.

Role of National Irish Bank Financial Services Limited

In addition to establishing the FASD, the Bank used National Irish Bank Financial
Services Limited ("the Company", "NIBFSL"), a wholly owned subsidiary of the
Bank, to account for the income and expenses of the FASD relating to the sale of life
assurance and investment type products. The Company, but not the Bank, was
authorised as an insurance intermediary under the Insurance Act, 1989, in its capacity
as a broker.

The board of the Company, from November 1989 and throughout the remainder of the
period the subject of the investigation, comprised senior executives of the Bank and
the secretary for the time being of the Bank was the secretary of the Company.
However the directors of the Company, qua directors, did not consider the affairs of
the Company other than in the context of formal approval of the annual financial
statements of the Company. None of those engaged in the business of the FASD
were employees of the Company.
Relationship of the Bank and the Company with CMI

On 6 March 1990 Mr Cooney and Alistair Stewart of the FASD attended a


presentation made in Dublin to a number of banks and investment houses by
representatives of CMI Insurance Company Limited and other companies within the
CMI Group of Companies ("CMI"). On 16 March 1990 CMI wrote to Mr D'Arcy
outlining possible developments between CMI and the Bank "with a view to providing
offshore contracts for your Irish clients'".

The FASD commenced to do business with CMI shortly after receipt of this letter.
The nature of the relationship of the Bank and the Company with CMI is evidenced
by copy documentation provided to us by the Bank and by CMI which indicates the
following:

• On 28 June 1990 Mr D'Arcy, purporting to act on behalf of NIBFSL, applied for


the appointment of the Company by CMI Financial Management Services Limited
as an intermediary. Mr D'Arcy was not at that time either an employee or a
director of the Company.

• On 24 July 1990 Linda Hughes, an administrative assistant in the FASD, as sole


signatory, made application for indemnity terms to CMI Insurance Company
Limited on behalf of "National Irish Bank Financial Advice & Service Division".
The application form stated that, in the case of a limited company, the application
must be signed by two directors.

• On 19 May 1993, Mr D'Arcy as Head of Financial Services signed a Terms of


Business and Scales of Commission Agreement for a Master Distributor with the
CMI Group of Companies and purported to do so on behalf of NIB.

• On 10 September 1993 Mr D'Arcy as Head of Financial Services signed a Terms


of Business and Scales of Commission Agreement for an Introducer with the CMI
Group of Companies and purported to do so on behalf of NIB.

• On 9 June 1994 Mr D'Arcy as Head of Financial Services completed an


application for indemnity terms with the CMI Group of Companies, purporting to
do so on behalf of the Company. In this instance the application for indemnity
terms was also signed by Bank executives Frank Brennan and Michael Keane,
then General Manager - Administration and General Manager - Banking
respectively.

• On 26 January 1995, CMI Financial Management Services Limited wrote to Mr


D'Arcy referring to the Terms of Business Agreement signed by him on behalf of
NIB on 10 September 1993:

Following your recent clarification of name, the Terms of Business Agreement


is hereby amended to show the correct name of National Irish Bank Financial
Services Limited.
The agreements of 19 May 1993 and 10 September 1993 each stated the role of the
Bank in the following terms:

For the avoidance of doubt the introduction of Business in accordance with


these Terms of Business does not constitute the Master Distributor (agreement
dated 19 May 1993)/Introducer (agreement dated 10 September 1993) a
partner employee or agent of the Companies and the Master Distributor/
Introducer remains at all times the agent of his client in respect of the
Business.

It is evident from the above that while there was confusion as to the identity of the
party contracting with CMI, the role of the Bank or of the Company as applicable was
that of an introducer of business to CMI.

Relationship of the Bank and the Company with Scottish Provident International

In early 1994, Mr Lacey instructed that, for prudential reasons, the monies deposited
by CMI with the Bank (discussed further below) should not exceed a ceiling of IR£20
million. Discussions took place with Scottish Provident International Life Assurance
Limited, ("Scottish Provident International"), a company mentioned by Mr Lacey as a
possible alternative to CMI, which company had a Personal Investment Portfolio
product similar to the CMI Personal Portfolio policy. These discussions led to the
Bank entering into an arrangement with Scottish Provident International similar to the
arrangement it had with CMI.

Extract from Nigel D 'Arcy memorandum to Kevin Curran, Regional Manager North
West, dated 25 March 1994:

Our business with CMI is substantial and, as a matter of prudence, we have


set up an arrangement (virtually identical to the CMI arrangement, vis-a-vis
deposits etc) with Scottish Provident International to split new business. The
CMI and SPI arrangements will run in tandem (one does not replace the
other).

An agreement dated 31 March 1994 between Scottish Provident International and the
Company was signed on behalf of Scottish Provident International on 5 April 1994
and was signed on behalf of the Company by Mr D'Arcy on 22 April 1994. Mr
D'Arcy was not at the time either an employee or director of the Company.

Relationship of the Bank and the Company with Old Mutual International

Mr D'Arcy, purporting to act for and on behalf of the Company signed a Terms of
Business Agreement with Old Mutual International (Guernsey) Limited ("Old Mutual
International") on 25 September 1996.

Only one policy was effected with Old Mutual International through NIB.
Authorisation of CMI, Scottish Provident International and Old Mutual
International to carry on business in the State

No insurance undertaking may carry on business in the State unless it is the holder of
an authorisation from the Minister for Enterprise, Trade and Employment. In the
case of life assurance business, this regulation has been in force since at least 1984
(see Article 4 of the European Communities (Life Assurance) Regulations, 1984 (S.I.
No. 57 of 1984)). This obligation is now imposed by Article 6 of the European
Communities (Life Assurance) Framework Regulations, 1994 (S.I. No. 360 of 1994).
Neither CMI Insurance Company Limited, Scottish Provident International nor Old
Mutual International was authorised to carry on life assurance business in the State at
any time in the period up to 15 June 1998.

THE LIFE ASSURANCE PRODUCTS

General

The Scottish Provident International policy shared the key features of, and was
promoted in the same manner as, the CMI Personal Portfolio product. Therefore,
while the focus hereunder is on CMI products, references to the marketing and sale of
CMI products are to be taken as references to the Scottish Provident International
product also, and the references to CMI in the Inspectors' conclusions at pages 115
and 116 are likewise to be taken as referring to Scottish Provident International also.

Nature of CMI Products sold by FASD

The FASD introduced life insurance business to CMI on behalf of its clients in the
period from March 1990 to 29 January 1998, the date from which the Bank withdrew
the CMI policies from sale.

The principal life insurance policies for which introductions were made to CMI by the
FASD were as follows:

• Emerald International Portfolio


• CMI Premier Bond
• CMI Personal Portfolio
• CMI Passport - Wealthbuilder Plan

Emerald International Portfolio

The Bank formally launched the Emerald International Portfolio, a broker bond based
on the CMI International Portfolio Bond underwritten by CMI, in July 1990, a
number of policies having been "sold" by the FASD prior to that time. The Emerald
International Portfolio was a fund of funds geared to medium to long term capital
growth and was dependent upon the performance of world equity markets.
From the outset, publicity for the product noted the advantages, so far as concerned
probate on the death of the policyholder, of having the policy assigned to a trust. The
principal advantages of the trust were that the policyholder could during his lifetime
enjoy the benefits of the policy and effect partial or complete surrenders of the policy.
The trust allowed the policyholder(s) as settlor(s) of the trust to retain the beneficial
ownership of the policy while vesting the legal ownership of the policy in the trustees
of the trust. Accordingly, on the death of the policyholder (or in the case of joint life
policies, on the death of the last policyholder to die), there is no transfer of legal
ownership and the trustees can therefore hold the trust fund on trust for the
beneficiaries nominated by the settlor without the need for probate.

Illustrative evidence includes:

Extract from, sales brochure issued by FASD:

TRUST DEED ADVANTAGES

Investing in the Emerald International Portfolio has the added advantage that
through a trust deed mechanism we can ensure that your beneficiaries will
receive the proceeds of your investment immediately on death with no probate
requirement.

Extract from Nigel D Arcy memorandum to senior management of the Bank, dated 11
July 1990, attaching copy of note sent to all branch managers on 4 July 1990:

TRUST DEED AD VANTAGES - EXTREMELY IMPORTANT

Investing in the Emerald International Portfolio has the added advantage that
through a trust deed mechanism, intended beneficiaries will receive the
proceeds of the investment immediately on death with no foreign probate
requirement. This is vitally important since many overseas deposit accounts
cause untold probate delays and problems.

Extracts from a report prepared by Alistair Stewart for customers at the time of their
investment in the Emerald International Portfolio:

[Customers have a] sum of money currently on sterling deposit to be invested


for long term growth and security. Confidentiality and the continuation of the
investment in the event of the death of [the customers] is of vital importance.

It would be our intention to assume that, in making these investments that


confidentiality and the continuance of the investment are assured i.e. that
whatever circumstances happen in the future, this portfolio will carry on and
not have to go through any probate process. This I believe together with the
investment strategy as outlined, will insure the growth and security of [the
customers'] investment.
It is suggested in Mr D'Arey's memorandum of 11 July 1990 that the advantage of
creating a trust was that it prevented the delay that could occur if probate had to be
obtained before the beneficiaries could access the funds. There is no doubt this was
one of the advantages but in the opinion of the Inspectors an equally if not the more
important one from the investor's point of view, and this would have been known to
Mr D'Arcy, was that the absence of the need for probate meant that the funds could be
kept concealed from the Revenue Commissioners. This is the clear inference to be
drawn from the following statement in a number of letters sent by Ms Cooper-Flynn
to customers in 1991 in regard to the Emerald Prosperity Fund. In referring to the
fact that the money could be paid out to the beneficiaries without going through
probate, she states:

This facility removes any risk involved in distributing [the customer 'sj money
on death.

With the downturn of world equity markets in early 1992, many of the Bank's clients
were concerned at the volatility of the Emerald International Portfolio and wished to
have their monies otherwise invested. As the funds invested in the Emerald
International Portfolio had failed to attain what was regarded by the Bank as "critical
mass", the fund was exposed to sudden unit price fluctuations upon any large
encashment of units in the fund. Accordingly, the FASD decided to close the
Emerald International Portfolio funds and to recommend to holders of units in these
funds that they switch their investments to other CMI managed funds.

CMI Personal Portfolio

The CMI Personal Portfolio is a whole of life assurance policy underwritten by CMI
in the Isle of Man. Although the contract provides the minimum life cover so as to be
considered a contract of life assurance, its primary purpose is as an investment
vehicle. The choice of investment content within the CMI Personal Portfolio is under
the control of the policyholder or that of his appointed advisor. A distinct and
identifiable portfolio is created for each policyholder. The FASD was invariably
appointed investment advisor to the policyholder and CMI acted upon the instructions
of FASD personnel in relation to the initial investment of CMI Personal Portfolio
funds and in relation to any change in the manner in which the funds were to be
subsequently invested.

The CMI Personal Portfolio was part of the normal product range offered by CMI and
was made available for sale through the FASD in 1991, with the first policy being
effected in the first half of that year.

There was no formal launch by the FASD of the CMI Personal Portfolio, or of any
CMI single premium product other than the Emerald International Portfolio. The
CMI Personal Portfolio was introduced to branch managers of the Bank in 1992
through presentations made by FASD financial services managers, often accompanied
by Richard Marshall, CMI area manager for Ireland.

When the CMI Personal Portfolio policies were first sold by the FASD, the funds
were typically invested outside the Bank, in CMI managed funds and in other
investments. From 1992, the majority of funds invested in CMI Personal Portfolio
policies were reinvested on deposit with the Bank and this was known to senior
management of the Bank.

A significant portion of the income of the Company in the year ended 30 September
1992 consisted of commissions earned on business introduced to CMI. The greater
part of the income of the Company in the years ended 30 September 1993 and 30
September 1994 consisted of such commissions.

Investor Targeting and Assurances of Confidentiality

The Inspectors are satisfied that at least from the second half of 1992 the CMI
Personal Portfolio policy was mainly targeted at persons who had funds undisclosed
to the Revenue Commissioners and was promoted in a manner that made it attractive
to such persons.

The Product Features Sheet used by some of the FASD financial services managers
was in the following form:

CMI PERSONAL PORTFOLIO

Advantages

1. Confideniality (sic)/Security

Deposit is transferred out of existing account and re-invested in the


names (sic) of a holding company. Therefore clients names does (sic)
not appear on any account.

2. No Probate requirements

Investment is written in trust i.e. client can decide on day one who the
beneficiaries will be in the event of his death. All the beneficiaries
need to supply is a death certificate and the investment will be
released.

3. Cautious Investment

The client can have the funds invested in the exact same deposit
account as he is in presently and at the same rate or he can choose any
other sterling deposit account anywhere in the world.

4. Tax Free

All returns are paid gross.

5. Accessibility

Client can draw an income if he wishes.


6. Quarterly Valuations provided

7. The portfolio can also invest in shares, unit funds, bonds and deposit
accounts.

The advantages at the top of those listed - "Confidentiality/Security" and "No Probate
requirements", would clearly have been of particular interest to persons with
undisclosed funds and they were reiterated regularly in reports prepared for
prospective customers by some of the FASD financial services managers.

The full text of the Product Features Sheet is reproduced at Appendix 10.

The advantage of "no probate requirements" is spelled out as follows in one of


Alistair Stewart's reports dealing with the Personal Portfolio product:

... thus avoiding the possibility of such monies being included in any
Inheritance Tax calculations.

It could hardly have been stated more clearly that the advantage was the possibility of
evading tax.

The advantage of "no probate requirements" is also stressed in the following extracts
from a report prepared for a prospective investor by Patricia Roche:

BANK DEPOSIT ACCOUNT

(C). In the event of the death of any of the named person (sic) to an account
a "Grant of Probate " would be required. This automatically notifies
the Capital Taxes Office of the existence of certain assets. ...

As confidentiality and continuity of your capital is ofparamount importance to


you, I would suggest that you consider changing your existing approach to
your deposit account. Instead of holding the deposit account directly in your
own names you should transfer the monies into a Trust, which you own and of
which you would be beneficiaries. ...

An important feature of the portfolio is the trust facility, which ensures that
a "Grant of Probate" is not required in the event of death. ...

The full text of this report is set out at Appendix 11.

In an earlier letter from Ms Roche to a customer, written in May 1992, comparing a


Scottish Provident Investment Bond with an investment in Post Office Savings
Certificates, the advantage to be gained from avoiding probate is again shown to be
that complete confidentiality is assured. It is stated in the letter that in the case of
investment in Post Office Savings Certificates "confidentiality is not complete"
because "in the event of the death of the Bond holder where Bonds to the total value of
£5,000 or more are held, either a Certificate of Clearance from the Capital Taxes
Office or letters of administration or a Grant of Probate are required".
Apart from what is to be found in the Bank's documentation, the Inspectors are
satisfied from the evidence of investors and some of the FASD financial services
managers that, as part of the promotion of the CMI Personal Portfolio, a guarantee
was given that the investment was confidential and that the Revenue Commissioners
would never get to hear of it. The latter part of the guarantee may not always have
been stated expressly, but that it was implied was quite clear.

The Investment Checklist

Even before the CMI Personal Portfolio began to be promoted as a means of tax
evasion, whether or not funds for investment in single premium policies had been
declared to the Revenue Commissioners was a matter of interest to the FASD.

At the time of the introduction by the FASD of the Emerald International Portfolio
there was in existence an investment checklist introduced by Patrick Cooney on 28
February 1990. Mr Cooney requested that this checklist be completed by the FASD
financial services managers in respect of all single premium investment
recommendations and returned to Mr Cooney. The completion of the investment
checklist, inter alia, required the financial services managers to reply to the following
question:

Is the money declared? Yes/No.

Copies of investment checklists for four parties who invested in the Emerald
International Portfolio each record "no" as answer to the question "Is the money
declared? " One of the investment checklists includes the notation "very hot ", and
another investment checklist notes that the person is "Ripe for the New Fund ".

Questioned as to the significance of this question, Mr Cooney at interview with the


Inspectors stated:

Is the money declared and that would have meant money declared, is it
declared in their tax returns. That could be an investment like post office,
unit linked funds, such investment did not have to be declared in a person's tax
returns. That would be what that is there.

Mr Cooney was questioned as follows on the recorded response referred to above:

Inspector: What does "very hot" mean?

Mr Cooney: That would mean a very hot prospect. It would mean that this

is a client who is ready to go.

Inspector: It wouldn 't mean "very hot "from a revenue perspective?

Mr Cooney: No, it is very easy in hindsight to look at these things when we


looked back at our division.
Coincident with the launch of the Emerald International Portfolio, Mr Cooney in a
letter dated 30 July 1990 which accompanied the monthly investment bulletin to the
FASD financial services managers stated:

Finally, we have the people who have money invested offshore already or
whose money is "Hot". In this scenario, we should in almost all cases, direct
the monies into our New Bond, "The Emerald International Portfolio "...

Mr Cooney was asked to explain the term "hot" in the context of this letter:

Inspector: Could I just ask then in relation to the second last paragraph
where you say "finally, we have the people who have money
invested off-shore already but whose money is hot". What
would you have meant by that?

Mr Cooney: Hot prospects.

The model Investment Checklist with accompanying note from Mr Cooney, together
with five completed examples of the Checklist, are reproduced at Appendix 12.

Mr Cooney's letter of 30 July 1990 is reproduced at Appendix 13.

Scottish Provident International and Confidentiality

In discussions with representatives of Scottish Provident International the issue of


confidentiality was also raised.

Illustrative evidence:

Extract from minutes of meeting between Nigel D 'Arcy and representatives of Scottish
Provident International on 1 March 1994:

ND A confirmed the following points regarding the bank deposit business:

Confidentiality is a key selling point along with flexibility.

Extract from note dated 27 January 1995 from a representative of Scottish Provident
International to the FASD:

Following my meeting with Charlie [McCarthy] and Michael [Fitzgerald],


they have both raised concerns over the use of Telegraphic Transfers. As you
know there is some question mark over the visibility ofTT's.

If you receive two pieces of business from the branches, both accompanied by
drafts, but one case is grey money and the other is clean declared money.
The drafts are both written out to NIB and have to be cleared in Dublin. You
will then raise TT's to go to the Isle of Man.
The question both Charlie and Michael have is: Which account will the
drafts go in to and from which accounts will the TT's come from? The point
they are making is that if both clean and grey money are mixed together and
there was an investigation by the Revenue, the clean money could actually
expose the grey money.

Extract from letter dated 23 October 2000 from the same representative of Scottish
Provident International to the Inspectors:

Grey money in the context of my discussions would have referred to funds or


investments not entering or having entered a tax system. This would not
imply that the funds or investment would not enter the tax system, although
there may be occasions when this was not necessary at that stage, for example
a foreign national temporarily residence (sic) in Ireland in receipt offoreign
emoluments etc. We would not have received information regarding clients,
or potential clients, funds (sic) as this would have been between the advisor
(NIBFS) and the client.

Obligation to make Returns to the Revenue Commissioners

The assurances of confidentiality given with respect to the CMI Personal Portfolio
policies effected on or after 20 May 1993 did not take account of the obligation of the
Bank or the Company to make a return of such sales to the Inspector of Taxes. It
appears that none of the FASD financial services managers had been instructed by
FASD management of those provisions of the Finance Act, 1993 which oblige any
Irish resident person acting as an intermediary in connection with the issuing of a
foreign life assurance policy on or after 20 May 1993 to deliver a return specifying the
following details of each resident in respect of whom it has acted:

• The full name and permanent address of the resident.


• The resident's tax reference number.
• The full name and address of the relevant person with whom the foreign policy
was entered into.
• The date on which the policy was entered into and the amount of the premium
payments made under the policy.

These provisions were originally introduced by Section 24 of the Finance Act, 1993,
which inserted Section 20A in the Capital Gains Tax Act, 1975. This latter Section
subsequently became Section 594 of the Taxes Consolidation Act, 1997 which applies
the provisions of Section 895 of the Taxes Consolidation Act, 1997 with relevant
amendments.

The return must be submitted by the intermediary company in respect of each


chargeable period in which it has acted as an intermediary, within nine months after
the end of the relevant accounting period of the company.
The Bank did not include details of the sale of CMI, Scottish Provident International
or Old Mutual International life assurance policies in any such return made at any
time prior to the news media allegations in January 1998.

THE PURPOSES FOR WHICH THE C M I PERSONAL PORTFOLIO WAS BEING USED

Mr D'Arcy's Evidence

Mr D'Arcy, in evidence which the Inspectors accept, confirmed to them that he was
aware that the CMI Personal Portfolio was being used for a purpose for which it was
not intended:

Inspector: Now, in the course of our investigation we have received


evidence that the purposes behind the sale of the CMI policy
included benefits for the bank as follows; "(a) The retention of
deposits, the regularising of bogus non-resident deposits, the
earning of commission for the bank, the securing of new
deposits for the bank, finding a safe haven for Revenue-
sensitive funds. "

Now, would you say that that is a fair summary of how CMI
was seen by branch managers, senior management within the
bank and by people in the FASD division?

Mr D Arcy: ... yes, that would be fair, if you are not time-specific.

Mr D'Arcy's response, acknowledging the different purposes behind the sale of the
CMI policies, was confirmed by evidence from other sources.

Each of the purposes, together with evidence relevant to each, will be dealt with
separately.

"Finding a safe haven for Revenue-sensitive funds"

Evidence of FASD Personnel

FASD personnel have told Inspectors that they did not consider it was incumbent on
them to refuse to do business with persons whose monies had not been declared to the
Revenue Commissioners, and they considered CMI was a suitable investment for
people with such monies.

Illustrative interview evidence, which the Inspectors accept:

Patricia Roche

Ms Roche: Generally speaking, at the sales meetings -1 use the phrase


"Revenue sensitive " when I am talking to you - but most of the
time we would just have discussed hot money and that was a
term that was freely used at sales meetings. That would not
have been unique to me.

Inspector: If the expression, "hot money" had been used at the sales
meetings, why would you have related that to the Revenue?

Why would you not have regarded it as a hot prospect?

Ms Roche: It might have been a hot prospect as well, but I would have
understood, and I don 7 think I am being presumptuous when I
say that we would all have understood, that hot money was in
respect of moneys that people had not declared or that they
were concerned about the Revenue becoming aware of.

And later

Ms Roche: The way we might have talked about this product is that the
beauty of it is that an individual can still have his deposit and it
is now confidential, they don't have to worry about the Revenue
discovering it, they are avoiding the DIRT on it and in the event
of death there is no probate. We were all talking about people
living here, it was not a case that these were all non-residents.

Inspector: ... the advantage effectively, that would have been explained to
you before you went out on the road to sell the product would
be, effectively, that once the investment was made, the Revenue
would never get to hear about it?

Ms Roche: Yes. It may not have been articulated in exactly those terms
but that it was the perfect home for hot money, that type of term
would have been used.

And later

Ms Roche: My own peace of conscience of the whole thing, because I


recognised from the beginning that it wasn 't kosher, was that it
wasn 't really a matter for me to concern myself with the tax
affairs of individuals, that it was a legitimate investment
product in itself and it was up to the individuals to act as their
own moral conscience and return it or not return it.

Patrick Cooney

Inspector: ... would you have become aware of the fact that some of the
moneys invested in CMI was money that hadn't been declared
to the Revenue?

Mr Cooney: No, that wasn't my job.


Inspector: And did you regard it as anybody else's job?

Mr Cooney: No. No, it wasn't anybody else's job.

Beverley Cooper-Flynn
Inspector: In relation to CMI Personal Portfolio policies ... were you
aware of the source offunds?

Ms Cooper-Flynn: Not generally but, at times, it did become apparent. But not
generally. Source of funds really wasn't an issue for me. I
was an investment advisor.

Nigel D Arcy

Inspector: So in other words when you speak about the culture of that time
by that you mean accepting undeclared funds for investment?

Mr D Arcy: I would think that whether they were going into deposits or
anything else, I would say, I would say yes.

Inspector: Where as a result of your making enquiry or otherwise you


became aware that funds for investment in CMI Personal
Portfolio policies or other single premium policies were
undeclared to the Revenue Commissioners did this knowledge
have any effect on your decision to allow FASD sales
consultants to sell or not to sell a policy to the particular
person or did it have any effect on the type of policy that they
would recommend to the customer?

Nigel D Arcy: It generally would not have had an effect.

Charlie McCarthy

Inspector: The selling point was that this was totally confidential ... and at
the end of the day there were no probate requirements ... Now
if you put the two of those together, right, would you think that
that product would be of interest to somebody who had money
that was undeclared to the Revenue?

Mr McCarthy: Probably.

And later

Inspector: ... is it right, Charlie, to say that you didn 't regard it as your
business ...to find out what the source offunds were (sic) as to
whether it was resident, non-resident, fictitious, bogus or hot ...

Mr McCarthy: Yes.
Al is fair Stewart

Inspector: If, say, I have the money on deposit with the Northern Bank in
Belfast, would you ask me why it was in Belfast?

Mr Stewart: No, that wasn't part of my brief. We were there to extend


investment advice. If you were to start asking clients those
questions I don't suppose they would hang around.

And later

Inspector: [Wouldyou say] something like: "if the money is not declared
to Revenue, CMI would be a good haven for it". Is that
correct?

Mr Stewart: Yes ...It was an option but not the only one.

Bob Wynne

Inspector: [Did you] concern yourself in relation to what the source of


funds were (sic)?

Mr Wynne: ... no I didn't.

Evidence of Bank Managers

Some branch managers also were of the view that CMI was a suitable investment for
people with undeclared funds. Illustrative evidence from branch managers, which the
Inspectors accept, includes:

Inspector: So at the time, at the meeting then, Mr [manager name], ... did
you come away with a view that this product, CMI, may have
been attractive to people who had not declared their income to
the Revenue Commissioners?

Branch Manager: Yes.

oooOooo

Inspector: Did you target people who had money in Northern Ireland or
elsewhere, outside the jurisdiction, as potential customers?

Branch Manager: I understood that they would be suitable for CMI.

oooOooo

It [the CMI product] was marketed at people who had sensitive money ..
oooOooo

Inspector: So the big benefit, the real big benefit of CMI?

Branch Manager: No name.

Inspector: The Revenue never get to hear about it?

Branch Manager: Yes, of course.


oooOooo

Inspector: After this briefing with the people from CMI and the FASD the
understanding was that if people invested in CMI the Revenue
would not get to hear about it?

Branch Manager: I would have to say that that is what I understood.

oooOooo

While the CMI Personal Portfolio policy was targeted principally at customers of the
Bank, many of whom held bogus non-resident accounts or fictitious or incorrectly
named accounts in the Bank, certain persons who were not customers of the Bank but
were known to have funds which were not disclosed to the Revenue Commissioners
were also approached with a view to investment in CMI Personal Portfolio policies.

Customers - Revenue-related matters

The Inspectors interviewed 135 persons who had invested in CMI policies and 4 who
had invested in Scottish Provident International policies. Many interviewees
indicated that the funds invested had not been declared to the Revenue
Commissioners and were on deposit with the Bank in a bogus non-resident account, a
fictitiously named account from which DIRT was being deducted, or a fictitiously
named bogus non-resident account. Their evidence was to the effect that the CMI
policies were promoted by the Bank as an investment which was wholly confidential
and would never become known to the Revenue Commissioners, and also that, if the
policy was assigned to trustees, the beneficiaries named by the investor would, on the
latter's death, be able to have the funds released to them on the production of a death
certificate, thereby avoiding the necessity of probate having to be obtained.

Reports of the Revenue Commissioners

That a substantial proportion of the monies invested in the Personal Portfolio had not
been declared to the Revenue Commissioners is made clear by the annual reports of
the Revenue Commissioners, the most recent of which covers the year ended 31
December 2003. The Report sets out the position in its "Clerical Medical Insurance
- National Irish Bank Scheme" investigation as follows:

Cases originally targetedfor investigation 452


Investigations concluded by end 2003 395
Cases settled 285
Total collected (tax, interest and penalties) €42.5 million
Cases finalised with no additional liability arising 110

The remaining 57 cases are the subject of ongoing investigations, in respect of


which €4.78 million has been paid on account.

"Regularising of bogus non-resident deposits"

Illustrative documentary evidence includes:

Extracts from an attachment to a memorandum of 17 August 1994 from Geoff Bell,


Head of Management Services, to Frank Brennan, General Manager, copied to
Michael Keane, Paul Harte, Patrick Byrne and Nigel D 'Arcy:

Background

Scheme launched several years ago by Financial Advice and Services Division
(FASD) whereby funds are invested for Irish residents by insurance company
based in the Isle of Man (Clerical Medical International - CMI) in deposits,
securities or stocks and shares in accordance with individual customer's
requirements. Funds are introduced by FASD and client confidentiality is of
the utmost importance. As part of the scheme CMI reinvest the Irish pound
investments in the originating NIB branch. ...

OPERA TION OF CMI DEPOSITS A T PRESENT

BRANCH

Customer decides to invest in CMIfollowing advice from FASD. Funds may


be an existing branch deposit or other but are usually of sensitive nature.
Confidentiality a prerequisite in investment.

Extracts from a report produced by NAB Group Audit entitled "Development,


Launch, Marketing and Selling of the CMI Personal Portfolio Product" dated 22
April 1998 ("the Washusen Report"):

There is evidence to suggest that certain senior managers at the time were
aware of NIB accounts containing funds which were 'sensitive' ... and that the
CMIPP product was being used by some branch managers to disguise the
ownership or status of the money contained therein.
An attachment to the Washusen Report addresses the term "sensitive" as follows:

The term 'sensitive' has been frequently used in interviews and appears in
some documentation. Those interviewed have expanded on this term with
phrases such as 'being of doubtful provenance, probably for tax related
reasons'.

Illustrative evidence, which the Inspectors accept, received at interviews of senior


Bank personnel, includes:

Frank Brennan

Inspector: ... doesn 't that indicate that as far back as ... 17 of August
1994, that you must have been aware that sensitive funds were
being channelled into CMI?

Mr Brennan: ... yes, I would have read that at the time, presumably, yes.

Nigel D 'Arcy

Mr D 'Arcy: It [CMI Personal Portfolio] was just another product on a


panel but it was seized upon, it was seized upon. I think it was
probably, I did discover quite, as I say, in 1992, that it was
being used perhaps in a way which wasn't intended and ...

Inspector: - and what way was that?

Mr D 'Arcy: Well, I mean I think it's quite clear, it's being used for, you
know, with sensitive funds or deposit accounts ... which were
not accurately classified.

And later

Mr D 'Arcy: ... it was quite obvious that, that there were a lot of non-
resident accounts that were not genuine non-resident accounts
and shouldn 't have been classified as such in the first place and
obviously there is a linkage between that and CMI product.

Similar evidence, which the Inspectors accept, was received from branch managers:

It [the CMI product] was marketed at people who had sensitive money to put it
nicely, ... People with hot money to put it bluntly.

oooOooo

There was an understanding, as I had it anyway and I think it was widespread,


that any accounts ... that you couldn 7 stand over from the point of view of
names or residential status to have them regularised [by introducing them to
the FASD for investment in CMI].
oooOooo

I would have told [financial services manager] the status of it [the account] at
the time ... And that we were endeavouring to have it changed.

oooOooo

Inspector: Did you have in your branch ...a number of accounts that you
would have regarded as sensitive, being defined as monies that
were not declared to the Revenue?

Branch Manager: I would have suspected, yes.

Inspector: And did you then target those accounts as possible candidates
or customers of CMI?

Branch Manager: Yes.


oooOooo

Well I may have asked him to regularise the account, he may not have been
happy to do that and then I may have asked him to speak with our Financial
Services Division to see was there anything else that could be done for him.

oooOooo

It was one way of regularising these accounts that needed to be regularised ...

oooOooo

It was implied that it was something which might facilitate people who had
non-resident money.

oooOooo

Inspector: What would happen if you became aware of the fact that there
was ...a bogus non-resident account...?

Branch Manager: ... they would be the people that I would be considering for
CMI.

Inspector: And why would you have regarded CMI as regularising the
position? Is that something you conceived of yourself or is that
something that somebody else told you?

Branch Manager: Well, that's how the product was introduced to us.

oooOooo
I cannot remember it being targeted specifically at non-resident deposits but it
looks very much to me as if it was geared towards that type of thing.

oooOooo

There was no question now about him [customer] being resident. We had his
money, we had to do something about it and I would have referred him to
FASD.

Inspector: Finally, what was the reason you introduced all of these
customers to FASD?

Branch Manager: They were non-resident accounts that we wanted out of the
branch.

oooOooo

The beauty ... was this product was available to people who had always [had]
... sensitive funds or funds that may not have been declared to the Revenue.
This was the last chance of tidying up any such accounts, it would take the
customer's name out of the equation.

oooOooo

Inspector: Why were these accounts swept into CMI?

Branch Manager: To tidy them up ... This was a way of removing them from the
normal deposits that were held at the branch.

oooOooo

Inspector: And can you recollect what the FASD people said to you about
the product?

Branch Manager: My recollection is that it was a Bond, an investment portfolio


that was offshore and on my understanding was that essentially
it legitimised any so-called bogus non-resident accounts that
may exist.

oooOooo

... there is no doubt in my mind ... it [the CMI product] was there to tidy up
the bogus non-resident accounts

oooOooo
The use of CMI policies to regularise bogus non-resident accounts was also
discussed with FASD financial services managers; interview evidence included the
following, which the Inspectors accept:

Charlie McCarthy

Inspector: If the bank had a bogus non-resident account and senior


management was insisting that the bank manager get rid of it.
In those circumstances, wouldn 't the bank have been at risk of
losing the deposit?

Mr McCarthy: Yes
Inspector: ... wouldn't that be one of the circumstances in which CMI
would enable the bank to keep the deposit?

Mr McCarthy: Maybe so, yes.

Patricia Roche

Inspector: Were you aware that some branch managers were trying to
disguise the ownership of money by using the CMI personal
portfolio product?

Ms Roche: ... it would have been my understanding, because of


conversations leading up to the investment taking place,
perhaps, that that was essentially the purpose of the investment.

"Retention of deposits"

Illustrative documentary evidence:

Extract from Nigel D 'Arcy memorandum to Kevin Curran, Regional Manager North
West, dated 25 March 1994:

As you are aware, our relationship with CMI has been extremely successful on
two counts:

Protecting deposits which would otherwise be lost to NIB (as well as


attracting new deposits into the network)

Extract from Nigel D 'Arcy letter to Inspectors, received 10 July 1998:

The Bank's original rationale for the Financial Services Division was to
provide a range of independent financial services as opposed to own
manufactured products, primarily in the insurance and investment related
sector, and also to keep monies within NIB control where they were in danger
of being lost, particularly deposits.

Branch responses relating to fictitiously named accounts:

The declarations to Paul Harte from branch personnel referred to at page 68 in Part 3
of the report, dealing with fictitious and incorrectly named accounts, contain notations
such as ' T o call and arrange transfer to CMI". It is a reasonable inference that this
was a way to retain deposits within the Bank.

Illustrative interview evidence from senior Bank personnel and FASD financial
services managers, which the Inspectors accept:

Kevin Curran

It had been indicated by Head Office that CMI had agreed with the bank to
replace any funds lodged with them on foot of insurance policies or bonds
with the bank and that the bank would allocate those funds to the branches
where the relationship existed.

... only when funds were likely to leave the bank, would the manager refer the
person to an FASD person.

Patricia Roche

... it goes so far as to say that were it (sic) to offer other investments, I would
have been in the seriously bad books of all the branch managers because they
would have lost the deposit. The only thing there was to do was to put
moneys on deposit.

What would generally happen is I would know that what is to happen is that
this money is to come back on deposit.

Branch managers were also questioned on the retention of deposits; their evidence,
which the Inspectors accept, included the following:

... if a deposit was under threat because of the poor return or the range of
products that we had in-house, we were definitely — to my knowledge, to my
recollection, we were instructed as a last resort; in other words, don't lose
that deposit without at least letting the FASD people see what they can do.

oooOooo

... the other part of the CMI would be, as we were told, was that the deposit,
while it might change to a number on the account, would remain in the bank.

Inspector: Did it surprise you that when an individual was investing his
money in CMI the form the investment would take would always
be a deposit in the branch of NIB out of which the money came?
Branch Manager: We were told at the time that this was the arrangement that had
been set up with CMI.

oooOooo

... we didn 't want to lose the resources.

oooOooo

... I never thought deeply about the issue other than that it allowed us to retain
our deposits.

Other documentary evidence, retention of deposits and related issues

Other evidence of the importance of the retention of deposits, and issues related
thereto, is provided by Bank documents, including the following:

Extract from memorandum of 4 March 1993 from Nigel D 'Arcy to all Financial
Services Managers, Patrick Cooney. Grace Gas kin and J Lacey (for information):

The outlook for the Division is now extremely positive, despite the severe
operating climate. This is (or will be) due to the following initiatives:

1. The "CMI" campaign. The results coming in from this initiative are
exceptional and also very desirable in terms of being extremely high value.
The Master Agency initiative will also bear excellent results over the next
few months. The addition of an offshore Irish Pound asset class to the
CMI currency portfolio is also a very significant development. An
excellent feature of the CMI initiative is that most of the underlying assets
are placed back on deposit with us.

Extract from memorandum titled "Procedures for CMI Personal Portfolio Deposits
returning to NIB Branches "from Eithne Martin of FASD to all branch managers on
19 November 1993:

The rate applied to this deposit is usually at the sole discretion of the Branch
Manager and is applied when the money is returned to Branch from CMI.

In certain cases a special rate has been agreed between Branch Managers and
clients.

Extract from facsimile transmission dated 17 February 1994 from Rick May of CMI
to Nigel D Arcy, copied to J Lacey, M Keane and D Boner:

... I am writing, as requested, to confirm CMI's position as to the money


currently held through Personal Portfolio Bonds originally introduced by
National Irish Bank that are invested in deposit accounts with the National
Irish Bank.
Whilst the contract is between CMI and the policyholder, National Irish Bank
is the Introducer of the business and is involved in the original
recommendation to invest the policy monies into National Irish Bank deposit
accounts. CMI is not involved with these contracts in any active fund
management of the policy monies and therefore CMI would not actually
change the investment decision without the agreement of the National Irish
Bank except at the expressed instructions of the individual policyholder or, of
course, in exceptional circumstances where CMI believed that the
policyholders assets were at risk.

Extract from memorandum dated 3 August 1994 from JF Brennan - General


Manager to Geoff Bell, Head of Management Services:

In fairness to Nigel [D'Arcy], he was under pressure from Retail not to strip
the individual branches of deposits and this led to a situation where funds
destined for CMI came back, in part, to the remitting branch but instead of
being in a customer's name they were now held under CMI with a reference
number for identification. As I understand it also, there was, at times,
negotiation on the term and rate given on the CMI deposit. The branch
manager had a role in this negotiation which led me to the conclusion that
they clearly identified the deposit with a particular customer even though the
account title was CMI with a unique number.

Extract from inter office memorandum dated 7 November 1994 from P Harte to JF
Brennan, MJKeane andND'Arcy:

FASD needs to actively manage investments in CMI. FASD are formally


appointed Investment Managers and they must not allow undue influence from
branches. FASD must make the investment decisions; if this does not happen
there is a possibility that the tax structures will be interfered with and that
FASD could be sued for any investment losses which might occur.

Extract from memorandum dated 11 November 1994 from Nigel D'Arcy to JF


Brennan, MJ Keane and P Harte, in response to inter office memo of 7 November
1994:

As stated correctly in the memo FASD are (sic) formally appointed Investment
Managers/Advisors on the CMI Personal Portfolio product. The important
point to note is that FASD instruct (sic) CMI to carry out certain investment
instructions, invest in deposits, individual equities or unit trusts. CMI then
make contact with the relevant Financial Institution or Investment House and
invest the funds accordingly.

As indicated ... above, our role is Investment Adviser and CMI's role is to
carry out and execute investment instructions.
Extract from memorandum dated 16 April 1996 from Nigel D 'Arcy to Michael Keane
following takeover by Halifax Building Society of CMI:

I will be meeting CM next week and will ask for a letter from them confirming
that there will be no "funny games " with the CM deposits in NIB. I already
have an older letter on this and basically there is no question of there ever
being a problem on this front: as advisors, we (FASD) decide where deposits
within the CM Personal Portfolio are to be placed.

We are prudential in terms of the level of CM deposits with NIB - these are
always within the region of £20m. to £21.5m.

Other evidence

Bank documents and the report of the authorised officer appointed by the Minister for
Enterprise, Trade and Employment highlight the proportion of funds re-deposited with
the Bank:

• The Washusen Report (a Report produced by NAB Group Audit in April 1998)
discloses that 216 Personal Portfolios were sold by the FASD and the report of the
authorised officer records that in the case of 194 Personal Portfolios the monies
were placed back on deposit with the Bank. The explanation for this is that the
investors, contemporaneously with making their investment, and frequently
without being aware of it, appointed the FASD as their investment advisor, and
the FASD then instructed CMI to place the funds back on deposit with the Bank.

• A letter from the Bank to the office of the Chief Inspector of Taxes dated 12
February 1998 states:

Of the £34M originally invested in the CMI Personal Portfolio, approximately


£29Mwas received by National Irish Bank as deposits from CMI. ... Currently
the funds deposited by CMI stand at circa. £ Irish 22.6M and £ sterling 2.5M.

"Securing new deposits for the Bank"

Illustrative interview evidence, which the Inspectors accept:

Branch managers spoke of gaining deposits through promotion of CMI policies:

So from the branch manager's point of view, you either gained a deposit on
your deposit base or you retained the deposit on your deposit base.

oooOooo

Inspector: So why was it... that you decided to introduce him to the
Financial Services Division?

Branch Manager: ... in the context of the twofold gain which the branch would
enjoy, both in terms of achieving an objective on referral
commission and, notional as it might be, and growing the
branch deposit book.

Financial services manager Patricia Roche stated:

... certainly in a small number of cases the branch manager may have had
somebody who was [a person who did not have money on deposit at the
branch] or was not necessarily a customer of the bank.

Illustrative documentary evidence:

Extract from Nigel D 'Arcy memorandum to Kevin Curran, Regional Manager North
West, dated 25 March 1994:

As you are aware, our relationship with CMI has been extremely successful on
two counts:

Protecting deposits which would otherwise be lost to NIB (as well as


attracting new deposits into the network) ...

"Earning commission for the Bank"

Bank personnel at interview indicated to the Inspectors how the sale of CMI products
assisted them meet their commission targets.

Illustrative interview evidence, which the Inspectors accept, includes:

Inspector: So why was it... that you decided to introduce him to the
Financial Services Division?

Branch Manager: ... in the context of the twofold gain which the branch would
enjoy, both in terms of achieving an objective on referral
commission and, notional as it might be, and growing the
branch deposit book.

oooOooo

Charlie McCarthy

Inspector: ... when you say targets, was that targets for the branch in
relation to referrals?

Mr McCarthy: No. It was commission target.

Inspector: For the branch?

Mr McCarthy:
Inspector: For the branch, and one way to get that target would be to refer
work because effectively then you 'd get the credit and the
branch would get the credit?

Mr McCarthy: Precisely.

Inspector: Then would it be fair to say that the deposit was protected and
commission was earned?

Mr McCarthy: Yeah, you could say that.

Other illustrative evidence includes:

Extract from Nigel D 'Arcy memorandum to Kevin Curran, Regional Manager North
West, dated 25 March 1994:

As you are aware, our relationship with CMI has been extremely successful on
two counts:

Providing substantial "other income ", which is a priority for all of us.

THE ROLE OF THE BANK

General

The Bank's role may be summarised as identification of customers and others with
undeclared funds, funds in bogus non-resident accounts, or funds offshore, and then
promoting the sale of the CMI policies to these persons.

Identifying customers with undeclared funds, funds in bogus non-resident


accounts, or funds offshore.

Illustrative interview evidence, which the Inspectors accept, includes:

Nigel D Arcy

Inspector: Did you know that potentially people within the bank were
targeting Revenue-sensitive monies for investment in CMI?

Mr D Arcy: Yes.

Patricia Roche

What would have more than likely happened is I would have been told [by the
branch manager] Mr [customer name] has a deposit, it's revenue sensitive, or
a term of that nature may have been used to suggest he had a deposit which
suggests he wanted it moved from its existing place into something else and
still keep as a deposit.

Branch manager interview

... and he [Kevin Curran] suggested to me that perhaps we should have FASD
look at the case [of a fictitiously-named bogus non-resident savings account
with a balance of £210,000]. At that point I contacted the rep concerned and
subsequent to that a meeting took place. That's how it ended up at CMI...
That's generally what used to happen.

Promoting the sale of the CMI policies - by Guaranteeing Confidentiality from the
Revenue Commissioners

Illustrative interview evidence from FASD personnel, which the Inspectors accept,
includes:

Nigel D 'Arcy

Inspector: Now, we have also received evidence that the bank and
personnel within the FASD Division of the bank ... promoted
the sale of the CMI policies by guaranteeing confidentiality
with the Revenue .... Do you believe that the bank, including
people within the FASD Division, was targeting hot money in
this fashion?

Mr D 'Arcy: ...at the outset I, I don't know but it certainly became the case.

Charlie McCarthy

The unique selling point I suppose would be the confidentiality ... They could
be concerned about the Revenue ...

Patricia Roche

If I were asked the question, then yes, I probably would have said that it was
completely confidential and that it was now in a numbered account at the
branch.

Bob Wynne
Inspector: So if somebody asked you would the Revenue get to hear about
this investment, what would your answer have been?

Mr Wynne: They will if you disclose it to them but the onus is on you, that
the product itself is confidential.

Mr Wynne commenced employment with the FASD on 15 August 1994, after the
enactment of Section 24 of the Finance Act, 1993 which required that details of all
sales of foreign life assurance policies be notified to the Revenue Commissioners by
the Bank as intermediary. Because of this the statement that the CMI Personal
Portfolio was confidential was incorrect and it appears that Mr Wynne had not been
instructed by FASD management on the provisions of the Act.

Evidence on confidentiality from branch managers, which the Inspectors accept,


includes:

Branch Manager: ... it's a similar type of confidentiality as to any other bank
product. I suppose that he could have kept it [the CMI product]
separate any other (sic), from his family or whatever as well.

Inspector: Or from the Revenue?

Branch Manager: Or from the Revenue, yes.

oooOooo

Confidentiality was a big issue.


oooOooo

Inspector: So why was it these customers would be interested in CMI?

Branch Manager: Total confidentiality ...No one would know about it.
oooOooo

Inspector: It was to facilitate the concealment of client funds from the


Revenue, that was the attraction of CMI?

Branch Manager: That was my understanding from day one.

Promoting the sale of the CMI policies - by representing that, where a trust was
created, the funds, on the death of the investor, would be passed to the beneficiaries
on the production of a death certificate, thus obviating the need for probate.

Illustrative evidence, which the Inspectors accept - FASD Personnel:

Nigel D 'Arcy

Inspector: Now, we have also received evidence that the bank and
personnel within the FASD Division of the bank ... promoted
the sale of the CMI policies ...by representing that where a
trust was created the funds on the death of the investor would
be passed to the beneficiaries on the production of a death
certificate thus obviating the need for probate and by
representing that the investment was free from tax. Do you
believe that the bank, including people within the FASD
Division, was targeting hot money in this fashion?

Mr D 'Arcy: ...at the outset I, I don't know but it certainly became the case.

Extract from internal memorandum dated 28 September 1994 prepared by the legal
department of CMI concerning the Personal Portfolio policy of a deceased customer
of the Bank, which memorandum was copied to Nigel D 'Arcy:

Perhaps the most important point that needs to be remembered here and
which I would ask you to consider very carefully is the fact that CMI has been
put on notice by both the Bank and the family that the policy proceeds
represent undeclared funds. As I understand it, this means that this is money
that has not been and is not intended to be declared to the Irish Revenue.
One of the objections to the Personal Representatives dealing with this policy
is that the value of the policy (or the proceeds) will form part of the estate and
that of course will be valued for Inland Revenue purposes. I assume that this
will cause a tax liability. The intention in asking CMI to pay the money to the
"nominated beneficiaries " and to take this somewhat unorthodox route is to
ensure that the policy proceeds remain undeclared monies and that the Irish
Revenue are not informed. It seems to me that this may amount to an attempt
to defraud the Irish Revenue. Therefore, in CMI agreeing to pay the
"nominated beneficiaries " in the manner suggested and in taking the
indemnity from the Bank, CMIfacilitates this process.

Mr D'Arcy executed a Deed of Indemnity on behalf of NIB wherein he represented


and warranted that the Bank had acted and continued to act as trustee in relation to the
deceased customer's CMI Personal Portfolio policy and was entitled to receive the
proceeds of the policy as trustee for the benefit of the beneficiaries. Mr D'Arcy was
not empowered by the Bank to execute such a Deed of Indemnity.

Charlie McCarthy

The advantage was the trust document and the letter of wishes that in the event
of a death, that the monies wouldn 't go into the estate, they 'd be payable to the
beneficiaries on the production of a death certificate

Illustrative evidence, which the Inspectors accept - branch managers

Branch Manager: I suppose the selling factor in the CMI was the trust element, if
a person died it was not necessary to effect probate.

Inspector: And what was the effect of that?

Branch Manager: The Revenue wouldn 7 know about it.

oooOooo
Inspector: Is it your understanding that in the event of the demise of the
husband or wife the money would pass and Revenue would not
become aware of it?

Branch Manager: That is what we were told.


oooOooo

Inspector: So is it fair to say that... you would have told customers in


relation to CMI, it was totally confidential both in life and in
death?

Branch Manager: That's right, yes.


oooOooo

Well in hindsight the advantage was that the money could pass on to the next
generation outside of the person's estate.

oooOooo

Obviously if the money was not declared to the Revenue or anyone else and it
was not included in the Will it was an advantage to be able to keep it
undeclared in the event of death.

REASONS FOR SUCCESS OF PRODUCT

Summary

In the opinion of the Inspectors, the reason for the success of the CMI campaign was
that it suited all the parties involved with it:

• The branch managers got rid of their bogus non-resident and fictitiously named
accounts, but retained the deposits.
• Promotion of the policy offered the prospect of gaining additional deposits of
"sensitive" funds.
• The Bank earned commission.
• The FASD financial services managers earned substantial bonuses.
• The customers believed they were getting an investment which would be
confidential from the Revenue Commissioners.

Typical Investment

The manner in which funds in the CMI Personal Portfolios were invested indicates
very strongly that most of the investors were not concerned with the return on their
investment but were interested in ensuring that it would be concealed from the
Revenue Commissioners. The following transaction was typical:

• A customer has a deposit of IR£100,000 in a branch of the Bank in a bogus non-


resident account.
• He is persuaded that it will be safer to have his money in CMI - confidentiality
from the Revenue Commissioners is absolutely guaranteed, and also no probate
requirements arise if a trust is created.
• On taking out the policy, the investor pays an immediate charge of 1% of the
capital invested and over the first five years a further 8% at a rate of 1.6%
annually.
• IR£97,000 of his investment is returned to the Bank on deposit at the same rate of
interest as before, the balance of IR£3,000 being retained in a separate account
and applied to meet initial charges.
• In addition to the 8% charge, the investor is charged Stg£300 per annum (later,
Stg£480 per annum) for being furnished with a quarterly account and, if he has
created a trust, a further annual fee of Stg£125 (later Stg£175), plus VAT, for the
maintenance of the trust.

While the above investment was typical, the Inspectors think it right that they should
state that not all the monies invested in the CMI Personal Portfolio product were
necessarily funds undisclosed to the Revenue Commissioners.

INSPECTORS' CONCLUSIONS

The Inspectors find:

1. Monies which were undisclosed to the Revenue Commissioners, including


funds held in bogus non-resident accounts and fictitious and incorrectly named
accounts, were targeted by Bank personnel for investment in CMI policies.

2. Bank personnel promoted CMI policies as a secure investment for funds which
had not been declared to the Revenue Commissioners, thereby engaging in a
practice which served to facilitate the evasion of Revenue obligations by third
parties.

3. Prospective investors were given an assurance by Bank personnel that their


investment would be confidential from the Revenue Commissioners and, if
made the subject of a trust, would pass to their beneficiaries without probate
having to be obtained, thus making it possible for the funds invested to be kept
hidden from the Revenue Commissioners even after the investor's death.

4. The role of the branch personnel of the Bank was to identify likely investors,
and the role of the FASD personnel was to introduce customers to CMI and
induce them to take out policies with CMI.
5. The purposes for the Bank behind the execution of such policies were:

(i) The earning of commission.


(ii) The retention of deposits.
(iii) The gaining of new deposits.
PART 6

THE IMPROPER CHARGING OF INTEREST


THE PRACTICE OF IMPROPER CHARGING OF INTEREST

OUTLINE OF SYSTEM

General

The system for charging interest on customer current accounts in branches remained
unchanged for the period covered by the investigation.

Interest rates for individual customers are set at branch level following agreement
with the customer on the provision of borrowing facilities. (For accounts with no
agreed borrowing facility a standard default rate applies if the account becomes
overdrawn). Data on the appropriate interest rate - base rate, DIBOR, etc, together
with any additional margin - is input to the Bank's central computer system at the
branch, and thereafter the calculation process is automated. The central system
applies the appropriate interest rate to the cleared balance daily and accrues the
interest charge until the quarterly charging date.

At quarter end the system applies the accrued interest amount to each account and an
Interest Applied Report is produced for each branch, detailing interest charged to each
account. This report does not require action by branch staff, but is produced for
record purposes only.

Changes in interest rates

When the reference rate - base rate, etc - changes, details are entered centrally.

Changes in margin can be made at branch level at any time, and become effective,
through the central system, from the following day.

Manual intervention in the interest charging process is provided for in the system:

• When an account is closed at other than a normal interest charging date, the
branch is obliged to charge manually the interest due to date of closure. In
addition to the amount accrued due on the system since the last charging date
(which branch personnel can ascertain by on-line enquiry), it may be necessary to
effect adjustments recorded in the Fee and Interest Amendment Book (see below),
and there may be interest due in respect of lodgement items uncleared as at
closure date. This latter necessitates a separate calculation by branch staff. The
combined amount is charged to the customer's account by journal entry at branch
level.

• The system also allows branch-originated journal adjustments to the interest


charge in respect of amounts recorded in the Fee and Interest Amendment Book.
This Book records errors requiring amendment of fee and interest charges to
customers, and also additional interest charges arising from the suspension of
cheques - ie where a customer cheque is "held over" rather than returned unpaid,
allowing the customer time to put his account in funds to meet the cheque.
Branch Procedures Manuals made available to the Inspectors state that the Fee and
Interest Amendment Book was to be used to provide branch staff with a day-to-day
record of fee and interest adjustments to be made at the end of the charging period, or
when the account was closed or transferred, whichever came first.

The Inspectors have received no evidence of improper charging of interest applied by


the central system; the balance of this section of the report therefore addresses manual
interest adjustments only.

MANUAL INTEREST ADJUSTMENTS

The Charging Regime

Introduction

As stated above, the system for charging interest is largely automated, but manual
intervention is possible:

• to facilitate closure of accounts at dates other than the normal interest charge
dates,
• to allow for the correction of errors, and
• to enable the charging of additional interest when cheques are suspended at a
branch.

In a report entitled "National Irish Bank - Unauthorised Interest & Fee Amendments",
dated March 1999, passed to the Inspectors on 26 March 1999 (the "Unauthorised
Interest & Fee Amendments Report" - see page 133 below), the Bank referred to the
process in the following terms:

... the systems catered for manual adjustments to be made to correct genuine
errors and to apply interest resulting from the practice of 'suspending'
customers' cheques to allow them time to introduce sufficient funds into their
account to allow these cheques to be presented and paid.

Guidance Material Issued

The Inspectors have been informed by the Bank that the 1992 Branch Procedures
Manual represented a consolidation of instructions and procedures then in force, and
that this Manual therefore, for practical purposes, sets out the system as it operated in
1988. This manual sets out detailed procedures for calculating interest adjustments
arising on closure of accounts and addresses the manner in which the Fee and Interest
Amendment Book should be maintained.

This Manual states that the Fee and Interest Amendment Book was to be used to
provide branch staff with a day-to-day record of fee and interest adjustments (eg
correction of errors) to be made at the end of the charging period, or when the account
was closed or transferred, whichever came first.
The Manual required that full details of the prospective adjustment, together with the
reason therefor, be entered in this Book and initialled by the branch manager. The
Manual specified that the Fee and Interest Amendment Book, in so far as interest
amendments were concerned, should not include adjustments which branch staff
might wish to make as a result of examining the interest applied report received at the
end of the charging period.

The 1996 Branch Procedures Manual contains very similar provisions, the initialling
process being re-assigned to a Signing Official.

Queried by the Inspectors as to why there existed a facility to further adjust interest
charges after adjustments noted in the Fee and Interest Amendment Book had been
incorporated in such charges, the Bank by letter dated 24 April 2001 advised:

This examination of the amounts of interest applied to customers' accounts


allowed the management of the branch a final opportunity to overview an
automated process for errors and to ensure that inappropriate interest
charges were not levied. Any errors apparent to the reviewer could be
rectified before customer statements were produced.

The Bank advised that it did not have an exhaustive list of reasons which would
justify the amendment of an interest posting; examples given are waivers of an
interest charge for various reasons.

Both Manuals provided that where an adjustment was made to the interest appearing
on the interest applied report, the customer statement should be retyped to show only
one interest amount - ie the original system-generated amount amalgamated with the
adjustment effected at branch level. Accordingly, the customer would not have been
aware from the bank statement that an adjustment had been made.

The 1996 Manual specified a routine designed to minimise the work involved in
retyping statements.

Operation of the System

Internal Audit Reports - General Themes

Contemporaneous evidence of the operation of the system for interest amendment is


furnished by the internal audit process. A number of themes emerge from review of
branch audit reports for the period covered by the investigation:

• Interest amendment book not used, resulting in customer not being charged;
• Interest amendment book not used, while adjustment effected in customer's
account;
• Interest adjustments recorded in the interest amendment book not adequately
annotated or not appropriately initialled/authorised;
• Interest discrepancies highlighted on Account Closure Reports not signed, not
explained;
• Interest adjustments not recorded, not annotated/explained on the Interest Applied
Report;
• Manual interest calculations not appropriately checked;
• Failure to charge interest in respect of suspended cheques;
• Failure to obtain appropriate authorisation for interest refunds.

While the frequent inclusion of comments of this nature in internal audit reports
indicates shortcomings in the operation of mechanisms for recording and controlling
interest adjustments, in the audit reports made available to the Inspectors no note of
improper charging is recorded until April 1990, notwithstanding evidence that fees
had been charged as interest prior to that time, as indicated at page 130 below.

Internal Audit Reports - Unjustified Interest Amendments

In a number of instances in the period 1990 to 1993, internal audit reports make
explicit reference to manual interest amendments which were inappropriate, in that
they were effected without legitimate reason or cause, or were adjustments in respect
of amounts said to be due to the Bank in respect of legitimate (non-interest) charges.

Several of these instances were treated as "Report Points" in the relevant audit report,
and a full extract of the particular passage in each case is reproduced below.

The April 1990 audit report on Carrick-on-Shannon branch recorded:

WEAKNESS/POTENTIAL ADVERSE CONSEQUENCE

It was noted that Interest Charges were increased without legitimate reason or
customers' knowledge on twenty accounts in November 1989 and thirty-three
accounts in February 1990.

The above practice could lead to loss to the Bank through customer dispute, litigation
or adverse publicity.

REMEDIAL ACTION REQUIRED

Interest amendments may only be made to correct Branch errors. The practice of
"loading" interest in this manner must be discontinued.

RESPONSE BY BRANCH MANAGEMENT

We note that as and from now only branch errors can be corrected using interest
amendment sheets.

While we only loaded interest rates for customers who were very demanding, we were
certain that we were safe in applying the additional interest charges. No queries
ever came back from customers who (sic) interest was loaded.

We note and confirm that this practice will be discontinued.


The audit report of August 1990 on Carndonagh branch recorded:

WEAKNESS/POTENTIAL ADVERSE CONSEQUENCE

It was noted that interest charges were increased without legitimate reason or
customer knowledge, on twelve occasions in May 1990 and thirteen occasions in
February 1990. This practice also applied in 1989. The Debit Interest Applied
Reports were not amended in respect of these alterations.

This could lead to loss to the Bank through customer dispute, litigation or adverse
publicity, due to the issuance of an Interest Certificate for the correct amount, or a
customer's accountant querying why an amended statement was issued at interest
charging periods.

REMEDIAL ACTION REQUIRED

Interest amendments may only be made to correct branch errors. The practice of
"loading" interest must be discontinued.

RESPONSE BY BRANCH MANAGEMENT

The practice of loading was initiated for accounts that were either constantly in
excess of their agreed limits (as evidenced by appearance in the Morning Report), or
were the subject of frequent urgent S/L reports. Through discussions at branch the
implications of loading were highlighted, but for obvious reasons immediate cessation
was not feasible. The practice has been gradually scaled down and will be totally
eliminated before the next charging period.

The following was reported in respect of Sligo branch in October 1990:

WEAKNESS

Interest amendments were effected on twenty-two accounts in November 1989 and


thirteen accounts in March 1990, without legitimate cause or customer authority.
The Debit Interest Reports were not amended.

POTENTIAL ADVERSE CONSEQUENCE

Increasing interest charges could lead to queries from the customer or his accountant
in respect of the non-computer produced statements at the interest charging periods.
Interest Certificates could also be issued for amounts different to the statement figure.
If a copy statement is requested by a customer the interest amendment could be
highlighted in error.

RECOMMENDED ACTION

Interest amendments should only be effected for legitimate reasons.

BRANCH RESPONSE: The practice has been discontinued.


The May 1993 audit report on Blanchardstown branch recorded:

WEAKNESSES

The following weaknesses were noted:


1. Interest charges were increased without legitimate cause on eight accounts in
November 1992 and on six accounts in November 1991.
2. One instance was noted where a customer's interest was increased by £300 to
offset bad debts of employees for (sic) that customer.
3. Many instance was (sic) noted where interest was increased on closure of
accounts to cover Management time charges.

POTENTIAL ADVERSE CONSEQUENCE

Increasing interest charges without legitimate cause could lead to queries from
customers or their accountants and result in loss to the Bank due to dispute or
adverse publicity.

RECOMMENDED ACTION

In future interest should only be amended where there are legitimate reasons. Where
Branch wish to apply additional charges these should be collected by way of a Fee.

BRANCH RESPONSE

We will ensure in future that interest is only amended when there is a legitimate
reason.

Critical comments considered less serious were classified in audit reports as


"Discussion Points" or as "Weaknesses of Lesser Significance". Matters reported in
relation to interest amendments included:

Discussion Point, College Green, Dublin branch, February 1992:

Interest should only be amended when properly authorised by the Manager or


Regional Office. Amendments relating to charges should NOT be included on
interest amend (sic) sheets.

Weakness of Lesser Significance, Walkinstown branch, March 1992:

It was noted that on a few occasions interest adjustments were effected which
did not relate to interest errors.

Weakness of Lesser Significance, Fermoy branch, May 1992:

It was noted that the fee for suspending cheques was incorporated in the
quarterly interest charge. Interest should only be amended in respect of
interest adjustments and all other charges should be incorporated in the fee.
Weakness of Lesser Significance, Strokestown branch, May 1992:

It was noted that amendments were effected to interest relating to charges for
suspending cheques and telephone calls. Interest should only be amended in
respect of interest errors. All other amendments should be incorporated in
the fee charged.

Weakness of Lesser Significance, Bray branch, December 1992:

A significant number of the interest discrepancies resulted from the Branches


(sic) practice of amending the interest calculated by Livelink by:
a) in the case of debit interest increasing the amount charged and
b) reducing the amount paid in the respect (sic) of credit interest.

Branch should cease this practice immediately and where deemed appropriate
a fee is to be levied.

Weakness of Lesser Significance, O'Connell Street, Dublin branch, January 1993:

A number of instances were (sic) noted where interest adjustments were


effected and the interest charged was increasedfor amounts between £10 and
£50 without legitimate cause. One instance was noted where interest was
increased by £150 in respect of Management time. In future interest should
only be increased for legitimate reasons. All other charges should be
collected by way of a fee.

Weakness of Lesser Significance, Letterkenny branch, May 1993:

It was noted that the £5 fee for each cheque suspended has been charged to
customers (sic) accounts as interest. Please note that this charge should be
applied as a fee in future.

In summary, the internal audit reports received by the Inspectors record the misuse on
eleven occasions (four of which were considered at the time to merit a "Report Point"
grading) of the facility to manually amend interest charges to customers.

Bank Investigation 1998/99

Investigations carried out by the Bank subsequent to news media reports on "interest
loading", reported upon in March 1999 (discussed in more detail below) resulted in
interest refunds totalling some IR£ 132,000 (before indexation) being made to
customers of twelve branches in all:

Branch Period in respect of which refund made

Baggot Street, Dublin May 1990 to November 1991


Blanchardstown February 1991 to May 1993
Carndonagh November 1987 to November 1990
Branch Period in respect of which refund made

Carrick-on-Shannon November 1987 to November 1990


Cork May 1988 to November 1990
Letterkenny November 1987 to May 1993
Limerick May 1988
O'Connell Street, Dublin November 1988 to November 1994
Sligo May 1988 to February 1990
Strokestown November 1995 to February 1998
Walkinstown May 1989 to November 1990
Waterford May 1988 to August 1990

No refunds were made by the Bank (nor was the amount involved quantified) in
respect of charges for suspending cheques which, though not interest, were included
in interest amounts debited to customers' accounts, on the basis that such charges
were "clearly substantiated as being due to the Bank" (see pages 20 and 21 of the
Unauthorised Interest & Fee Amendments Report at Appendix 14). This Report
makes clear that the practice of classifying as interest charges for suspending cheques
was not limited to the twelve branches listed above.

The Inspectors regard as improper the charging as interest to customers' accounts of


any non-interest charges, and therefore consider such charges should have been
refunded.

Branch Staff Evidence

The Inspectors interviewed 37 current and former Bank branch managers and staff.

A number of those interviewed were at the relevant times managers of branches


identified in news media reports as locations where "interest loading" was reported to
have taken place - ie where interest charges had been increased without proper cause.
In other instances, the Inspectors were aware at the time of interview that the Bank
personnel had held positions of responsibility at the relevant times in branches where
the Bank had made refunds of interest charged.

A significant proportion of interviewees stated that they had not participated in the
practice of loading interest in the manner described, and that they were unaware of its
occurrence at other locations.

It is evident from the manager responses to the "Report Points" in the 1990 branch
audit reports cited above that the managers concerned did not regard themselves as
charging customers other than for amounts due, albeit that these were not interest
amounts. The majority of managers and others interviewed who worked at the
branches where "loading" had taken place did not deny knowledge of its occurrence,
but sought to justify the loading by reference to features of the account or the
customer, and their understanding of Bank practice as observed at other locations.
Justifications offered by interviewees included:

At the time I considered it quite a legitimate charge. On reflection and with


the benefit of hindsight, I certainly should not have charged it as interest, I
should have charged it as fees.

oooOooo

I had simply done what I had seen done in my previous office which was Cork.

... loadings were made ... for a variety of reasons, the most common one being
that the account was troublesome in some shape or form, not necessarily a
bad account, but where a good deal of additional time was taken up in respect
of the account for various reasons.

oooOooo

... you were not doing the interest on the basis of boosting revenue to the
bank, you were doing it on the basis that the customer you picked was entitled,
by virtue of the amount of additional work he had caused you, to pay this
amount.

oooOooo

...I condoned the fact that interest was increased by a smaller amount to
cover the activity associated with the suspension of the cheque.

oooOooo

Extract from note from manager interviewee passed to the Inspectors at interview:

At the interest charging periods the interest was amended by small amounts on
the listed accounts which had been very troublesome during the year.
Because we had no Control Clerk I felt that proper interest was not being
collected on those accounts where many cheques were being suspended,
returned, unpaid, recalled, received for collection and value given prior to
lodgement, or paid against uncleared effects.

Extract from interview with the above-noted manager:

Inspector: They [interest adjustments] didn 't relate to management time at


all?

Manager No.

oooOooo

And I would have decided — the unpaid book was the record, and if Mr
Brown's appearing in the unpaid book very, very regularly, we would have
made a crude estimate of saying we possibly should be charging this guy £20,
£50 or £100 interest adjustment to recoup our loss. That was how it was
done.

It would have been just a guess in relation to the number of cheques that were
suspended.

The determining factor possibly was to basically recoup the lost interest for
the bank and the extra work involved in doing what we did, which I honestly
would have considered was a benefit to the customer rather than return his
cheque for whatever reason, and letting the customer worry about it. We
would have contacted the customer, said we have a cheque here, would you
mind holding it, yeah, no problem. Possibly where we fell down was certainly
we will hold the cheque, Mr [customer namej, but it is going to cost you £5 or
£10 or whatever. That is where we fell down.

oooOooo

When questioned by the Inspectors on why charges were levied in this fashion, and
whether customers would have been aware that the interest charge included an
element of fee, interviewee responses included such observations as:

It was probably a sneaky way of making a charge that was seen to be properly
due. I suppose it was easier than fighting with someone because of a fee. It
was probably cowardly.

oooOooo

You couldn 't collect it by way of fee because it would have been noticed so it
was applied by way of interest, and applied inappropriately.

Inspector: At the time it was done would the customers of the bank have
been aware of the practice?

Manager: No.
oooOooo

Inspector: Would the customers have known at that stage that their interest
figure was being adjusted because they were being
troublesome?

Manager: The interest charge was posted on the statement and sent out to
them so it was left to them to query the interest charge if they
wished.

Inspector: No, but would they have known?

Manager: They wouldn't have been advised in writing.


oooOooo

Inspector: The customer sees interest on his bank statement, would it have
been normal that he would have assumed that that related to
interest, and not to charges?

Manager: I would assume — he had every right to assume that, yes. ...

Inspector: Why would it [charge related to work in suspending cheques]


not be put through as a charge?

Manager: I don't honestly know at this stage. It possibly should have


been put through — split and put through as a charge on it, and
an interest amendment.

oooOooo

Questioned on the extent of the practice throughout the branch network, interviewees
who admitted participation in, or direct knowledge of, the practice gave as their
understanding that the practice was to a greater or lesser extent widespread:

Inspector: Was this something you invented yourself?

Manager: Not at all. That is one of the points I made to our internal
auditors. I told them that whatever was in the report... I had
not invented the wheel.

oooOooo

Inspector: Have I understood you correctly to say that interest adjustment


was a widespread practice within the bank?

Manager: I would have felt it was.

Inspector: There has been a suggestion that the practice existed in only the
five branches that were named.

Manager: That is totally incorrect.

oooOooo

At the time it [ie inclusion in interest charged of a fee element related to


suspension of a cheque] was something that was not peculiar just to
O'Connell Street branch, it happened in a number of branches, ...

oooOooo

I was aware that it was fairly widespread.


A number of Bank personnel interviewed by the Inspectors have spoken of a practice,
prior to the period covered by this investigation, and indeed prior to the introduction
of the Bank's computerised accounting system, of "adjusting the decimal", a practice
whereby interest charges to customers were increased to compensate the Bank for the
time and trouble involved in servicing their needs. It was represented to the
Inspectors that this practice was accepted by senior management of the day, and the
practice reported in audit reports in the 1990/93 period represented no more than the
continuation of this procedure into the computerised era. These managers believed
that the inclusion of amounts for "time and trouble" in interest charges was accepted,
if not overtly approved, by senior management in the Bank.

Dermott Boner stated in the course of his evidence that the practice of charging
specifically for management time originated in a request in 1985 or 1986 from the
Chief Executive of the day that management time should be recovered, and that
interest charges were increased to reflect management time during his period as
manager of the Cork branch. Since the purported request to charge for management
time pre-dated the period being investigated by the Inspectors, they have not sought to
verify it, nor to ascertain how it was intended that the charge should be made.

A number of managers who admitted that interest had been loaded by them or at their
direction stressed that the practice was transparent as regards the internal records of
the Bank, but had not been the subject of comment in branch audit reports prior to
1990. The manager of the Carrick-on-Shannon branch also placed some emphasis on
the fact that the 1990 audit of his branch was the first branch audit carried out by the
person who led the audit team on that occasion.

In summary, the majority of bank managers interviewed by the Inspectors denied


participation in, or knowledge of, a practice of loading interest. Managers who
admitted they had loaded interest indicated a belief that the practice was widespread
and predated the period covered by the investigation; they believed senior
management in the Bank would not at the time have disapproved of the practice.

ACTION TAKEN BY THE BANK ON FIRST DISCOVERY OF IMPROPER PRACTICE

The Chief Executive (Jim Lacey)

As noted at page 122 above, the practice of increasing interest "without legitimate
reason" appears to have been first reported by Internal Audit to senior management in
the April 1990 report on Carrick-on-Shannon branch. This report was circulated to
the Chief Executive, Mr Lacey, the General Manager - Retail Banking, Frank
Brennan, and the Regional Manager responsible, Kevin Curran.

On 21 May 1990, Mr Lacey issued a memorandum to Mr Brennan, with a copy to Mr


Curran, stating, inter alia:

From the Branch Manager's response it would seem to me to indicate that he


was somewhat surprised at this matter having been picked up by Audit and I
would be obliged if you could let me have a bit more detail as to how this
practice came into being and also your view as to how widespread such a
practice might be. It is a practice that we must cease immediately for obvious
reasons. We have in place a variety of means ofputting on additional
charges to accounts where they are troublesome and cost a lot more to run,
etc. This can be through additional fees and also, if necessary, we can charge
higher interest rates but if we are they must be clearly communicated to the
customer.

The General Manager - Retail Banking (Frank Brennan)

Mr Brennan's review of the Carrick-on-Shannon branch audit report, addressed to Mr


Curran, also dated 21 May 1990, included the following:

The remarks under Report Point 1, Core 2 (ie the text reproduced at page 122
above) we discussed briefly in the recent past. The branch management
response would seem to suggest that interest was loaded to compensate for a
short fall in fee income from demanding customers. Given that the auditors
found 33 cases of loading it would appear that branch have used the "soft
option " principle widely and this is unacceptable. Report Point 4 indicates
some refunds were made and no doubt you will see if there is a link between
the two.

Mr Brennan wrote to both Regional Managers (Kevin Curran and Dermott Boner) on
5 June 1990 as follows:

In the recent audit of Carrick-on-Shannon branch it was discovered that there


was an interest loading made on customer accounts without any prior
agreement or notice to the customer. Some indication was given that this
loading was in lieu of irrecoverable fees or simply a penalty for nuisance
caused by the customer during the charging period.

I was not aware of such a practice in the branches and would wish to

(a) know of all incidences where this practice has taken place and
(b) confirmation that it ceases immediately.

I am sure you do not need me to tell you that it is quite wrong to surcharge a
customer without proper notice. Should there be occasion to penalise an
account holder for any reason, be it breaking an arrangement or causing a
considerable amount of labour to service their (sic) needs, then there is a
mechanism in place to make additional charges. What I do not want to see
from any manager is use of the soft option of "hidden " costs and this must be
stopped immediately.

Mr Brennan's review of the August 1990 Carndonagh branch audit report, addressed
to Mr Boner, included the following:

I don 7 understand the management reply to Report Point 1, Core 2 (ie the text
reproduced at page 123 above). If an account is in excess of the agreed limit
then the 6% loading should automatically apply. Was it a case of the loading
being omitted at the static input stage and applied manually later or was it
that interest over and above the 6% loading being (sic) charged? The
frequency of the S/L report has nothing to do with interest rates but suggests
that the limits are insufficient for customer needs or that customer is taking
unauthorised credit which we would not support from Regional Office? In
either case the matter should be addressed with the customer and if penalty
interest is used to bring discipline notice should be given in advance to
customer.

Mr Brennan has advised the Inspectors that the 1990 audit reports on Carrick-on-
Shannon and Carndonagh branches and the memoranda referred to above are the only
references he can find on the subject of improper charging of interest to accounts in
the investigation period.

The Regional Managers (Dermott Boner and Kevin Curran)

While there is evidence that the Regional Managers addressed the issue with the
branch managers concerned, and sought assurance from all branches within their
respective regions that if such a practice existed it should cease immediately, the
extent to which they received such assurance is unclear.

Mr Brennan has advised the Inspectors that he received no formal response from
either Regional Manager to his memorandum of 5 June 1990.

Impact on Customers

Neither Mr Lacey's memorandum nor Mr Brennan's directed that refunds be made


where interest had been improperly charged.

The Regional Managers did not instruct the branch managers to make refunds.

The Bank has confirmed to the Inspectors that it has found no evidence that refunds of
such interest were made prior to the Inspectors' appointment.

ACTION TAKEN BY THE BANK FOLLOWING NEWS MEDIA REPORTS

Interviews with Bank Staff

Bank internal audit staff interviewed 210 staff following the news media allegations
of interest and fee loading. The Inspectors, with a view to minimising the number
and extent of interviews they themselves would be obliged to carry out, sought from
the Bank copies of the notes taken at these interviews. The Bank claimed privilege
over this material, and declined to make it available to the Inspectors. The Bank has
however formally advised the Inspectors that all material otherwise requested by the
Inspectors has been furnished to them, including all documentary material referred to
at the staff interviews.
The Inspectors considered a Court challenge to the Bank's claim to privilege over the
interview notes, but decided against it on the grounds that it was preferable to conduct
a comprehensive interview programme themselves rather than become involved in
what might turn out to be lengthy and costly litigation.

Bank Investigation Work: The Unauthorised Interest & Fee Amendments


Report

General

The Bank's investigation of the allegations of interest and fee loading broadcast on
RTE is the subject of a report dated March 1999 entitled "National Irish Bank:
Unauthorised Interest & Fee Amendments", prepared by National Australia Group's
European Audit function, hereafter termed the "Unauthorised Interest & Fee
Amendments Report". A copy of this report was furnished to the Inspectors on 26
March 1999 and is reproduced at Appendix 14. Brief extracts from this report have
been cited at pages 120 and 126 above.

Work Done

The work described in the Unauthorised Interest & Fee Amendments Report includes
initial work carried out by the Bank's internal audit staff, work carried out by Arthur
Andersen at the Bank's request, and work carried out thereafter by Bank staff.

The objectives of the investigation included the quantification of the impact on


customers of any unacceptable activities which had taken place.

The scope of the review was restricted to current account adjustments. The Bank
concluded that a "targeted approach rather than a fully substantive one" was
appropriate and therefore directed its work at "locations where the risk of occurrence
was assessed as being high".

The investigation team did not seek to verify the working of the system in either the
interest or fee areas, but sought to consider the result of the amendment process.

Arthur Andersen work

In the interest area, the Bank's initial scoping exercise identified five branches where
interest loading might have occurred, and the accounting firm Arthur Andersen
("AA") was engaged to establish "whether additional interest charges have been
debited to customer current accounts at quarter end without any contractual,
statutory or other valid basis for doing so and, if so, the extent thereof at the following
branches of the Bank for the following periods":

• Blanchardstown February 1991 - May 1993


• Carndonagh October 1987 - December 1990
• Carrick-on-Shannon October 1987 - December 1990
• Cork January 1988 - December 1990
• Walkinstown January 1989 - December 1990

The timespan for review was later extended to encompass manual bulk postings of
interest amendments within 5 business days of the quarter end posting date.

Following their review, AA classified the adjustments by reference to the


explanations contained in the available documentation, and these findings are
summarised in the Unauthorised Interest & Fee Amendments Report as follows:

Number Value
IR£

Supporting evidence for interest adjustment found 332 128,201


Additional charge relates to management time 200 42,255
Unresolved 574 58,257
Total 1,106 228.713

Bank staff carried out further review work on all interest adjustments identified by
AA, other than those found to be justified interest amendments or charges in respect
of management time. Incorporation of the results of this additional work in the
summary resulted in final summary figures as follows:

Number Value
IR£

Supporting evidence for interest adjustment found 359 132,364


Additional charge relates to management time 382 55,112
No basis for justification 365 41,237
Total 1,106 228.713

The Report notes that the 365 adjustments for which no justification could be found
relate to 171 customers across the five branches the subject of review.

Inspectors' Observation on Analysis of Adjustments

The title of the third class of adjustments in the review work carried out by Bank staff
- "No basis for justification" implies that the inclusion as interest of charges relating
to management time (the second class) was justified, which clearly it was not. In fact
it was the practice which had been highlighted by Internal Audit as being improper.
There could clearly be no justification for including a charge for management time as
interest. The number of adjustments for which there was no justification should
accordingly have been 747, and not 365.
Work carried out by Bank investigation team

Bank staff carried out additional work on manual interest amendments under a
number of headings:

• Supplementary work on the five branches reviewed by AA, extending the time
periods of review;

• Review of adjustments at branches where staff who had worked in branches


where loading had been identified subsequently worked;

• Review of branch audit reports;

• Review of General Ledger postings, all branches, for round-sum adjustments in


the quarters ended 31 May 1989 and 30 November 1990;

• Limited review of Interest Amendment Sheets;

• Investigation of customer enquiries;

• Review of all manual interest adjustments over IR£500, and all round-sum
adjustments below that amount, effected during the period 31 March 1996 to 31
March 1998.

Only adjustments made at or about the quarter end date were reviewed, and with few
exceptions, investigation was limited to "round-sum" adjustments.

Conclusions

The conclusions of the Unauthorised Interest & Fee Amendments Report in the
interest area are as follows:

Some incidence of interest amendments, which could not be fully justified as


interest, was found in all of the five named branches. In total this amounted to
£100,513. Additional work carried out identified that of this total an amount
of £59,275 could have been justified if it had been charged as a management
time fee. This leaves £41,238 with no evidence of a justifiable charge being
due.

The review of the wider network identified incidences of interest adjustments


which could not be justified, as interest, in a further 8 branches totaling (sic)
£34,816.

The relatively small incidence discovered in the remainder of the network,


supported by the absence of repetitive interest loading findings in Internal
Audit reports, indicates that the practice was not widespread and given the
absolute amounts involved that the motivation was not to enhance Bank
profitability. No branches were identified through the review of external
audit management letters.

The review of Internal Audit reports highlighted instances where branches


were charging a management time fee for suspending cheques as interest.
Although non compliant with procedures, on the basis that these charges
could be fully substantiated they were not included within amounts to be
refunded.

The system for interest charging was unchanged throughout the period
investigated and, due to interest calculations being made on cleared balances,
remains largely invisible to the customer. The requirement for interest
amendments still remains although this process could be reviewed to give
greater visibility to the customer which in turn would act as a control over the
processing of unjustified amounts.

The review of the last two years showed that only one 'spoke' branch,
Strokestown, was not adhering to the laid down procedures for interest
amendments by recovering management charges through amending the
interest charge. This amounted to less than £800 in total.

The Bank made refunds both of amounts where no justification could be established
and of amounts representing management time, excepting time and other charges in
respect of suspending cheques. As already stated at page 126 above, the Inspectors
consider these latter charges should also have been refunded.

Inspectors' Observations, Unauthorised Interest & Fee Amendments Report:


Findings on Interest Amendments

The Inspectors do not accept that the Bank, on the basis of the work done, was
entitled, because of the scope limitations on that work, to reach the conclusion that the
practice of interest loading was not widespread within the Bank.

The Inspectors do not disagree with the other conclusions of the Report as far as they
go, but do not accept that the work done excludes the possibility that there were other
incidences of improper interest charges in the branches reviewed or elsewhere in the
branch network.

Customer Queries

The Bank set up and advertised a telephone helpline, which customers could contact
with queries relating to interest or fee charges on their accounts.

The Bank has advised the Inspectors that on receipt of a customer query, it sought to
review the customer's account for the entire period covered by the query, relying on
the presence or absence of a request for a customer statement (to facilitate re-typing,
as described at page 121 above) at or about the charge period end as conclusive
evidence of whether a manual adjustment was made, requiring review. A prescribed
review procedure was followed to establish whether a refund was warranted, to
prepare an inflation-adjusted refund if required, and advise the customer of the
position.

Inspectors' Observations on Work done by the Bank

In course of their consideration of the work done and the conclusions reached in the
Unauthorised Interest & Fee Amendments Report, the Inspectors indicated to the
Bank their reservations regarding the scope of work undertaken, and their view that
the work carried out did not adequately support the conclusion reached.

Further Work proposed by the Bank

By letter dated 10 April 2001, the Bank advised the Inspectors that it"has embarked
on a programme to review interest postings across the branch network for the period
1/10/1987 - 5/4/1998" - see Appendix 15. The Bank subsequently advised the
Inspectors that the details of the additional work carried out, the conclusions reached
and the consequent action undertaken or proposed, would be included in its
submissions in response to the Inspectors' provisional findings.

Following receipt of the Inspectors' draft report on 1 August 2003, the Bank devised a
new programme, "Fees and Interest Refund Programme" which is set out in Schedule
V of the Bank's Reaction Paper, reproduced in full at Appendix 19. How the Bank
came to take this step is described as follows on page 4 of Schedule V:

In light of the views expressed by the Inspectors, and on reconsidering the


decisions underlying its previous approach, the Bank has devised a further
programme of work and refunds on which it has sought independent
verification.

It is anticipated by the Bank, at page 4 of the Reaction Paper, that this programme will
result in additional fees and interest refund payments to customers of Euro 10.6
million.

INSPECTORS' CONCLUSIONS

The Inspectors find:

1. During the period the subject of the Inspectors' investigation, the interest
charged by the Bank to some customers in their quarterly account included
sums which were not in fact interest.

2. The inclusion of such sums in the charge for interest was improper.

3. The sums which were improperly charged as interest should, on discovery by


Internal Audit, have been immediately refunded by the Bank.
4. While the Inspectors note that since the commencement of their investigation,
the Bank has refunded to customers an inflation-adjusted total of
approximately IR£570,000 in respect of charges which could not be justified
as interest on 564 accounts in twelve branches, they do not accept that the
Bank, on the basis of its investigative work done, is entitled to conclude that
all incidences of improper interest charges have been identified.

5. Refunds of sums improperly charged as interest made following the Bank's


investigation should not have excluded sums charged for the suspension of
cheques.
PART 7

THE IMPROPER CHARGING OF FEES


THE PRACTICE OF IMPROPER CHARGING OF FEES

REGULATORY REGIME

Introduction

All financial institutions which provide banking services to customers in Ireland are
required to hold a banking licence issued by the Central Bank. The Central Bank is
accordingly the principal public authority assigned to regulate and supervise the
operations of the domestic banks. The powers and functions of the Central Bank in
this regard are derived from the Central Bank Acts, 1942-1997.

On 13 May 1996 certain regulatory functions were transferred to the Director of


Consumer Affairs, under the provisions of the Consumer Credit Act, 1995. Under
Part XII of this Act, the Director of Consumer Affairs is responsible for the regulation
of all charges imposed by credit institutions "m relation to the provision of any
service to a customer or group of customers."

The Central Bank Act, 1971

The Central Bank Act, 1971 provided the Central Bank with two main powers with
which it might regulate the fees charged to customers by banks:

• Under Section 10, the Central Bank was given a discretion to attach to any licence
granted, conditions which they believed would promote the orderly and proper
regulation of banking, and

• Section 18 obliged licence holders to furnish to the Central Bank any information
the Central Bank specified as necessary for the due performance of its statutory
functions.

Prior to 1989 the Central Bank had no specific powers in relation to charges, but they
were the subject of an informal agreement between the licensed banks and the Central
Bank. Pursuant to its ongoing task of monitoring the business carried on by licence
holders, the Central Bank would regulate the fees charged by banks to the accounts of
customers, while the banks would keep the Central Bank informed of same. This
agreement was strictly between the Central Bank and the banks.

The Central Bank Act, 1971 placed no specific obligations on banks to disclose to the
Central Bank the level of (or changes to) fees charged to customers unless, of course,
they were requested to make such disclosure.

The Central Bank Act, 1989

Section 28, Central Bank Act, 1989 required that, within two months of the
commencement date for this Section (1 September 1989), banking licence holders
should keep the Central Bank informed as to the charges (and the terms and
conditions of such) that were being levied for services provided.
Section 28 (1) required all licensed banks to notify the Central Bank of:

• All charges imposed by such licence holder in relation to the provision of any
service to the public or to any class of the public, and

• Any term or condition upon or subject to which such service was provided.

Section 28 (2) stated the Central Bank must be notified of every proposal:

• To change any charge, term or condition previously notified to the Central Bank
for the purposes of the Section, or

• To impose any charge, term or condition applying to the provision of a service to


the public or to any class of the public not previously notified to the Central Bank
for the purposes of the Section.

Section 28 (3) empowered the Central Bank to direct a licensed bank:

• To refrain from imposing or changing a charge, term or condition applying to the


provision of a service to the public or to any class of the public, without the prior
approval of the Central Bank, and

• To publish, in such manner as might be specified by the Central Bank from time
to time, information on any charge, term or condition applying to the provision of
a service for the public or to any class of the public.

Section 28, Central Bank Act, 1989 was repealed by Section 19 of the Consumer
Credit Act, 1995 which came into force on 13 May 1996. Thus, the provisions
summarised above were applicable between 1 November 1989 and 13 May 1996.

The Consumer Credit Act, 1995

The repealed Section 28 of the Central Bank Act, 1989 was replaced by Section 149
(1) of the Consumer Credit Act, 1995. The functions and powers formerly vested in
the Central Bank under Section 28 of the 1989 Act were vested by Section 149 of the
1995 Act in the Director of Consumer Affairs and the obligations of banks (together
with all other credit institutions) in regard to notifying charges, and alterations in
charges, remained broadly similar to what they had been, save that the party to be
notified became the Director of Consumer Affairs.

Subsequent Changes in the Regulatory Regime

Pursuant to the Orders of the High Court dated 30 March 1998 and 15 June 1998, the
investigations cover the period from 1988 to 30 March 1998. Consequently, the
regulatory regime summarised above is that which prevailed during the period of the
investigations and does not take into account the further changes which were
introduced subsequently.
THE BANK'S FEE CHARGING SYSTEM, AND ITS DEVELOPMENT OVER THE PERIOD
COVERED BY THE INVESTIGATION

Introduction and Overview

At the outset of the period covered by the investigation, the system in NIB for the
calculation of bank fees provided that a proportion of the charge was automatically
recorded by the Bank's computerised accounting system, while the balance required
manual adjustment by Bank staff. Since 1988, the system has evolved, with the
progressive introduction of formalised charges for a wide range of account activity
and an increase in the proportion of those charges automatically captured by the
computerised system. There remains a facility for manual amendment of charges,
but, since the introduction of pre-notification of fees in 1996 (see page 155 below),
the only amendments which ought to be made are those necessary for the correction
of errors.

Fee Categories

Personal Accounts

The Inspectors have been advised by the Bank that at the outset of the period under
review, in January 1988, fees calculated and charged to personal customers' accounts
fell under three headings:

• Transaction charges
• Administration and management time charges
• Ancillary charges.

Transaction Charges

Transaction charges relate to the number of debit transactions (eg cheques) processed
through a customer's account for the quarterly charging period. The Bank's
computer system calculated this fee by applying the standard tariff for each type of
transaction to the number of transactions processed in the period.

There was a minimum charge of IR£3.25 per quarter for all active current accounts.
This charge applied for any level of activity up to twenty-five debit transactions in the
quarter. Where a greater number of debit transactions had been processed, the
normal tariff based calculation applied.

If an account remained in credit during the entire quarter, it was exempt from fees.

Administration and Management Time Charges

Administration and Management time charges arise from the provision of services
"outside the normal course of business", which do not fall within the transactional or
ancillary charge categories. The charges were based on a time measurement priced in
1988 at a rate of IR£10 per hour or part thereof.
Ancillary Charges
Ancillary charges relate to specific services rendered; these were charged as they
arose, by effecting manual accounting entries to the customer account. Services and
events giving rise to ancillary charges included the following:

• Accepting direct debit mandates


• Bank drafts/gift cheques
• Cheque cards
• Standing Orders
• Unpaid cheques.

Business Accounts

Business accounts were subject to charges on principles similar to those applicable to


personal accounts, with two exceptions:

• For business accounts with more than 1,500 transactions per year, it was Bank
policy that a costing be carried out, which monitored all account activities; based
on this data a fee was agreed with the customer, subject to periodic review. This
agreed fee could be a set amount per quarter, or expressed as a percentage of
account turnover, resulting in the charge moving in line with the level of activity
on the account.

• For business accounts which maintained cleared credit balances, an allowance was
made against the charges at an agreed rate, based on the average balance
maintained. (This abatement rate formed part of the published tariff information).

The Fee Charging Process

The computed charges for each account in each branch were listed quarterly on a
"Fees to be Applied Report", which was despatched to the branch some days prior to
the end of the quarterly charging period. At that time a routine circular was issued to
all branches reminding staff of the review to be carried out, and the deadline for its
completion.

Upon receipt of the Fees to be Applied Report, the branch was required to adjust the
charge recorded therein both in respect of adjustments arising during the quarter as
recorded in a "Fee and Interest Amendment Book", and in respect of administration or
management time.

As outlined in Part 6 at pages 120 and 121, the 1992 Branch Procedures Manual,
represented to the Inspectors as reflecting the instructions applicable to branch staff at
1 January 1988, states that the Fee and Interest Amendment Book was to be used to
provide branch staff with a day-to-day record of fee and interest adjustments (eg
correction of errors) to be made at the end of the charging period, or when the account
was closed or transferred, whichever came first. The Manual required that full details
of the prospective adjustment, together with the reason therefor, be entered in this
Book and initialled by the branch manager. The Manual specified that the Fee and
Interest Amendment Book should not include adjustments which branch staff might
wish to make as a result of examining the fee and interest reports received at the end
of the charging period.

At the end of the charging period the net fee adjustment was to be transferred to the
Fees to be Applied Report, "together with any other adjustments which you may wish
to make as a result of examining these reports ". Senior Bank management have
advised the Inspectors that the principal adjustment to be made in exercise of this
discretionary authority was in respect of fees for administration and management
time.

The 1992 Branch Procedures Manual also required that a branch official

Annotate, on the [Fees to be Applied] report, any changes which you wish to
make, by replacing the Mainframe calculated fee with the fee which you wish
to charge. Initial all changes and, where the fee is reduced, state the reason
for reduction.

Amendments effected in the Fees to be Applied Report were entered to the Bank's
central computer system through branch terminals and a listing of amendments,
termed the "Static Mark-off Report - Amended Fees Input Details" then issued to
branches for checking purposes.

After the amended fees had been charged to customer accounts a Fees Applied Report
was issued to each branch for record purposes, detailing all fees charged to customer
accounts for the quarter.

Fees charged to customers at quarter end thus potentially comprised three elements:

• a combined amount for transactions charges (or, in the case of business accounts,
a negotiated fee) and ancillary charges, as set out on the Fees to be Applied
Report;
• adjustments recorded during the quarter in the Fee and Interest Amendment
Book, and
• charges in respect of administration and management time,

the latter two being incorporated in the fee charged initially by way of manual
amendment on the Fees to be Applied Report.

Development of System

The "three report" system described above remained in place throughout the period
covered by the investigation. Developments during the period included:

• Adjustments to the standard tariffs.


• Increase in the hourly rate of charge in respect of administration and management
time from IR£10 per hour to IR£25 per hour in 1992.

• Introduction of an account maintenance fee of IR£3 per quarter in September


1990, when the minimum charge was abolished. This maintenance fee was
increased in November 1992 to IR£3.75 per quarter. Transaction charges were
levied in addition to this charge.

Form St.20 - Customer Action Pad

On 24 July 1992 guidelines for charging management time were issued, together with
a "Customer Action Pad" for recording, on a daily basis, details of services provided
to customers outside the normal course of business.

Time Recording Procedures to Facilitate Pre-notification of Charges

In March 1996, prior to the introduction of pre-notification of charges, a detailed


circular was issued to Bank staff setting out procedures for recording account
administration time (formerly referred to as administration and management time),
including a listing of standard times for many services and tasks. Time sheets for
input on a daily, weekly or monthly basis to the Bank's central computer system were
also introduced. A second circular, issued in April 1996, described systems changes
arising from the introduction of pre-notification of charges.

Ancillary Charges

Ancillary charge development over the period arose through both the introduction of
new charges - eg fees in respect of amendments to standing orders or direct debits,
and the standardisation of charges, such as referral fees, previously accounted for by
way of charge for administration and management time.

Summary

The Inspectors have not received any evidence of improper charging of fees in respect
of transaction charges, ancillary charges or adjustments recorded in the Fee and
Interest Amendment Book. It is not necessary, accordingly, to refer further to any of
these charges or adjustments, and the balance of this Part of the report is therefore
concerned solely with the purported charging of fees for administration and
management time.

CHARGES FOR ADMINISTRATION AND MANAGEMENT TIME

The Charging Regime prior to 1996

Introduction and Overview

As stated above, in the period covered by the investigation, one of the categories of
fee for which the branches were instructed to charge was administration and
management time. Such charges are described as follows in a document entitled "Fee
and Interest Procedures 1988 - 1998", furnished to the Inspectors by the Bank on 15
December 2000:

These charges accrue for the provision of services outside the normal course
of business to customers and is (sic) not covered by either transactional or
ancillary charges. The charges are based on a time measurement that is
converted at a prescribed hourly rate.

In a later paragraph in the same document, it is stated that:

Upon receipt of the Fees to be Applied Report the branch has the discretion to
adjust the charge to reflect the appropriate level of administration or
management time.

In a document entitled "Evolution of Current Policy and Controls in National Irish


Bank Limited" dated 28 May 1998, and furnished to the Inspectors on 21 October
1999, the fee amendment process was described as follows:

At each charging date, branch management review all current accounts,


amending the actual printout to the required amount.

At the end of each quarterly charging period, branch staff were obliged to go through
the Fees to be Applied Report and decide which accounts should be charged for
administration and management time and how much the charge should be.

Prior to July 1992, the Bank did not provide branches with any procedural guidance
setting out how administration and management time should be charged, nor with any
system prescribing how such time spent on customers' accounts should be recorded.
As stated in the document quoted above, this was left to the discretion of the branch.

In the Unauthorised Interest & Fee Amendments Report referred to in Part 6 at page
133, the Bank described the fee amendment process in the following terms:

The fee system required a significant amount of manual adjustments to be


made which, particularly in the earlier periods when there was little
automation, was heavily reliant on the accuracy, judgment and integrity of the
individuals processing and reviewing them.

Guidance Material in use at 1 January 1988

The Bank has confirmed to the Inspectors that at 1 January 1988 there was no written
instruction to staff on the maintenance of records of chargeable time.

Guidance in relation to charges as of 1 January 1988 was provided by a paper entitled


"Guide to Costings, Northern Bank (Ireland) Limited, November 1987". This Guide
set out details of fees chargeable on personal and business accounts, much of the
Guide addressing costing methodologies. An appendix to the Guide provided a list of
ancillary charges, specifying that they "should be levied on an "on the spot basis " ",
and not, except in exceptional circumstances, be allowed to accrue and thus require
adjustment at the end of the quarterly charge period. The Guide did not address the
area of administration or management time in any respect.

The 1992 Branch Procedures Manual, represented to the Inspectors as reflecting the
instructions applicable to branch staff at 1 January 1988, does not contain any
guidance on the nature of work or service to customers which should give rise to an
administration or management time charge, nor does it give any guidance on the form
of record to be maintained by branch staff responsible for delivery of the service. As
noted at page 145 above, the Manual refers only to "any changes which you wish to
make" on the Fees to be Applied Report.

Every branch was however set an annual target for fees, and the charges for
administration and management time were part of the fees which contributed to
meeting this target.

Routine circulars advising the timetable for issue and review of the Fees to be Applied
Reports in the period covered by the investigation contained no guidance on the form
of amendment required or how it should be determined.

The fee charged by the Bank in the customer's quarterly account was a global amount,
none of its constituents being separately identified, so customers were unaware of the
level of charges for administration and management time.

The Customer Action Pad, Form St.20, introduced July 1992

As noted above, on 24 July 1992 Dermott Boner, then Head of Retail, issued a
memorandum to all branch managers and staff in relation to fees and management
time. Attached were guidelines for charging management time with the instruction
that such a charge be "applied to all accounts that are troublesome and time
consuming". It instructed managers that accounts "should be monitored daily with
details of services provided recorded " on a new "Customer Action Pad ". The
memorandum stated that increasing fee income was "one of our key targets for the
present financial year" and the branch managers were instructed to set "a target for
Management time for the quarter ending September '92 ". A copy of this
memorandum, with attachments, is reproduced at Appendix 16.

A similar memorandum prepared by Mr Boner was issued on 24 August 1995, under a


covering note from Michael Keane, General Manager - Banking.

The introduction of the Customer Action Pad did not bring about any improvement in
how management time was recorded and charged. Managers found the system
cumbersome and unworkable. So, notwithstanding the availability of the Customer
Action Pad, the situation in regard to charging management time remained basically
the same as it had been prior to its introduction.

The introduction of the Pad does however confirm that there had previously been no
system in place for recording management time.
Branch managers, in evidence which the Inspectors accept, stated that the Customer
Action Pad was rarely used; illustrative extracts include:

There was a time when they brought in what they call 'actionpads' ... I would
have to say that the completion of those was haphazard ...

oooOooo

... around 1992/'93, there was a system brought in of action pads ... it would
be only fair to say that it was a guesstimate again of the action [pads] that you
didn't complete.

oooOooo

The customer action pad was ...an unworkable system.

oooOooo

I would say 90% of the time they weren 7 used.

oooOooo

... they were not used widely. They were not used at all.

oooOooo

Bank management have suggested to the Inspectors that the memorandum covering
the issue of the Customer Action Pad did not constitute an addition to the Branch
Procedures Manual, and may not therefore have been regarded by Branch staff as a
mandatory direction.

In thirty-one branch audit reports in the period October 1993 to July 1995 it was noted
that the Customer Action Pad St.20 was not used to record management time.

Operation of the System prior to 1996

The Inspectors interviewed 37 current and former branch managers and staff.

There was general agreement amongst these interviewees that between January 1988
and March 1996 there was no prescribed system for charging administration and
management time, and no system for recording such time, apart from the attempt to
introduce a "Customer Action Pad" in July 1992 referred to above (and a similar
communication in August 1995). One branch manager did devise a system of his
own, which appeared to work satisfactorily, but this was an exception to the general
practice.

Descriptions of how the charging of management time operated in practice were very
similar. Generally the bank manager, in some cases with assistance from senior
officials within the branch, decided what charges to make. They went through the
Fees to be Applied Report and picked out the customers who, from memory, they
considered should be charged, and set about determining what the charge should be.
Their view of the procedure was that it was a guesstimate, unscientific, arbitrary,
crude and clumsy. As regards matters which were taken into account in deciding
which customers to charge, and the amount of the charge, the following is a summary
of the evidence, which the Inspectors accept, of the managers interviewed:

• Business customers bore the brunt of the charges, particularly those who were
regarded as "troublesome".

• "Troublesome" personal customers were also charged.

• The charge for the previous quarter was the guideline. The current quarter's
charge would either be the same or slightly more.

• The charges were target driven. There was pressure to increase fee income.

• The branches were required to recover 125% of customer cost. (Interpretations of


this requirement varied, and its application was limited in practice).

• Consideration was given to the level of charge the account could bear without the
customer querying it.

Bank manager interviewees indicated that while the IR£10 per hour (later, IR£25 per
hour) charge was applicable to the time spent in servicing customer accounts, no
detailed workings were prepared to support the application of this composite rate to
time spent.

As evidence of the subjective and random nature of amendments made, managers


confirmed that if for any reason the amended Fees to be Applied Report were
destroyed, and it was necessary to repeat the adjustment exercise, the revised charges
to individual customers would probably differ from those determined in the first
instance, though the total uplift would in all likelihood be the same or very similar to
the original total.

Bank branch staff evidence

Illustrative extracts of evidence from present and former branch managers and staff on
how the system operated at branch level, which the Inspectors accept, include:

Well, there was no rule of thumb, it was kind of a guess figure, you know.

oooOooo

It was a guesstimate.

oooOooo
It would have been relative to the last quarter

Well, it [the hourly rate of £25] would have been at the back of our head ...I
didn 7 apply, I didn 7 have a scientific rate. As I say, there was just a
guesstimate that £100 would cover my time. ...

A guesstimate, yes. It was my best, I wasn't being dishonest, I wasn't trying


to load people or anything. It was my best guesstimate on what time I had
spent or [my assistant] had spent or how troublesome this account was. It
was a best guesstimate.
oooOooo

Well, I would have sort of thought what sort of nuisance has he been over the
previous period and come up with a figure.

oooOooo

It was, at best, a decent guess as to the level of how the fee should be
increased. ...

Inspector: ... would you have been conscious of the target that had been
set for the branch in relation to charges?

Manager: Honestly, yes.

oooOooo
Well, fees there was no sort of organised - well structured way of collecting
what we now call administration time in dealing with customers. So fees
would have been added on if it was a troublesome account at each quarter.

oooOooo

... the bank never really had a system where management time was to be
charged other than the fact that we were told to obtain 125% cost covered. ...

There was no basis really. It was really just how much trouble you had with
that account during the previous charging period, and it could have been as
simple as just adding £10 or £5. There was no real basis, it was just
depending on what happened.

oooOooo

Truthfully, I would say there was a lot of guesswork done on troublesome


accounts, put on a bit here and there. ...

There were a lot of things omitted from it that the system wouldn't pick up but
there was no proper system in place to record things that should have been
recorded. I would say there were people overcharged and people
undercharged, if one were to go through the nitty gritty.

oooOooo

Up until the fairly recent past, the Bank had no way of recording Management
time and [it] had to be guessed.

oooOooo

... the guideline was the previous fee and there would have been a certain
amount of fees to be got in that quarter so it would really have to be the same
fee as the last time plus a little bit more.

oooOooo

There wasn't a system, what was there was archaic. You were relying on
memory for a good number of years.

oooOooo

There were no guidelines as to how to price, something which always annoyed


me somewhat. All one really had to go on was the view of the previous
manager in relation to the customer. In consultation with the Deputy
manager, the Assistant Managers, the Accounts Department and perhaps the
Foreign Box (sic), you would come to a decision as to whether the customer
merited a similar loading. It was really a very unsatisfactory exercise.

oooOooo

I suppose the best way of putting it is that you would not reduce the fees to less
than they were in the previous period. That is taking a bald point. You
would leave the fees as they were in the previous year or quarter as the case
might be. You would know the people who should be charged a little more
than indicated in the report and that would be based on the level of
correspondence you had to do in relation to them or the fact that they were in
and out to you all the time.

oooOooo

On the fee, it was target driven. There is no doubt in my mind on that ...

oooOooo

Inspector: Was it a guesstimate based on documentation on what you


thought the time may have been or was it a guesstimate of what
the account might bear without raising a query?

Manager: It was a guesstimate, it's probably a combination of those.


oooOooo

I would say that in some instances people were possibly overcharged and in
other instances undercharged.

Internal A udit Reports

Findings noted in branch audit reports between 1992 and 1996, at the dates set out
below, are consistent with the evidence set out above:

March 1992: It was noted that where fees were increased that an explanation was
not annotated and confirmed by the Manager/Deputy Manager as required.

May 1992: Where increases to fees are made an explanation should be recorded
beside the entry on the fees to be applied report. Branch should ensure that
increases can be justified if queried by customers.

June 1992: When fees were increased/decreased there was (sic) often inadequate
explanations annotated to the fees to be applied report.

September 1992: It was noted that a reason was not annotated on the fees to be
applied report when fees were decreased or increased.

February 1993: From examination of the fees to be applied reports many instances
were noted where customers (sic) fees were increased by substantial amounts and
there was often inadequate explanations annotated on the report.

April 1993: It was noted that the reason why fees were increased was not noted on
the fees to be applied report.

May 1993: It was noted that the reason why fees were increased or reduced was not
annotated on the fees to be applied report as required.

June 1993: A number of instances were (sic) noted where fees calculated by the
computer system were amended but no explanation was given.

July 1993: When fees are increased/reduced the fees to be applied report was not
annotated with a suitable explanation.

July 1993: Many instances were noted where the fee as calculated by Livelink was
increased/reduced but the report was not annotated with a suitable explanation.

August 1993: Many instances were noted where fees were increased or reduced
below the figure calculated by Livelink and a suitable explanation was not annotated
on the fees to be applied report.

September 1993: The fees to be applied report is not annotated as required when
fees are increased/reduced below the figure calculated by Livelink.
October 1993: It was noted that the fees to be applied report was not annotated with
a meaningful explanation or signed by an authorised official beside the relevant entry,
when fees were adjusted.

October 1993:
• Numerous instances were noted where customers (sic) fees were substantially
increased without legitimate cause or reason.
• The fees to be applied report is not annotated with a meaningful explanation and
signed by an authorised official beside the relevant entry when fees are increased
or reduced below the figure calculated by Livelink.

November 1993: It was noted that the Fees to be Applied Report was not annotated
with a meaningful explanation beside the relevant entry when fees were increased or
decreased below the figure calculated by Livelink.

December 1993; January 1994; May 1994: Numerous instances were noted where
customers (sic) fees were substantially increased and a meaningful explanation was
not annotated beside the relevant entry.

January 1994; February 1994; March 1994; November 1994; February 1995:
Numerous instances were noted where fees were increased or decreased and a
meaningful explanation was not annotated beside the relevant entry.

April 1994: Numerous instances were noted where fees were increased and a
meaningful explanation was not annotated beside the relevant entry.

July 1995: Many instances were noted where fees were increased and a meaningful
explanation was not annotated beside the relevant entry.

July 1994; December 1994; January 1995; February 1995; May 1995; June 1995;
July 1995: Instances were noted where fees were increased or decreased and a
meaningful explanation was not annotated beside the relevant entry.

July 1994: A few instances were noted where fees were increased or decreased and
a meaningful explanation was not annotated beside the relevant entry.

September 1994: Many instances were noted where customers (sic) fees were
substantially increased and a legitimate reason was not recorded on the Fees to be
Applied Report.

November 1994: On a number of occasions fees as calculated by Livelink were


increased and a suitable explanation was not recorded on the fees to be applied
report.

February 1995: A number of instances were noted where fees were increased or
decreased and a meaningful explanation was not annotated beside the relevant entry.

June 1995; March 1996: Instances were noted where fees were increased and a
meaningful explanation was not annotated beside the relevant entry.
Findings noted in internal audit reports referred to below are consistent with the oral
evidence received to the effect that there was no system in the branches for recording
management time:

August 1995: Following an examination of the Fees to be Applied reports and


Costing reports produced this year to date, it is noted that approximately £20k is
charged to customers each quarter in respect of management time (this is in addition
to normal fees). There is no system at Branch to record details of management time.

September 1995: It is noted that administration charges represents (sic)


approximately 25% of total fees charged each quarter. There is presently no system
at Branch to record details of administration charges.

November 1995: It is noted that there is no system at Branch to record details of


administration charges.

February 1996: Administration charges represent approximately 5% of total fees


charged each quarter. There is presently no system at Branch to record details of
administration charges.

March 1996: Account administration charges represent approximately 20% of total


fees charged each quarter. There is presently no structured system at Branch to
record details of administration time.

April 1996: From an examination of two recent Fees to be Applied Reports, it is


noted that account administration time charges represents (sic) only approximately
8% of total fees charged each quarter. Furthermore, there is no system at Branch to
record details of account administration time.

April 1996: From an examination of two most recent Fees to be Applied reports, it is
noted that account administration charges represents (sic) only approximately 4% of
total fees charged each quarter. Furthermore, there is currently no system at Branch
to record details of account administration time.

May 1996: From an examination of two recent Fees to be Applied reports, it is noted
that account administration time charges represents 1% to 2%> of total fees charged
each quarter. There is currently no structured system at Branch to record details of
account administration time.

Pre-notification of Fees

In 1996, as a result of an initiative taken by the Director of Consumer Affairs, a


system of pre-notification of fees was introduced by the five main banks, including
National Irish Bank. Special Circular SI 0/96 dated 1 March 1996, the title of which
was "Recording of Account Administration Time" summarised the background as
follows:

Currently, it is still the practise (sic) of some Banks, including National Irish
Bank, to apply fees to a customer's account and leave it up to the customer to
discover the extent of the bank's deductions on receipt of their statement.
Information on the makeup of this charge is not provided to the customer
unless it is subsequently requested. Whilst it has been normal practice for
Banks to act in this way, lately there has been growing pressure on Banks,
particularly from the Director of Consumer Affairs, to provide customers with
an itemised breakdown of their charges before they are applied to the account.

In a press release on 'Bank Charges' made during 1995, the Director of


Consumer Affairs referred to the provisions of the pending Consumer Credit
Bill and declared:

"All of the five main Banks will have introduced a system ofpre-notification
of their main transaction charges before the end of1996 The effect of
pre-notification will be to give customers details of charges two weeks before
they are debited to accounts. Customers will then have an opportunity of
querying these charges before they are actually debited."

It should be noted that the requirements of pre-notification will not be


included in formal legislation provided that the Banks' "voluntary" actions
are approved by the Director of Consumer Affairs.

Within National Irish Bank, software is currently being developed which will
allow the Bank to meet these requirements. It is expected that this software
will be implemented at the beginning of May with the first pre-notification Fee
Advices being produced at the end of the charging period in August.

The circular went on to state that the charge which was previously referred to as a
management time or administration charge had now been replaced with the
designation "account administration".

The requirement for the pre notification of fees necessitated keeping a record of
account administration and a key feature of the revised system provided for the input
at branch level on an ongoing basis of time spent on account administration, so that
such charges would henceforth be automatically included in the calculation of the fee
at the end of the charging period. New forms, which required that details of time
taken and the nature of the work done be recorded and input daily, weekly or monthly
to the computer system, were introduced in the circular, to take effect from the
May/August charging period of 1996.

The content of the Fees to be Applied Report was amended to include all activity
items, including details of all account administration time inputs - date, time spent
and work category.

It was explicitly stated that the only amendments which ought to be necessary on
review of the Fees to be Applied Report would be those resulting from current period
input errors which had not already been corrected. Fee amendment procedures were
set down, and a fee amendment form, requiring that the basis of the alteration be
recorded, was prescribed.
Managers interviewed were comfortable with the post-1996 system, albeit that there
appeared to have been some "teething troubles" attending its introduction. Their
comments included:

It's a proper system now.

oooOooo

Well, I am not sure of the date [of introduction of the new system in 1996], but
even in the early stage of that system it is difficult to, you know, people weren't
familiar with the system, they weren't documented. We are documenting it
90% correctly now, but in the early stage at the introduction of the system,
again you would have had an element of the crude mechanism.

oooOooo

Since '98 (sic) - I can't remember exactly what time in '98 but during '98, that
system was discontinued and everything was, we had to do administration
sheets ...

oooOooo

Inspector: The situation now is there would be no manual intervention at the


quarter end?

Manager: No, except... if there was a blatant error.

Delay in Implementing new Time Recording System

Fee Income Theme Audit

This audit was carried out in October 1996, and was the subject of a report to Bank
management in November 1996. The audit represented the first formal review of the
fee income area following introduction of the revised system for recording account
administration time on a contemporaneous basis. The stated principal objective was
to ensure that fee income was being properly collected.

The majority of findings relate to areas where the Bank may have been failing to
record, and therefore to recover, charges, but the report also records deficiencies in
completion, coding, input and checking of account administration forms in the
branches visited. It would appear that at the outset of the pre-notification period, the
newly introduced system for recording account administration time was not fully
operational and that to an extent the practice of unsupported amendment of the Fees to
be Applied Report persisted.

As is indicated in the second interview extract quoted above, managers interviewed


acknowledged that the new system took some time to become fully operational.
Internal Audit Reports

Internal audit reports from branch visits about this time also indicate some delay in
adoption of the revised procedures:

August 1996:

By enquiry, it was established that the completion and input of account


administration input forms in respect of quarter end August did not commence
until early July. This has necessitated the manual input of a considerable
amount of account administration time at quarter end for which details are not
fully documented.

October 1996:

By enquiry, it was established that account administration input forms were


not completed and input on all occasions in respect of the first half of the
quarter ended August 1996. This necessitated the input of a considerable
amount of account administration time (65 hours approximately) at August
quarter end under category 99 (general) for which details are not fully
documented. It was further noted that category 99 (general) represents
almost 40% of total administration time charges for this quarter.

December 1996:

• An examination of the most recent Fees to be Applied reports indicates


that account administration input forms are not being completed on all
occasions by staff dealing with customer queries, lending, counter activity
etc. An examination of the reports revealed the following:
(a) Over 95% of the account administration time charges for the quarter
ending August 1996 were input in bulk at the end of the quarter for
which details were not fully documented.
(b) Only two hours of account administration time were input for the full
quarter ending November 1996 (some charges are levied at time of
transaction/task).

• By enquiry, it was established that in some cases account administration


time charges and in one case activity charges are applied to accounts at
the time of the transaction/task and are therefore not pre-notified.

Review of November 1997 Fees to be Applied Reports

Review on behalf of the Inspectors of a sample of Fees to be Applied Reports for the
quarter ended November 1997 revealed that at that date, extensive manual
adjustments were still being effected at quarter end in a number of branches.
ACTION TAKEN BY THE BANK ON FIRST DISCOVERY OF IMPROPER PRACTICE

No Action Taken prior to 1996

While Internal Audit had regularly reported that "customer fees were substantially
increased and a meaningful explanation was not annotated beside the relevant entry",
as appears from the branch audit reports referred to above, the Inspectors have not
found any evidence that these reports resulted in any move by the Bank to examine
how fees were being charged.

In fact, prior to the introduction of the Customer Action Pad in July 1992, there
appears to have been no appreciation at any level within the Bank that it was improper
or inappropriate that customers be charged for services on a time-related basis while
there was no system in operation for recording such time. Indeed, as is clear from the
memorandum which accompanied it, the Customer Action Pad was not introduced
with the intention of remedying a deficiency in control systems, but in an effort to
ensure that a greater proportion of manager and staff time was charged to customers.
As already stated, the introduction of the Pad did not bring about any improvement in
how management time was charged. Managers found the system cumbersome and
unworkable.

No effective action was taken until an upgrade of the computerised system for
customer charges was introduced in April 1996 in anticipation of the requirement of
the Director of Consumer Affairs (referred to at pages 155 and 156) to prenotify
customer charges.

ACTION TAKEN BY THE BANK FOLLOWING NEWS MEDIA REPORTS

Interviews with Bank Staff

As already indicated in Part 6, the initial action taken by the Bank was to have internal
audit staff interview 210 Bank personnel. The Inspectors, with a view to minimising
the number and extent of interviews they themselves would be obliged to carry out,
sought from the Bank copies of the notes taken at these interviews. The Bank
claimed privilege over this material, and declined to make it available to the
Inspectors. The Bank has however formally advised the Inspectors that all material
otherwise requested by the Inspectors has been furnished to them, including all
documentary material referred to at the staff interviews.

As already noted, the Inspectors considered a Court challenge to the Bank's claim to
privilege over the interview notes, but decided against it on the grounds that it was
preferable to conduct a comprehensive interview programme themselves rather than
become involved in what might turn out to be lengthy and costly litigation.
Bank Investigation Work: The Unauthorised Interest & Fee Amendments
Report

General

As described in Part 6, the Bank's investigation of the allegations of interest and fee
loading broadcast on RTE is the subject of a report dated March 1999 entitled
"National Irish Bank: Unauthorised Interest & Fee Amendments", prepared by
National Australia Group's European Audit function, hereafter termed "the
Unauthorised Interest & Fee Amendments Report". A copy of this report was
furnished to the Inspectors on 26 March 1999 and is reproduced at Appendix 14.

Work Done

As already outlined in Part 6, the work described in the Unauthorised Interest & Fee
Amendments report includes initial work carried out by the Bank's internal audit staff,
work carried out by Arthur Andersen at the Bank's request, and work carried out
thereafter by Bank staff.

The objectives of the investigation included the quantification of the impact on


customers of any unacceptable activities which had taken place.

The scope of the review was restricted to current account adjustments. The Bank
concluded that a "targeted approach rather than a fully substantive one" was
appropriate and therefore directed its work at "locations where the risk of occurrence
was assessed as being high".

The investigation team did not seek to verify the working of the system in either the
interest or fee areas, but sought to consider the result of the amendment process.

Arthur Andersen work

In the fee area, following review of available branch audit reports, the Bank decided
to concentrate on the branch referred to in the RTE report, that at College Green,
Dublin. The Fees to be Applied Report was not available for the November 1989
charge period, the subject of the allegations of unjustified fee increase, and so the next
charge period was chosen. Arthur Andersen ("AA") was therefore engaged to
investigate "whether fees have been debited to customer current accounts at the
College Green branch of the Bank without any contractual, statutory or other valid
basis and, if so, the extent thereoffor the February 1990 quarter end posting date."

Following classification of a total of 896 manual amendments to the Fees to be


Applied Report in the quarter, AA reviewed Fee Amendment Sheets, Costing Sheets
and Customer files; the documentation provided unambiguous support for a specific
amendment in two instances only.
Work carried out by Bank investigation team - College Green branch

Bank staff carried out an account by account review for each College Green, Dublin,
branch customer identified by AA as having a fee amendment greater than IR£3.00 in
the quarter - 549 in all. By applying standard times for management activities
identifiable from examination of the account to a cost per hour, a calculation of
management time cost was compared to the fee uplift.

The outcome of this exercise is summarised in the Unauthorised Interest & Fee
Amendments report as follows:

No. IR£

Fee amendments 885 11,294

Examined 549 10,651

Justified 439 9,958

The Report notes, and Bank management have emphasised the point to the Inspectors,
that the list of activities warranting a management charge indicates that only a small
proportion would be identifiable from a review of transactions on the account.

The Bank concluded that the results of this work represented a "high level of
satisfaction with ...fee charging practices at the time of the allegations". The Bank
further decided to use a matrix based on the level of fee uplift identified at this branch
as a key indicator in evaluating the level of fee adjustment effected at other branches
during the period investigated.

Work carried out by Bank investigation team - other branches

Bank staff carried out additional work on fee amendments using the same approach as
that adopted for the College Green, Dublin, branch, under a number of headings:

• A sample of twelve branches was selected for detailed review of some 50


amendments for one quarter. The Report states that the sample was biased
towards branches and time periods which had been found to include unjustified
interest amendments. The Bank concluded that the results of this examination
were satisfactory for all branches except Cork and Carndonagh branches.

• Review of other branches where the managers of these two branches had worked
resulted in a similar "unsatisfactory" conclusion being reached in respect of
Waterford branch.

• A matrix of "reasonable" fee uplifts, by account type and account activity level,
was developed based on the results of the review at College Green, Dublin branch.
This matrix was then applied across all customer fee enquiries for one quarter.
Enquiries failing this test were subjected to a detailed account review for the
quarter in question to establish whether adequate justification for the fee uplift
existed. The Bank concluded from this work that fee refunds were not warranted
at branches other than those identified above - Cork, Carndonagh and Waterford.

• A minimum of ten amendments over two quarters was examined at all other
branches; no further instances of unjustified fee charging were identified from this
work.

Conclusions

The conclusions of the Unauthorised Interest & Fee Amendments Report in the fees
area are as follows:

The fee charging process in place at the time of the allegation involved a
series of three reports and required manual intervention for the application of
management time charges. The approach taken in College Green branch,
namely making manual amendments to the Fees to be Applied Report, was
typical across the network.

While many of the activities which would warrant management time charges
are invisible to a retrospective account review, the results of the work carried
out in College Green gave a high level of satisfaction with their fee charging
practices at the time of the allegations.

Work carried out across the remainder of the network confirms that there was
no widespread abuse of fee charging practices. However Cork, Carndonagh
and Waterford branches have been identified as having low justification levels
for fee uplifts applied during certain time periods. Whilst the full
quantification of the position in Waterford has not yet been completed, it is
anticipated that the total amount of fees that will be refunded will be
approximately £200k before indexation.

System developments in the periods since the allegations were made have
resulted in improvements in the capture of administration and management
time and, as a follow on, in enhanced transparency to the customer.

The introduction of detailed pre-notification offees in August 1996 gives a


high level of comfort with the integrity of current fee charging practice.

Arising from the work described above, fee refunds were made to customers of the
three above-named branches only.

The Bank has advised the Inspectors that it has now made inflation-adjusted refunds
totalling approximately IR£960,000 in respect of unjustified fee adjustments. (This
total includes refunds in respect of some charges made in 1987).
Inspectors' Observations, Unauthorised Interest & Fee Amendments Report-
Findings on Fee Amendments

As there was no system in operation in the Bank for recording administration and
management time between 1988 and April 1996, and in light of the internal audit
reports and the consistency of the evidence the Inspectors have received from branch
managers, the Inspectors reject the conclusions of the Unauthorised Interest & Fee
Amendments Report that there was no widespread abuse of fee charging practices and
that fee refunds to customers should be confined to three branches only.

Customer Queries

The Bank set up and advertised a telephone helpline, which customers could contact
with queries relating to interest or fee charges on their accounts.

The Bank has informed the Inspectors that approximately 1,481 fee-related queries
were received, through the helpline and otherwise.

The Bank's approach to the resolution of these queries and to responses to customers
placed considerable reliance on the work described in the Unauthorised Interest & Fee
Amendments Report and the conclusions reached from that work, as summarised at
pages 160 to 162 above. This resulted in many replies to customers being based on
work done at branch level rather than on review of their accounts. Customers whose
individual accounts did not reach an acceptable threshold in course of the work
underlying the Unauthorised Interest & Fee Amendments Report, or whose accounts
contained unresolved issues, were given assurances based on the view taken of the
relevant branch, notwithstanding the results of work on their accounts.

Further Work proposed by the Bank

Following, inter alia, discussions with the Inspectors, the Bank informed the
Inspectors that it would undertake a fee review which would examine in detail the
areas described in a paper entitled "Fees Review 2001" which was furnished to the
Inspectors on 8 August 2001. This paper is reproduced as Appendix 17.

The Bank subsequently advised the Inspectors that the details of the additional work
carried out, the conclusions reached and the consequent action undertaken or
proposed, would be included in its submissions on the Inspectors' provisional findings
when received.

Following receipt of the Inspectors' draft report on 1 August 2003, the Bank devised a
new programme, "Fees and Interest Refund Programme" which is set out in Schedule
V of the Bank's Reaction Paper, reproduced in full at Appendix 19. How the Bank
came to take this step is described as follows on page 4 of Schedule V:

In light of the views expressed by the Inspectors, and on reconsidering the


decisions underlying its previous approach, the Bank has devised a further
programme of work and refunds on which it has sought independent
verification.
As already stated (see page 137) the Bank anticipates that this programme will result

in additional fees and interest refund payments to customers of Euro 10.6 million.

INSPECTORS' CONCLUSIONS

The Inspectors find:


1. Between 1988 and April 1996 there was no system in operation at the
branches for the contemporaneous recording of administration and
management time.

2. The manner in which branch managers purported to charge fees for


administration and management time during this period was in the opinion of
the Inspectors improper, resulting in some customers being overcharged,
across the branch network.

3. While the new system for recording and charging account administration time
introduced in March 1996 was to take effect from the May/August charging
period of 1996, this system did not become fully operational in the branches
on schedule, and extensive manual adjustments were still being effected in a
number of branches in November 1997.

4. Customers at branches other than those at Carndonagh, Cork and Waterford


were overcharged and have not been refunded.
PART 8

IMPROPER PRACTICES:
KNOWLEDGE AND RESPONSIBILITY
IMPROPER PRACTICES: KNOWLEDGE AND RESPONSIBILITY

INTRODUCTION

The Order appointing the Inspectors to investigate the affairs of the Bank requires that
they, inter alia, investigate and report on the identity of those responsible for or aware
of the practices being investigated.

In carrying out this aspect of the investigation, the Inspectors have not considered it
relevant to comment on the knowledge of employees of the Bank holding positions
subordinate to that of manager, as, while junior officials may have been aware of the
existence of practices which were improper, they were not in a position to effect
change, and so could not be held to have any responsibility for their existence.

Subject to that limitation the issue of the responsibility of individuals or their


knowledge is dealt with hereunder, separately, in respect of each of the improper
practices identified in Parts 2 to 7 of the report.

The responsibility or knowledge of other entities falls to be dealt with in respect of the
totality of the improper practices, and the Inspectors' conclusions in regard to these
form the first section of this Part.

CONCLUSIONS CONCERNING ENTITIES OTHER THAN INDIVIDUALS

The relevant entities are:

• The Bank's internal audit function


• The external auditors to the Bank
• The Audit Committee of the Board
• The Board of Directors.

Internal Audit

The Inspectors reviewed with particular attention internal audit reports on branch
visits carried out during the period covered by the investigation, as they represent a
contemporaneous record of the results of examination of branch procedures and
records over that time. (The Bank advised the Inspectors that a total of 202 branch
audit reports had been prepared in the period 1988 to 1997, but that only 164 of these
reports could be located, the missing reports largely relating to the early years of the
period being investigated).

The Inspectors also reviewed internal audit reports on other areas within the scope of
the investigation, including reports on the FASD and theme audits on DIRT, interest,
and fee income.

Review of these reports and interviews with internal audit personnel, past and present,
have led the Inspectors to conclude that the Bank's internal audit personnel performed
their function in a satisfactory manner. As noted above, in each of the areas the
subject of the investigation, with the exception of the manner of promotion of the
CMI policies, internal audit staff identified, and reported to senior management in the
Bank, instances of improper practices. The Inspectors are of the view that the
manner of promotion of the CMI policies was not within the remit of Internal Audit.

The Inspectors accept that it is not the function of internal auditors to correct improper
practices or deficiencies in procedures discovered by them.

The External Auditors

The Inspectors have considered the position of KPMG, who were the external auditors
from 1990, in relation to the matters being investigated.

In carrying out their audits KPMG were aware of, and placed reliance on, the work of
Internal Audit, as they concluded that Internal Audit was competent. In so far as
Internal Audit identified the matters being investigated by the Inspectors, KPMG were
satisfied that the issues were being reported to management and the Audit Committee
and accordingly did not consider it necessary to modify their audit plans to
specifically examine the areas reviewed by Internal Audit. In the opinion of the
Inspectors, these judgements, with one exception, which is dealt with above at pages
57 and 58, were appropriate.

The Audit Committee of the Board

General

The Inspectors have considered the operation of the Board Audit Committee and have
concluded that the Committee:

• afforded to Internal Audit access to Board level in the Bank, independent of


senior management;
• ensured that no limitation was placed on the scope of operation of the internal
audit function;
• met regularly and received presentations from Internal Audit,

and dealt satisfactorily with matters the subject of the Inspectors' investigation which
were raised by Internal Audit, save in relation to DIRT.

DIRT

The management summary in the quarterly audit report to the Audit Committee in
respect of the quarter ended February 1995 stated that, in the quarter under review,
Internal Audit had completed its first theme audit, which was concerned with DIRT.
The audit was rated "unsatisfactory".
The report noted three major audit findings in relation to DIRT, each with a 4 star
significance rating (ie the second most serious rating on a scale of 1 to 5). It was
clear from the findings that both in regard to non-resident accounts and Special
Savings Accounts there had been a significant failure on the part of the Bank to
observe the relevant statutory requirements.

The corrective action proposed by Internal Audit and accepted by management did
not include any proposal to deal with the issue of the Bank's liability for such arrears
of DIRT as might be due in the circumstances. Because of this, the Audit Committee
ought not to have accepted the corrective action proposed as being adequate, but
should have sought further information as to how management intended to deal with
the issue of a potential retrospective liability for DIRT.

The Board of Directors

The Inspectors have considered the duties of a Board of Directors in relation to the
matters under investigation, in particular the general duty of care imposed on
directors.

The Inspectors note that:

• the Board of NIB appointed a committee of the Board with suitable terms of
reference to deal with audit matters, appointed suitably qualified directors to this
Committee, and received regular reports from it;
• there was an internal audit function in place, with independent access to Board
level in the Bank;
• the Audit Committee met regularly and received reports from the Head of Internal
Audit.

The Inspectors have received no evidence that any of the improper practices being
investigated were brought to the attention of the Board.

In the circumstances, the Inspectors are of the opinion that the Board of the Bank
cannot be held responsible for the existence of these practices.

EVASION OF REVENUE OBLIGATIONS:

INCORRECTLY CLASSIFIED NON-RESIDENT DEPOSIT ACCOUNTS

Bogus Non-Resident Accounts


As stated in Part 2 at page 59, the Inspectors have concluded that the opening and
maintenance of bogus non-resident accounts by the Bank constituted an unlawful and
improper practice which served to encourage the evasion of Revenue obligations by
third parties, both on the funds deposited and the interest earned thereon.
The Branch Managers

Managers at those branches where bogus non-resident accounts existed were aware or
ought to have been aware of the existence of such accounts. They failed in their duty
to deduct the relevant Deposit Interest Retention Tax ("DIRT").

Branch managers also had a duty to ensure that if properly completed declarations
were not held for all accounts classified as DIRT-exempt non-resident accounts,
DIRT should be deducted. They were aware of this obligation and failed to observe
it.

The Inspectors do not consider it appropriate to find individual managers responsible


for the practice of non-compliance with the legislative provisions relating to DIRT, as
they believe that responsibility for this practice lay at a higher level in the Bank.

The Regional Managers (Dermott Boner, Kevin Curran and Tom McMenamin)

The titles and roles of Messrs Boner, Curran and McMenamin, and the periods for
which the positions were held are set out in Part 1 at pages 7 and 8.

Throughout the periods they held Regional Manager (or superior) positions - ie 1
June 1988 to 19 January 1996 in the case of Mr Boner, 1 June 1988 to 4 July 1997 in
the case of Mr Curran, and 1 October 1990 to 18 January 1996 (including a period as
Area Manager) in the case of Mr McMenamin - each was made aware, through
internal audit reports circulated to him (see Part 2, pages 44 to 50), of the deficiencies
or "irregularities" which existed in the operation of DIRT-exempt non-resident
accounts at branches. The majority of such reports referred to the failure of branches
to hold properly completed declarations for all accounts classified as DIRT-exempt
non-resident accounts.

Certain audit reports copied to the three above-named referred to instances where
lending to resident customers was secured by letters of lien over deposit accounts with
non-resident status. Reports copied to Mr Boner and Mr Curran also referred to
instances where the residential status stated on non-resident declarations was at
variance with other branch records. A report circulated to Mr McMenamin noted that
some accounts designated "non-resident" were connected to resident accounts at the
branch; another referred to four instances where non-resident savings accounts were
opened in fictitious or incorrect customer names. In the opinion of the Inspectors,
these audit reports pointed to the likelihood that the non-resident accounts referred to
therein were in fact bogus. In addition, reported documentary non-compliance was
on such a scale as to constitute, in the opinion of the Inspectors, a further indication
that a substantial proportion of the non-resident accounts could be bogus.

Additionally, while none of these three executives were on the circulation list for the
DIRT Theme Audit report of December 1994, Mr Boner and Mr McMenamin
attended the meeting of senior management held on 9 February 1995 to discuss the
results of the audit and the DIRT compliance issues arising therefrom, and Mr Curran,
although not present at the meeting, is noted as having been circulated with a copy of
the minutes.
In evidence given when interviewed by the Inspectors, Mr Boner and Mr Curran
acknowledged that they had suspicions that bogus non-resident accounts existed in the
branch network.

The Inspectors believe the inevitable inference from the above is that Mr Boner, Mr
Curran and Mr McMenamin were not only aware of the failure of branches to hold
properly completed non-resident account declarations but ought also to have been
aware of the widespread existence of bogus non-resident accounts in the branch
network.

Mr Boner, Mr Curran and Mr McMenamin had each a responsibility in respect of the


branches in his region to ensure that all accounts classified as DIRT-exempt non-
resident accounts were correctly classified as such and, in this regard, particularly in
light of the deficiencies disclosed in the audit reports circulated to him, had each a
responsibility to make reasonable enquiries of the branches for which he was
responsible to satisfy himself that all such account holders were genuinely non-
resident and that properly completed declarations were in place for all accounts so
classified.

Mr Boner, Mr Curran and Mr McMenamin had each a responsibility to ensure that


DIRT at the standard rate was deducted from interest paid or credited where the
conditions for the operation of accounts as DIRT-exempt non-resident accounts were
breached.

Mr Boner, Mr Curran and Mr McMenamin each failed to discharge these


responsibilities.

Area Managers Appointed February 1996

As noted in Part 1 at page 8, six Area Managers were appointed with effect from 1
February 1996. Each had previously been a branch manager; the majority received
branch audit reports in respect of the branches for which they were responsible which
contained adverse comment in respect of compliance with the DIRT regime.

In February 1996, DIRT compliance issues were being addressed at a higher level in
the Bank (as a result of the Bank's review of the 1994 DIRT Theme Audit). The
Inspectors have therefore concluded that these Area Managers do not bear
responsibility for the failures at branch level to deduct DIRT where it ought to have
been deducted.

General Manager - Retail Banking/General Manager - Banking (Frank


Brennan and Michael Keane)

The titles and roles of Messrs Brennan and Keane, and the periods for which these
positions were held are set out in Part 1 at pages 5 to 7.

As General Manager - Retail Banking between May 1988 and July 1991, one of Mr
Brennan's responsibilities was to ensure that the branches had full and accurate
instructions in regard to deducting DIRT from deposit interest, and to ensure that
appropriate procedures were in place to implement the instructions.

Between July 1991 and March 1998, while Mr Brennan's title and functions changed
from time to time, he continued to be responsible for procedures in the branches and
accordingly he continued to be responsible for ensuring that there was an appropriate
system in place for compliance with the DIRT regime.

The evidence discloses that prior to May 1995 no circular or other communication
was issued to the branches, after the coming into force of the Finance Act, 1986,
which informed branch staff of the effect of Section 32 (2) of the Act which provides
that "a relevant deposit taker should treat every deposit as a relevant deposit unless
satisfied that it is not a relevant deposit." The effect of this Section was that the
Bank was required to deduct DIRT from every account designated non-resident unless
it held a valid declaration and was satisfied that the person beneficially entitled to the
interest on the account was genuinely non-resident. By failing to inform the branches
prior to May 1995 of the requirements of this Section, Mr Brennan, during the period
preceding May 1995, failed to discharge his responsibility of ensuring that proper
procedures were in place in the branches to secure compliance with the statutory
provisions for the operation of DIRT-exempt non-resident accounts.

In the capacity of General Manager - Retail Banking or General Manager - Banking,


Mr Brennan and Mr Keane were each made aware, through internal audit reports
circulated to them, of the deficiencies or "irregularities" which existed in the
operation of DIRT-exempt non-resident accounts at branches. The majority of such
reports referred to the failure of branches to hold properly completed declarations for
all accounts classified as DIRT-exempt non-resident accounts.

Certain audit reports copied to Mr Keane referred to instances where the residential
status stated on non-resident declarations was at variance with other branch records;
others referred to instances where lending to resident customers was secured by letters
of lien over deposit accounts with non-resident status. In the opinion of the
Inspectors, these audit reports pointed to the likelihood that the non-resident accounts
referred to therein were in fact bogus.

None of the branch audit reports received by the Inspectors where Mr Brennan was on
the circulation list referred to non-resident accounts connected to other resident
accounts at the branch, to lending to resident customers being secured by liens over
deposits with non-resident status or to other matters which, in the opinion of the
Inspectors, pointed to the likelihood that certain non-resident accounts were in fact
bogus. However, he attended the meeting of senior management held on 9 February
1995 to discuss the results of the DIRT Theme Audit and the issues arising therefrom.
In the minutes of this meeting, Mr Brennan is noted as having stated that he felt that
there was a need to change attitudes at branch level so that possible tax evasion could
be eliminated to the greatest degree possible.

On the same day, 9 February 1995, Mr Brennan sent a memorandum, quoted in Part 2
at page 44, to the Executive Director, which noted Mr Brennan's concerns over a
number of years in the area of compliance with the legal requirements for the
operation of DIRT-exempt non-resident accounts.

Mr Keane was on the circulation list for the DIRT Theme Audit report and chaired the
9 February 1995 meeting.

The Inspectors believe in the light of the above that Mr Brennan and Mr Keane were
not only aware of the failure of branches to hold properly completed non-resident
account declarations but ought also to have been aware that bogus non-resident
accounts existed throughout the branch network.

It was the responsibility of Mr Brennan and Mr Keane, while General Manager -


Retail Banking or General Manager - Banking, to ensure that accounts classified as
DIRT-exempt non-resident accounts were correctly classified as such and to see that
Regional Managers secured full compliance with the statutory provisions relating to
DIRT. They failed to discharge this responsibility.

As noted at pages 54 and 55 above, the conclusion in the DIRT Theme Audit report
was as follows:

Results of this audit are very disappointing and management must take
immediate steps to improve the situation. The structure of the whole area can
be improved but the level of non-compliance is too high. It appears that there
needs to be an organisation-wide change in attitude to the whole area. This
is a risk area and the penalty for non-compliance at the level shown in this
report would be very significant.

No one at the meeting of 9 February 1995, Mr Brennan and Mr Keane included,


raised the question of a potential retrospective liability to the Revenue Commissioners
for DIRT resulting from the findings of the Theme Audit. In his evidence to the
Inspectors Mr Brennan claimed that this would have been the responsibility of the
Finance Department. Even if the primary responsibility rested elsewhere, both Mr
Brennan and Mr Keane, by reason of being part of senior management, had a
responsibility to raise the issue at the meeting, and this they failed to do.

Head of Finance (Gerry Hunt and Patrick Byrne)

Mr Hunt was Chief Accountant at 1 January 1988. His title subsequently changed to
Head of Financial Control, then to Head of Finance and thereafter to Head of Finance
and Strategy. He ceased to hold the latter position on 31 December 1993.

Mr Byrne was appointed Head of Finance on 11 April 1994; his title subsequently
became Head of Finance and Planning.

The Head of Finance had responsibility for ensuring that the Bank made returns of
DIRT to the Revenue Commissioners within prescribed time limits. The accuracy of
these returns was critically dependent on the proper categorisation of deposit accounts
at branch level between those exempt from DIRT, those liable to DIRT at the standard
rate of tax, and those liable at a reduced rate.
In the respective periods throughout which Mr Hunt and Mr Byrne were responsible
for returns of DIRT to the Revenue Commissioners, neither was on the circulation list
for branch internal audit reports. Accordingly neither was aware through this
medium of the extent of the deficiencies or "irregularities" in the declarations held by
branches in support of claims for DIRT-exempt non-resident status.

On 18 November 1993, Mr Hunt, as a result of concerns expressed to him by senior


officials in the Department of Finance and in the Office of the Revenue
Commissioners sent a memorandum to Mr Brennan, Mr Keane and Mr Boner, with a
copy to Mr Lacey (see Part 2, page 43, and Appendix 8) to alert them to the
probability of a Revenue audit of banks' non-resident accounts.

As stated above, Mr Hunt ceased to be Head of Finance on 31 December 1993.


While the concerns which caused him to send the memorandum referred to could have
put him on notice that the DIRT figures received from the branches might not be
accurate, since no DIRT returns were submitted to the Revenue Commissioners by the
Finance Department in the interval before he left, he did not have to consider the
implications for future returns.

Mr Byrne was on the circulation list for the DIRT Theme Audit report of December
1994 and attended the meeting on 9 February 1995 to discuss the results of the audit
and the issues arising therefrom. He was thus aware of the extent of non-compliance
in the operation of DIRT-exempt non-resident accounts and ought to have known the
consequences of such non-compliance for the accuracy of the returns of DIRT being
made by him, or persons under his control, to the Revenue Commissioners.

At the meeting on 9 February 1995, Finance and Planning Department was charged
with responsibility for drafting revised instructions to staff in relation to the operation
of DIRT. These instructions were issued on 8 March 1995, as Special Circular No.
S11/95. As already stated, this Circular introduced documentary requirements in
relation to the opening of new non-resident accounts, but did not address the position
in regard to accounts which had been opened previously apart from indicating that a
valid declaration must be held "which has been signed, dated and in all respects fully
completed by the customer ", nor did it inform the branches of the provisions of
Section 32 (2) of the Finance Act, 1986 (see page 27 above). As Head of Finance
and Planning, Mr Byrne shares responsibility for the defects in this Circular.

Mr Byrne, in common with Mr Seymour, Mr Keane and Mr Brennan, has given


evidence to the Inspectors that the issue of a potential retrospective liability to the
Revenue Commissioners for DIRT arising from the findings of the Theme Audit was
not considered at the meeting of 9 February 1995. The Bank has confirmed to the
Inspectors that no payment of retrospective DIRT was made to the Revenue
Commissioners prior to their appointment.

Mr Byrne, as Head of Finance at the time of the DIRT Theme Audit, had a
responsibility to raise the issue of potential retrospective liability for DIRT due in
respect of interest on accounts wrongly classified as DIRT-exempt, and failed to do
so.
Chief Executive (Jim Lacey)

Jim Lacey was the Chief Executive of the Bank from 1 April 1988 to 22 April 1994.

During this time he was copied with internal audit reports and accordingly had notice
of the deficiencies or "irregularities" which existed in the operation of DIRT-exempt
non-resident accounts at branches. The majority of such reports referred to the
failure of branches to hold properly completed declarations for all accounts classified
as DIRT-exempt non-resident accounts, but certain of the reports referred to instances
where the residential status stated on non-resident declarations was at variance with
other branch records, while others referred to instances where lending to resident
customers was secured by letters of lien over deposit accounts with non-resident
status. In the opinion of the Inspectors these audit reports pointed to the likelihood
that the non-resident accounts referred to therein were in fact bogus. In addition, the
extent of reported documentary non-compliance was on such a scale that, in the
opinion of the Inspectors, it constituted a further indication that a substantial
proportion of the non-resident accounts could be bogus.

The Inspectors believe the inevitable inference from the above is that Mr Lacey
should not only have been aware of the failure of the branches to hold properly
completed non-resident account declarations but should also have been aware that
bogus non-resident accounts existed throughout the branch network.

As Chief Executive, Mr Lacey held ultimate responsibility to ensure that DIRT was
deducted from interest paid or credited on all accounts subject to DIRT under the
Finance Act, 1986. He failed to discharge this responsibility.

Executive Director (Barry Seymour)

Barry Seymour was appointed Executive Director of the Bank on 22 April 1994 in
succession to Mr Lacey. Mr Seymour's appointment was on an interim basis but was
in fact continued until 15 July 1996.

During his term of office, Mr Seymour was copied with internal audit reports, as Mr
Lacey had been, and accordingly had notice of the deficiencies or "irregularities"
which existed in the operation of DIRT-exempt non-resident accounts at branches.

The majority of such reports referred to the failure of branches to hold properly
completed declarations for all accounts classified as DIRT-exempt non-resident
accounts. Certain of these reports referred to instances where the residential status
stated on non-resident declarations was at variance with other branch records, while
others referred to instances where lending to resident customers was secured by letters
of lien over deposit accounts with non-resident status. In the opinion of the
Inspectors, these audit reports pointed to the likelihood that the non-resident accounts
referred to therein were in fact bogus. In addition, the extent of reported
documentary non-compliance was on such a scale that, in the opinion of the
Inspectors, it constituted a further indication that a substantial proportion of the non-
resident accounts could be bogus.
The DIRT Theme Audit of December 1994 highlighted the extent of the irregularities.
Mr Seymour was made aware of significant issues of documentary non-compliance,
the lack of understanding at branches of the Bank's duty to satisfy itself on non-
resident status, and the resultant failure to deduct DIRT at the standard rate from
interest paid or credited where the conditions for the operation of accounts as DIRT-
exempt non-resident accounts were breached.

Through his receipt of the branch audit reports referred to above, and the DIRT
Theme Audit report, Mr Seymour should not only have been aware of the failure of
the branches to hold properly completed non-resident account declarations, but should
also have been aware of the fact that bogus non-resident accounts existed throughout
the branch network.

Mr Seymour attended the meeting of senior management of the Bank on 9 February


1995 convened to consider what corrective action was needed to remedy the situation
disclosed by the DIRT Theme Audit, but he failed at that meeting, as did everyone
else who attended it, to address, or even to raise, the question of the potential liability
of the Bank to the Revenue Commissioners resulting from the irregularities.

In spite of the corrective action taken by the Bank following the DIRT Theme Audit,
there continued to be non-compliance in the branches with the requirements for
DIRT-exempt status during the remainder of Mr Seymour's term of office.

Whilst the Inspectors accept Mr Seymour's submission that DIRT compliance


procedures improved during his term of office, nonetheless, as Executive Director, Mr
Seymour held ultimate responsibility to ensure that DIRT was deducted from interest
paid or credited on all accounts subject to DIRT under the Finance Act, 1986. He
failed to discharge this responsibility.

Chief Operating Officer (Philip Halpin)

Philip Halpin was appointed Chief Operating Officer from 15 July 1996 and held that
position on the appointment of the Inspectors on 30 March 1998. In that role, Mr
Halpin was circulated with seven branch internal audit reports which referred to DIRT
compliance issues in the area of DIRT-exempt non-resident accounts. None of these
reports referred to issues other than documentary compliance. Mr Halpin, in his
previous role as Head of Treasury & International, was circulated with a copy of the
DIRT Theme Audit report of December 1994 but did not attend the meeting on 9
February 1995 held to discuss the results of the audit and the issues arising therefrom.

Mr Halpin's evidence to the Inspectors was that, as Head of Treasury at that time, he
was not concerned with the main findings of the DIRT Theme Audit but only with the
audit's favourable conclusion in regard to Treasury.

Mr Halpin inherited the problem of bogus non-resident accounts. He considered that


he was entitled to assume that the issues concerning DIRT compliance raised by the
DIRT Theme Audit had been addressed by those who were directly responsible.
While Mr Halpin may not have received such a volume of internal audit reports of
documentary non-compliance as to make inevitable the inference that a substantial
proportion of the non-resident accounts could be bogus, he had sufficient information
to be aware that there were continuing problems in relation to DIRT. As Chief
Operating Officer part of his responsibility was to ensure that DIRT was deducted
from interest paid or credited on all accounts subject to DIRT under the Finance Act,
1986 and he failed in this regard.

EVASION OF REVENUE OBLIGATIONS:


FICTITIOUS AND INCORRECTLY NAMED ACCOUNTS

The Branch Managers

Between 1988 and 1996 fictitious and incorrectly named accounts existed in the
branch network. In the opinion of the Inspectors, branch managers were aware that
the principal reason for the opening of these accounts was the evasion of tax by the
Bank's customers.

In response to the instruction dated 30 May 1996 from the General Manager -
Banking and the General Manager - Risk Management and Administration to remove
such accounts from the books (see Part 3, page 67), certain managers suggested to
customers that they close the accounts and either invest the money in CMI or place it
in their correct names at another branch of the Bank. These "solutions" were
improper as they served to encourage the account holder to continue to evade tax, but
were not objected to by the Head of Audit, who was aware of them.

While the opening and maintenance of such accounts and the "solutions" proposed for
regularising them were improper, the Inspectors have nonetheless concluded that it is
not appropriate to find individual managers responsible for this practice as they
believe that responsibility in this regard lay at a higher level in the Bank.

General Manager Risk Management and Administration, General Manager -


Banking (Frank Brennan and Michael Keane)

The Inspectors have received no evidence that the General Manager - Risk
Management and Administration or the General Manager - Banking were aware of
the existence of fictitious and incorrectly named accounts across the branch network
prior to the issue by Mr Keane of the memorandum dated 7 December 1995 referred
to at page 67. The Inspectors believe the action taken by Mr Brennan and Mr Keane
to eliminate such accounts was appropriate.

Head of Audit (Paul Harte)

Paul Harte, Head of Audit, had a major role in having fictitious and incorrectly named
accounts removed from the branches (see Part 3, pages 67 and 68). The declaration
which the branches were required to make by the memorandum of 30 May 1996 from
the General Managers was directed to be sent to the internal audit department. This
declaration was to include details of all the fictitious accounts still remaining in the
branches, and Mr Harte was informed by the managers what they proposed to do in
order to eliminate these accounts. What was being recommended to some customers
was that the account be closed and the funds either invested in CMI or placed in
correct names at another branch of the Bank.

In the opinion of the Inspectors, Mr Harte ought to have known that these "solutions"
were improper, as they served to encourage the continued evasion of tax by the
Bank's customers, and he should have refused to allow them to be adopted.

Chief Executive, Executive Director

Jim Lacey, as Chief Executive of the Bank in the period 1 April 1988 to 22 April
1994 may not have had knowledge of the existence of fictitious or incorrectly named
accounts at the branches. Barry Seymour, Executive Director of the Bank from 22
April 1994 to 15 July 1996, may not have had knowledge of the existence of such
accounts until late 1995.

Nonetheless, as Chief Executive and Executive Director respectively, both Mr Lacey


and Mr Seymour must bear ultimate responsibility for the practice of opening and
maintaining fictitious or incorrectly named accounts during the periods they held their
respective positions.

During the period Mr Seymour held the position of Executive Director, the General
Managers took action to eliminate such accounts.

EVASION OF REVENUE OBLIGATIONS:


SPECIAL SAVINGS ACCOUNTS

The Branch Managers

Branch managers knew or ought to have known that properly completed declarations
were not held by them for all accounts classified as Special Savings Accounts
("SSA's").

Branch managers also knew or ought to have known that withdrawals from SSA's
were being permitted within three months of the opening of the account or without the
requisite notice period being given.

It was the branch managers' duty to ensure that Deposit Interest Retention Tax
("DIRT") at the standard rate was deducted from interest paid or credited where a
properly completed declaration was not held for an account classified as an SSA,
where there was a withdrawal within three months of the account being opened, or the
statutory period of notice for a withdrawal was not given, and they failed to discharge
that duty.

While the breaches of statutory requirements relating to declarations and withdrawals


occurred at branch level, the Inspectors do not consider it appropriate to find
individual managers responsible, as they believe that responsibility for ensuring
adherence to statutory provisions lay at a higher level in the Bank.

The Regional Managers (Dermott Boner, Kevin Curran and Tom McMenamin)

The titles and roles of Messrs Boner, Curran and McMenamin, and the periods for
which they held their positions are set out in Part 1 at pages 7 and 8.

Each of these three was made aware, through circulation of branch internal audit
reports, of widespread documentary non-compliance in the area of SSA's.
Furthermore, Mr Boner and Mr McMenamin attended the meeting of senior
management held on 9 February 1995 to discuss the results of the DIRT Theme Audit
and the issues arising therefrom, while Mr Curran was circulated with a copy of the
minutes of the meeting.

In the light of this evidence, the Inspectors believe that Mr Boner, Mr Curran and Mr
McMenamin were aware that DIRT at the standard rate was not being deducted as it
ought to have been from interest paid or credited where the conditions for the
operation of accounts as SSA's were being breached.

Mr Boner, Mr Curran and Mr McMenamin had each a responsibility to ensure that all
accounts classified as SSA's were correctly classified as such and, in this regard,
particularly in light of the deficiencies disclosed in the internal audit reports circulated
to them, each had a responsibility to make reasonable enquiries of the branches for
which he was responsible to satisfy himself that properly completed declarations were
in place for all accounts classified as SSA's.

Mr Boner, Mr Curran and Mr McMenamin had each a responsibility to ensure that


DIRT at the standard rate was deducted from interest paid or credited where the
conditions for the operation of accounts as SSA's were breached.

Mr Boner, Mr Curran and Mr McMenamin each failed to discharge these


responsibilities.

General Manager - Banking (Michael Keane)

Michael Keane was appointed General Manager - Banking on 3 May 1993 and held
that position up to 18 August 1996. Throughout this period, Mr Keane was made
aware, through audit reports circulated to him, of the deficiencies which existed in the
operation of SSA's at branches, the failure of branches to hold properly completed
declarations for all accounts classified as SSA's and instances of failure to comply
with the relevant withdrawal notice requirements. The Inspectors believe that
through these reports he was aware that DIRT at the standard rate was not being
deducted as it ought to have been from interest paid or credited where the conditions
for the operation of the accounts as SSA's were being breached.

Furthermore, Mr Keane was on the circulation list for the DIRT Theme Audit report
of December 1994 and chaired the meeting of senior management held on 9 February
1995 at which the results of the audit and the issues arising therefrom were discussed.
Mr Keane had a responsibility to ensure that all accounts classified as SSA's were
correctly classified as such and to ensure that DIRT at the standard rate was deducted
from interest paid or credited where the conditions for the operation of accounts as
SSA's were breached. Mr Keane failed to discharge these responsibilities.

Head of Finance (Gerry Hunt and Patrick Byrne)

As noted at page 173 above, the Head of Finance had responsibility for ensuring that
returns of DIRT were made to the Revenue Commissioners within prescribed time
limits. As stated, the accuracy of these returns was critically dependent on the proper
categorisation of deposit accounts at branch level between those exempt from DIRT,
those liable to DIRT at the standard rate of tax, and those liable at a reduced rate.

In the respective periods throughout which Mr Hunt and Mr Byrne were responsible
for returns of DIRT to the Revenue Commissioners, neither was on the circulation list
for branch internal audit reports. Accordingly neither was aware through this
medium of the extent of the deficiencies in the operation of SSA's at the branches.

The Inspectors have no evidence that anything was brought to the notice of Mr Hunt
which ought to have apprised him of these deficiencies.

Mr Byrne, however, was on the circulation list for the DIRT Theme Audit report of
December 1994 and attended the meeting on 9 February 1995 to discuss the results of
the audit and the issues arising therefrom. He was thus aware of the extent of non-
compliance in the operation of SSA's and ought to have known the consequences of
such non-compliance for the accuracy of the returns of DIRT being made by him, or
persons under his control, to the Revenue Commissioners.

As already noted, Mr Byrne, in common with Mr Seymour, Mr Keane and Mr


Brennan, has given evidence to the Inspectors that the issue of a potential
retrospective liability to the Revenue Commissioners for DIRT arising from the
findings of the Theme Audit was not considered at the meeting of 9 February 1995.
The Bank has confirmed to the Inspectors that no payment of retrospective DIRT was
made to the Revenue Commissioners prior to their appointment.

Mr Byrne, as Head of Finance at the time of the DIRT Theme Audit, also had a
responsibility to raise the issue of potential retrospective DIRT due on accounts
wrongly classified as SSA's, and failed to do so.

Chief Executive, Executive Director

Jim Lacey, as Chief Executive of the Bank in the period 1 January 1993 to 22 April
1994 may not have had knowledge of the deficiencies in the operation of SSA's at the
branches. As Chief Executive Mr Lacey must nonetheless bear ultimate
responsibility for the shortcomings which existed in this area during that period.

Barry Seymour held the position of Executive Director of the Bank from 22 April
1994 to 15 July 1996 and during that period was made aware, through audit reports
circulated to him, of the deficiencies which existed in the operation of SSA's at
branches, both in relation to documentary non-compliance and breaches of the
withdrawal notice requirements.

Mr Seymour was also circulated with the DIRT Theme Audit report of December
1994 and attended the meeting on 9 February 1995 to discuss the results of the audit
and the issues arising therefrom. He was thus aware of significant issues of
documentary non-compliance in relation to SSA's, the widespread failure to ensure
adherence to the notice requirements for withdrawals from such accounts, and the
resultant failure to deduct DIRT at the standard rate from interest paid or credited
where the conditions for the operation of such accounts as SSA's were breached.

As Executive Director, Mr Seymour bears ultimate responsibility for the failure of the
Bank to deduct DIRT at the standard rate from interest paid or credited on all accounts
classified as Special Savings Accounts where the conditions to which such accounts
were subject were not observed.

THE SALE OF C M I , SCOTTISH PROVIDENT INTERNATIONAL AND OLD MUTUAL


INTERNATIONAL POLICIES

The Financial Advice and Services Division

As described at pages 83 and 84 above, on 1 May 1989 Nigel D'Arcy was recruited
by the then Chief Executive of National Irish Bank, Jim Lacey, to establish the
Financial Advice and Services Division ("FASD") of the Bank to provide a range of
independent financial services, primarily in the insurance and investment-related
sector, to Bank customers and others.

The Bank employed financial services managers whose responsibilities were to obtain
referrals for high value insurance products from the Bank's retail branches and to deal
with direct enquiries from the public with respect to such products.

Nigel D'Arcy

Mr D'Arcy was head of the FASD during the entire of the period from 1 May 1989 to
the date of the appointment of the Inspectors on 15 June 1998 to investigate the affairs
of National Irish Bank Financial Services Limited. All the financial services
managers reported directly to him.

Mr D'Arcy's evidence to the Inspectors, at his interview on 7 September 2000, can be


summarised as follows:

• As head of the FASD, Mr D'Arcy became aware in 1992 that funds


undisclosed to the Revenue Commissioners were being targeted by Bank
personnel for investment in CMI.

• Prospective investors were being assured by the FASD managers that their
investment would be confidential from the Revenue Commissioners.
• They were also being assured that if their investment was made the subject of
a trust, the beneficiaries could obtain the funds invested, after the death of the
investor, on production of a death certificate, thus avoiding the necessity of
probate having to be taken out.

• He also became aware that CMI was being used by the Bank to regularise
bogus non-resident accounts and fictitious and incorrectly named accounts.

• The manner in which the CMI policies were being promoted served to
facilitate the evasion of tax by the persons investing in the policies.

The Inspectors' findings concerning Mr D'Arcy's knowledge and responsibility are:

• Mr D'Arcy was aware that monies which were undisclosed to the Revenue
Commissioners, including funds held in bogus non-resident accounts and
fictitious and incorrectly named accounts, were being targeted by Bank
personnel for investment in CMI policies, and he failed to stop the practice.

• Mr D'Arcy was aware that the FASD financial services managers were
promoting CMI policies as a secure investment for funds which had not been
declared to the Revenue and failed to stop the said practice, which served to
facilitate the evasion of Revenue obligations by third parties.

• Mr D'Arcy was aware that prospective investors were being given an


assurance by the FASD financial services managers that their investment
would be confidential from the Revenue Commissioners and, if made the
subject of a trust, would pass to their beneficiaries without probate having to
be obtained, thus making it possible for the funds invested to be kept hidden
from the Revenue Commissioners even after the investor's death.

In his evidence to the Inspectors Mr D'Arcy stated that from 1992 he was fully aware
of the manner in which the CMI policies were being promoted by the financial
services managers, and since as head of the FASD he could have stopped the practice,
he was, in the opinion of the Inspectors, primarily responsible for the continuation of
the practice. The responsibility of the financial services managers has to be judged
against this background. They were operating with Mr D'Arcy's tacit approval.

The FASD Financial Services Managers; Patrick Cooney, Investment Manager

The names of the nine individuals who were employed at different times as financial
service managers in the FASD are set out at page 84 above. The Inspectors make no
findings in regard to three of the persons named, Michael Fitzgerald, Gerry Stewart
and John Bailey.

Michael Fitzgerald was interviewed by the Inspectors on 25 March 1999 and a copy
of the transcript of this interview was mailed to his solicitors on 18 May 1999. The
Inspectors sought to interview Mr Fitzgerald a second time in late 1999, but were
advised by Mr Fitzgerald's solicitors that he was not medically fit. The Inspectors
arranged that Mr Fitzgerald be examined by an independent medical practitioner, who
confirmed Mr Fitzgerald's incapacity to attend for interview.

In January 2002 the Inspectors sent to Mr Fitzgerald their provisional findings relating
to him. In reply, the Inspectors received a letter from his solicitor enclosing a
medical certificate from a doctor stating that Mr Fitzgerald was not fit to respond to
the Inspectors' provisional findings.

In these circumstances, the Inspectors are precluded from making any findings with
regard to Mr Fitzgerald.

Messrs Stewart and Bailey are omitted because they did not join the FASD until June
and August 1997 respectively, and were involved in the sale of very few CMI
policies.

The Inspectors' findings in regard to the remaining six financial services managers
and Patrick Cooney will be structured as follows:

• Beverley Cooper-Flynn, Charlie McCarthy, Patricia Roche and Alistair Stewart

• Frank Lynch and Bob Wynne

• Patrick Cooney

Beverley Cooper-Flynn joined the FASD as a financial services manager on 1


September 1989 and continued working in the FASD until 5 January 1997 when she
was given leave of absence by the Bank.

Charlie McCarthy joined the FASD as a financial services manager on 4 December


1989 and was still working in the FASD on 15 June 1998, the date on which the
Inspectors were appointed to investigate the affairs of the company.

Patricia Roche joined the FASD as a financial services manager on 1 October 1991.
She took leave of absence from the Bank on 19 September 1994 for personal reasons.

A list air Stewart j oined the FASD as a financial services manager on 1 September
1989 and he continued working in the FASD until 25 June 1994.

Beverley Cooper-Flynn, Patricia Roche and Alistair Stewart sold a substantial number
of CMI policies. Charlie McCarthy also sold a number of CMI policies, but not as
many as the other three.

All four were aware that monies being invested in CMI were undeclared to the
Revenue. All four assured their customers that their investment was completely
confidential from everyone, including the Revenue. They also informed their
customers that if their investment was made the subject of a trust their beneficiaries
could obtain the funds after their death without having to take out probate.
The Inspectors' findings in regard to the knowledge and responsibility of Beverley
Cooper-Flynn, Charlie McCarthy, Patricia Roche and Alistair Stewart are:

• They sold CMI policies as a secure investment for funds which had not been
declared to the Revenue.

• They gave an assurance to prospective investors that their investment would


be confidential, that the Revenue Commissioners would not become aware of
it.

• They told prospective investors that if their investment was made the subject
of a trust it would pass to the beneficiaries on the production of a death
certificate, thereby avoiding the necessity of probate being obtained, and
making it possible for the funds invested to be kept hidden from the Revenue
Commissioners even after the investor's death.

Bob Wynne joined the FASD as a financial services manager on 15 August 1994, and
Frank Lynch joined as a financial services manager on 15 March 1995.

At the respective times they joined, the culture in regard to the sale of CMI policies
was well established. After they took up their positions, the CMI policies continued
to be sold in the same way as previously. Branch managers continued to refer
customers to the financial services managers with a view to investment in CMI only,
particularly when they thought that they were at risk of losing a deposit. However,
the level of CMI sales had declined from its peak.

The Inspectors are satisfied that on joining the FASD, Mr Wynne and Mr Lynch
carried on the practice that existed in regard to the promotion of CMI policies before
they joined, and accordingly find:

• They sold CMI policies as a secure investment for funds which had not been
declared to the Revenue.

• They gave an assurance to prospective investors that their investment would


be confidential, that the Revenue Commissioners would not become aware of
it.

• They told prospective investors that if their investment was made the subject
of a trust it would pass to the beneficiaries on the production of a death
certificate, thereby avoiding the necessity of probate being obtained, and
making it possible for the funds invested to be kept hidden from the Revenue
Commissioners even after the investor's death.

Patrick Cooney joined the FASD as Investment Analyst on 4 December 1989 and he
was appointed Investment Manager on 1 January 1991, a position he held until he
ceased working for the Bank on 12 July 1996.
Mr Cooney worked closely with the financial services managers and the Inspectors
are satisfied that he was fully aware that they were promoting the CMI policies as a
secure investment for funds which had not been declared to the Revenue.

While Mr Cooney's principal function was to assist the financial services managers
with advice in regard to investments, he was also involved in the sale of CMI policies
to a small number of customers, either assisting the financial services managers, or
occasionally replacing a financial services manager who was not available.

The Branch Managers

Branch managers introduced customers to CMI or referred customers to the FASD for
introduction to CMI, in many cases in the knowledge that such introduction was to
enable the customers to continue to conceal funds from the Revenue.

The Inspectors have concluded that it is not appropriate to find individual managers
responsible for the manner in which the CMI policies were promoted. They take the
view that responsibility in this regard lay with the FASD and at a higher level in the
Bank.

Head of Retail/Regional Managers (Dermott Boner, Kevin Curran)

Dermott Boner was Head of Retail between 1 October 1990 and 1 January 1995 and
after that a Regional Manager until his retirement in February 1996. During his
period as Head of Retail he was aware that funds coming from deposits in the
branches, when invested in CMI through FASD, were reinvested by CMI on deposit
with the Bank. He was also aware, from his knowledge of the retail section of the
Bank, and in particular from his knowledge of an investment made in CMI in 1993 by
a customer of the Bank who invested approximately £600,000 which had not been
declared to the Revenue Commissioners, that FASD were promoting CMI polices as a
secure investment for funds which had not been declared to the Revenue
Commissioners.

Mr Boner shares responsibility for this practice and for the Bank's failure to take steps
to ensure that the promotion of CMI policies in this manner was stopped.

Kevin Curran was one of the Regional Managers in the Bank between 1988 and
February 1996 and after that was Head of Retail Banking until his retirement from the
Bank. He was aware that "sensitive" funds, and funds in bogus non-resident
accounts and fictitious and incorrectly named accounts were being invested in CMI
through the FASD.

He was also aware that the CMI product was very successful and resulted in CMI
having substantial deposits with the Bank.

He knew that the FASD was promoting CMI policies as a secure investment for funds
which had not been disclosed to the Revenue Commissioners.
Mr Curran shares responsibility for this practice and for the Bank's failure to take
steps to ensure that the promotion of CMI policies in this manner was stopped.

General Manager - Administration (Frank Brennan)

Frank Brennan, while General Manager - Administration, as the addressee of the


memorandum dated 17 August 1994 from Geoff Bell, Head of Management Services
quoted in Part 5 at page 100, knew that the CMI policy was being promoted to
persons with "sensitive" funds with "confidentiality a prerequisite in investment" and
also knew the extent of the funds deposited by CMI with the Bank resulting from the
sale of CMI Personal Portfolio policies.

Mr Brennan shares responsibility for the Bank's failure to take steps to ensure that the
promotion of CMI policies in this manner was stopped.

General Manager - Banking (Michael Keane)

Michael Keane, while General Manager - Banking, was copied with Mr Bell's
memorandum of 17 August 1994. He thus knew that the CMI policy was being
promoted to persons with "sensitive" funds and also knew the extent of the funds
deposited by CMI with the Bank resulting from the sale of CMI Personal Portfolio
policies.

Mr D'Arcy reported directly to Mr Keane from 1 January 1995 to the date of Mr


Keane's ceasing to act as General Manager - Banking.

Mr Keane shares responsibility for the Bank's failure to take steps to ensure that the
promotion of CMI policies in the manner stated above was stopped.

Head of Audit (Paul Harte)

Paul Harte, Head of Audit, became aware in 1996 that CMI was being used by branch
managers as a means of continuing to conceal from the Revenue Commissioners
undeclared funds which had been on deposit in fictitious or incorrectly named
accounts. He ought to have taken steps to ensure that this practice was stopped.

Chief Executive, Executive Director, Chief Operating Officer (Jim Lacey, Barry
Seymour, Philip Halpin)

Jim Lacey as Chief Executive recruited Mr D'Arcy to establish the FASD; Mr D'Arcy
reported directly to him. Mr Lacey was aware of the level of deposits made by CMI
with the Bank. He knew or ought to have known how the product was being
promoted.

Whether or not Mr Lacey was aware that the CMI product was being promoted to
persons wishing to conceal, or continue to conceal, funds from the Revenue
Commissioners, as Chief Executive of the Bank he has to bear responsibility for the
existence of this practice, which served to facilitate customers of the Bank and others
in evading tax.
Barry Seymour held the position of Executive Director of the Bank from 22 April
1994 to 15 July 1996. On his appointment, he inherited the practice whereby
customers of the Bank, and others, were being facilitated in evading tax through
investment in the CMI product. As Executive Director of the Bank he has to bear
responsibility for the continuation of the practice.

Philip Halpin was appointed Chief Operating Officer of the Bank on 15 July 1996 and
held that position on the appointment of the Inspectors on 30 March 1998. On his
appointment, he inherited the practice whereby customers of the Bank, and others,
were being facilitated in evading tax through investment in the CMI product. As
Chief Operating Officer of the Bank he has to bear responsibility for the continuation
of the practice.

THE PRACTICE OF IMPROPER CHARGING OF INTEREST

The Branch Managers

The branch managers who effected, or who directed there be effected, adjustments to
interest charged to customers otherwise than in respect of legitimate interest amounts
were clearly aware of the practice of "loading" interest.

These branch managers undoubtedly engaged in the practice, but the Inspectors have
nonetheless concluded that it is not appropriate to find individual managers
responsible, as they accept the evidence of managers that they loaded interest in the
belief that they were charging customers for amounts legitimately due to the Bank
(albeit misdescribed), and under the impression that their superiors would not at the
time have disapproved of such practice.

No instruction to make refunds was received by the branch managers and accordingly
the Inspectors are of the opinion that the managers were not responsible for the
Bank's failure in this regard.

The Regional Managers (Dermott Boner and Kevin Curran)

As noted in Part 1 at page 7, the Regional Managers in 1990, the time of first
reporting of interest loading, were Dermott Boner and Kevin Curran.

Mr Curran was made aware of the existence of the practice of loading interest through
receipt of the May 1990 internal audit report on Carrick-on-Shannon branch. This
knowledge was reinforced by memoranda from Frank Brennan, then General Manager
- Retail Banking, dated 21 May 1990 (addressed to Mr Curran) and 5 June 1990
(addressed to both Mr Curran and Mr Boner), quoted in Part 6 at page 131.

As noted, Mr Boner was an addressee of Mr Brennan's memorandum of 5 June 1990


and he also received a copy of the August 1990 internal audit report on Carndonagh
branch.
Mr Boner's knowledge of the practice antedated the 5 June 1990 memorandum and
the audit report on Carndonagh branch; he had, for some six years prior to being
appointed Regional Manager, been manager of the Bank's Cork branch, where he had
overseen interest loading on customers' accounts (to remunerate the Bank for
management time, according to Mr Boner). In common with other managers
interviewed, he at the time considered the practice acceptable.

The actions of the Regional Managers in response to Mr Brennan's memorandum of 5


June 1990 were appropriate in that they gave instructions that the practice of loading
interest cease.

They however did not revert to Mr Brennan as requested by him to report on how
widespread the practice was, and it remains unclear whether they took sufficient steps
to establish this. While it must remain a matter of speculation what might have
ensued if they had furnished a comprehensive report to Mr Brennan, no
supplementary guidance to the branches was issued.

The Regional Managers share with Mr Brennan responsibility for the failure to refund
customers whose interest charges had been loaded - no instruction issued to the
branches, and the focus of attention was on the future only.

General Manager - Retail Banking (Frank Brennan)

The General Manager - Retail Banking in 1990 was Frank Brennan. He was made
aware of the practice of loading interest through receipt of the audit reports on the
Carrick-on-Shannon and Carndonagh branches. (Mr Brennan ceased to be on the
circulation list for branch audit reports from September 1990).

Mr Brennan's response to the audit report on Carrick-on-Shannon branch, and to the


related memorandum dated 21 May 1990 from Mr Lacey, was appropriate in so far as
he requested that he be advised of the extent of the practice and he instructed that the
practice cease. He however omitted to give any instruction that refunds be made to
customers.

Mr Brennan also failed to ensure that he was advised of the extent of the practice, and
by reason of his failure in this regard he was unable to take any decision on whether
further action was required.

Mr Brennan shares responsibility for the Bank's failure to make appropriate refunds
to customers at the time, notwithstanding his evidence to the Inspectors that the
primary responsibility to refund customers lay with the branch manager, and
thereafter with the relevant Regional Manager.

Chief Executive (Jim Lacey)

Jim Lacey was Chief Executive of the Bank for the period during which the adverse
internal audit reports on interest loading were issued, and with which he was copied.
Mr Lacey's reaction to receipt of the April 1990 report on Carrick-on-Shannon branch
was appropriate in that he directed that the practice cease, but incomplete in that it
failed to address the issue of refunds to customers.

THE PRACTICE OF IMPROPER CHARGING OF FEES

The Branch Managers

During the period 1988 to mid 1996, the vast majority of branch managers included,
in amounts charged to customers, fees for which there was no supporting
documentation.

Managers interviewed have indicated to the Inspectors that these fees purportedly
related to management time.

The Inspectors are satisfied that the branch managers were required by senior
management in the Bank to charge for management and administration time, but that
senior management had failed up to 1996 to put in place a proper system for recording
and charging such time.

In these circumstances the Inspectors have concluded that it is not appropriate to find
the branch managers responsible, as they believe that responsibility for the failure to
introduce an appropriate time recording system lay at a higher level in the Bank.

The Regional and Area Managers

As set out in Part 1 at pages 7 and 8, the management structure and the titles of the
personnel to whom branch managers reported changed on a number of occasions
between 1988 and 1996. The executives holding the positions of Regional and Area
Manager during the period were Dermott Boner, Kevin Curran, Tom McMenamin and
Barry Grogan.

The late Michael O'Rourke also held the position of Regional Manager. By reason
of the death of Mr O'Rourke, it has not been possible for him to be heard and
accordingly the Inspectors make no finding in this report in relation to his knowledge
and responsibility. Any references to Regional Managers in this section are not to be
taken as including him.

All those holding the position of Regional or Area Manager during the period 1988 to
1996 knew or ought to have known that the Bank Procedures Manual did not contain
any guidance on the nature of the work or services to customers which should give
rise to an administration or management time charge, nor did it give any guidance on
the form of record to be maintained by branch staff responsible for delivery of the
service.

They were aware that there was not at that time any system in operation for recording
branch management and administration time which was charged to customers.
In addition, they were all on the circulation list for internal audit reports on branches
under their supervision; as indicated in Part 7 at pages 153 to 155, there was a
constant theme therein of dissatisfaction with the lack of explanation for fee increases
recorded on the Fees to be Applied Report. They were also aware from internal audit
reports of the failure of the introduction of the Customer Action Pad by Mr Boner in
1992 to bring about an improvement in the situation.

The Regional Managers, Head of Retail, and Area Managers holding the latter title in
the 1993/94 period - ie Dermott Boner, Kevin Curran, Tom McMenamin, and Barry
Grogan must bear some of the responsibility for the failure to put in place an
appropriate system for recording management and administration time to be charged
to customers.

Following a reorganisation in February 1996, six Area Managers were appointed.


The Inspectors are unaware of any initiative taken by these Area Managers to rectify
the position; their date of appointment as Area Managers however postdates
commencement of work on the systems improvements which included the time
recording facility referred to in Part 7 at pages 155 and 156 and therefore the
Inspectors have concluded that they should not be held responsible for failing to act to
bring about a change in the system.

General Manager - Retail Banking/General Manager - Banking (Frank


Brennan and Michael Keane)

As outlined in Part 1 at pages 5 to 7, Frank Brennan held the position of General


Manager - Retail Banking from 1988 to 30 June 1991 and Michael Keane held the
position of General Manager - Banking from 3 May 1993 to 18 August 1996.

During the periods they respectively held the position, Mr Brennan and Mr Keane
knew or ought to have known that the Bank Procedures Manual did not contain any
guidance on the nature of the work or services to customers which should give rise to
an administration or management time charge, nor did it give any guidance on the
form of record to be maintained by branch staff responsible for delivery of the service.

As General Manager - Banking, Mr Keane was made aware, through receipt of


branch audit reports, of the consistently reported shortcomings concerning the lack of
explanation supporting adjustments on the Fees to be Applied Reports, and, from
September 1993, of the failure of the 1992 introduction of the Customer Action Pad to
bring about an improvement in the situation.

Mr Brennan and Mr Keane bear the principal responsibility for the Bank's failure,
during the periods they occupied the respective positions of General Manager - Retail
Banking or General Manager - Banking, to put in place an appropriate system for
recording management and administration time which was chargeable to customers.
Between July 1991 and March 1996, while Mr Brennan's title and functions changed
from time to time, he continued to be responsible for procedures in the branches and
accordingly he continued to share responsibility for the Bank's failure in this regard.
Chief Executive, Executive Director (Jim Lacey and Barry Seymour)

Jim Lacey was Chief Executive of the Bank from 1 April 1988 to 22 April 1994.

Barry Seymour became Executive Director of the Bank on 22 April 1994 and held
that position until 15 July 1996.

Through receipt of branch audit reports, both Mr Lacey and Mr Seymour were made
aware of consistently reported shortcomings concerning the lack of explanation
supporting fee increases recorded on the Fees to be Applied Reports. They were also
made aware, through receipt of branch audit reports, that the Customer Action Pad
introduced in July 1992 was not being used. It was their responsibility to ensure that
there was a system in place in the branches for the contemporaneous recording of
management and administration time. Such a system was introduced in March 1996
following pressure on banks from the Director of Consumer Affairs to provide
customers with an itemised breakdown of their charges before being applied to the
account.

Mr Lacey, during the period he was Chief Executive, and Mr Seymour, during the
period he was Executive Director, each bear ultimate responsibility for the failure of
the Bank, prior to March 1996, to put in place in the branches an appropriate system
for recording management and administration time which was chargeable to
customers.

John Blayney

Tom Grace

Joint Inspectors

9 July 2004
APPENDICES
1998 No 89 COS

Monday the 30th day of March 1998

BEFORE MR JUSTICE KELLY

IN THE MATTER OF THE COMPANIES ACTS 1963-1990

AND IN THE MATTER OF NATIONAL IRISH BANK LIMITED

AND IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 8

OF THE COMPANIES ACT 1990

THE MINISTER FOR ENTERPRISE TRADE AND EMPLOYMENT

APPLICANT

Upon the Application of Counsel for the Applicant made unto the

Court on this day pursuant to Notice of Motion herein filed on the 27th day of

March 1998

On reading the said Notice of Motion the Affidavit of Paul Appleby

sworn on the 27th day of March 1998 and on the 30th day of March 1998 the

documents and exhibits in said Affidavit referred to and on hearing said Counsel

and Counsel for National Irish Bank Limited

1. IT IS ORDERED pursuant to Section 8( 1) of the Companies Act 1990

that John Blayney SC and Tom Grace be appointed as inspectors to

investigate and report on the affairs of National Irish Bank Limited

2. IT IS ORDERED until further Order of the Court that the said John

Blayney SC and Tom Grace shall investigate and report on the affairs

of National Irish Bank Limited relating to


(i) the improper charging of interest to accounts of customers of

the said National Irish Bank Limited between 1988 and this

day

(ii) the improper charging of fees to accounts of customers of the

said National Irish Bank Limited between 1988 and this date

(iii) the improper removal of funds from accounts of customers of

the said National Irish Bank Limited between 1988 and this ^

date

(iv) all steps and action taken by National Irish Bank Limited its

directors and officers servants or agents in relation to the

charging of such fees or interest or the removal of any funds

without the consent of the account holders and their actions

arising from the issues when discovered

(v) the matter in which the books records and accounts of the said

National Irish Bank Limited reflected the foregoing matters

(vi) the identity of the person or persons responsible for or aware of

any of the practices referred to above

(vii) whether other unlawful or improper practices existed or exist

in National Irish Bank Limited from 1988 to date which served

to encourage the evasion of any revenue or other obligations on

the part of the Bank or Third Parties or otherwise

IT IS ORDERED that the said Inspectors investigate and deliver an

interim report to the Court not later than 5 o'clock in the afternoon of Monday the

22nd day of June 1998 and that the matter be listed before the Court on Monday the

29th day of June 1998


The Court doth direct that in preparing the report that the said

Inspectors bear in mind the provision of Section 22 of the Companies Act 1990

Reserving the costs of this Application and Order

Liberty to apply

/J,
REGISTRAR

Chief State Solicitor vlilch 1 attest


Solicitor for the Applicant
j A / — — s ^ ^ ^ ^ r
S S 5 S £ £ S £ r t of copy to*

DOC:MBENTE
JT
1998 No 132 Cos

Monday the 15th day of June 1998

BEFORE MR JUSTICE SHANLEY

IN THE MATTER OF THE COMPANIES ACTS 1963 TO 1990

AND IN THE MATTER OF NATIONAL IRISH BANK FINANCIAL

SERVICES LIMITED

AND IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION

8 OF THE COMPANIES ACT 1990

THE MINISTER FOR ENTERPRISE TRADE AND EMPLOYMENT

APPLICANT

Upon application of Counsel for the Applicant made unto the Court

pursuant to Notice of Motion dated the 11th day of June 1998

And on reading the said Notice of Motion and the Affidavit of Paul

Appleby filed the 11th day of June 1998 and the Affidavit of Graham Savage filed

the 12th day of June 1998 the documents and exhibits referred to in said Affidavits

And on hearing said Counsel and Counsel for National Irish Bank

Financial Services Limited

IT IS ORDERED

1. that pursuant to Section 8 (1) of the Companies Act 1990 Mr John

Blayney S.C. and Mr Tom Grace be appointed as Inspectors to

investigate and report on the affairs of National Irish Bank Financial

Services Limited

2. that until further Order of this Court the said Mr John Blayney S.C.

and Mr Tom Grace do investigate and report on the affairs of National

Irish Bank Financial Services Limited relating to


(a) The effecting of insurance policies through National Irish Bank

Financial Service ., Limited with Clerical Medical Insurance

Company Limited Scottish Provident International Life Assurance

Limited and Old Mutual International (Guernsey) Limited

(b) The role of National Irish Bank Financial Services Limited its

officers servants and employees in connection with the effecting of

the said policies of insurance

(c) The purposes behind the execution of the aforesaid policies of

insurance

(d) The knowledge of the management and board of directors of

National Irish Bank Financial Services Limited of the effecting 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

that the said Inspectors do deliver an interim report to the Court not

later than 5 o' clock in the afternoon of Tuesday the 11th day of

August 1998 and that the matter be listed before the Court on

Wednesday the 12th day of August 1998

that the Solicitors for National Irish Bank Financial Services Limited

be notified in advance of the date of the presentation of said interim

report

that the cost of the proceedings herein be reserved


THE HIGH COURT

1998 No 89COS

Tuesday the 31st day of July 2001

BEFORE MR JUSTICE KELLY

IN THE MATTER OF THE COMPANIES ACTS 1963 - 1990

IN THE MATTER OF NATIONAL IRISH BANK LIMITED

AND IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION

8 OF THE COMPANIES ACT 1990

THE MINISTER FOR ENTERPRISE TRADE AND EMPLOYMENT

APPLICANT

Upon Motion of Counsel for the Applicant made unto the Court this

day pursuant to Notice of Motion dated the 31st day of July 2001 in the presence of

Counsel for the National Irish Bank Limited and the Solicitor for the Inspectors

Whereupon and on reading said Notice the Affidavit of Peter Durnin

filed this day the Order dated the 30th day of March 1998 and on hearing said

Counsel and said Solicitor

IT IS ORDERED that the said Order dated the 30th day of March 1998

be amended as follows

(a) The insertion of "(A)" at the commencement of page 2 thereof

(b) The insertion of the letter "(B)" after sub-paragraph (7) of the aforesaid

Order and the addition thereafter of the following:

(i) The effecting of insurance policies through National Irish Bank

Limited with:

• CMI Insurance Company Limited

• Clerical Medical and General Life Assurance Society

• Clerical Medical Investment Group Limited

• Scottish Provident International Life Assurance Limited


• Old Mutual International (Guernsey) Limited

(ii) The role of National Irish Bank its officers servants and

employees in connection with the effecting of the said policies

of insurance

(iii) The purpose behind the execution of the aforesaid policies of

insurance

(iv) The knowledge of the management and Board of Directors of

National Irish Bank Limited of the effecting of the said policies

of insurance

(v) The identity of person or persons responsible for or aware of the

effecting of or purposes behind the said policies of insurance

And the Court doth make no Order as to the casts of this Motion

CxSti /Vx2_
REGISTRAR

A Copy which ! ettest

f /{aCxSUL^J

Supertetsmient of Coasts
1998 No 132 COS

Tuesday the 31 st day of July 2001

BEFORE MR JUSTICE KELLY

IN THE MATTER OF THE COMPANIES ACTS 1963 - 1990

IN THE MATTER OF NATIONAL IRISH BANK FINANCIAL SERVICES

LIMITED

AND IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION

8 OF THE COMPANIES ACT 1990

THE MINISTER FOR ENTERPRISE TRADE AND EMPLOYMENT

APPLICANT

Upon Motion of Counsel for the Applicant made unto the Court this

day pursuant to Notice of Motion dated the 31st day of July 2001 in the presence of

Counsel for the National Irish Bank Financial Services Limited and the Solicitors

for the Inspectors

Whereupon and on reading said Notice the Affidavit of Peter Durnin

filed this day the Order dated the 15th day of June 1998 and on hearing said

Counsel and said Solicitor

IT IS ORDERED that the said Order dated the 15th day of June 1998

be amended as follows

(a) The insertion of "(A)" at the commencement of page 2 thereof

(b) After "Clerical Medical Insurance Company Limited" as same appears

on the second line of sub-paragraph (a) at the top of page 2 thereof

"CMI Insurance Company Limited

Clerical Medical and General Life Assurance Society

Clerical Medical Investment Group Limited"


The insertion of the letter "(B)" after paragraph 2 sub-paragraph (e) of

the aforesaid Order and the addition thereafter of the following

"(i) The effecting of insurance policies through National Irish Bank

Limited with

• CMI Insurance Company Limited

• Clerical Medical and General Life Assurance Society

• Clerical Medical Investment Life Assurance Limited

• Old Mutual International (Guernsey) Limited

(ii) The role of National Irish Bank Limited its officers servants and

employees in connection with the effecting of the said policies

of insurance ..

(iii) The purpose behind the execution of the aforesaid policies of

insurance

(iv) The knowledge of the management and Board of Directors of

National Irish Bank Limited of the effecting of the said policies

of insurance

(v) The identity of the person or persons responsible for or aware of

the effecting of or purpose behind the said policies of

insurance"

And the Court doth make no Order


1998 No 89 Cos
Wvca^O-A VV^
l a p s e s the day of July 1998
BEFORE MR JUSTICE SHANLEY
IN THE MATTER OF NATIONAL IRISH BANK LIMITED (UNDER
INVESTIGATION)
AND IN THE MATTER OF THE COMPANIES ACT 1990

The Motion pursuant to Notice dated the 11th day of June 1998 on

behalf of John Blayney and Tom Grace the Joint Inspectors appointed by this

Honourable Court on the 30th day of March 1998 (hereinafter referred to as "the

Inspectors") having been at hearing before this Court on the 25th day of June 1998

the 26th day of June 1998 the 30th day of June 1998 the 1st day of July 1998 and

the 2nd day of July 1998 in the presence of Counsel for the Inspectors Counsel for

the Minister for Enterprise Trade and Employment and for the Attorney General

Counsel for National Irish Bank and Counsel for John O'Reilly (the Representative

Respondent) (Counsel for Jim Lacey having appeared on the 25th day of June 1998

and indicated that he did not wish to be represented or take part in any way)

And on reading said Notice and the Affidavit of John Blayney and

Tom Grace filed the 11th day of June 1998 and the documents and exhibits

referred to therein the Order herein dated the 11th day of June 1998 the skeleton

legal arguments on behalf of the Applicant filed the 18th day of June 1998 the

Affidavit of Edmund Fry filed the 22nd day of June 1998 the Affidavit of Grahame

Savage filed the 25th day of June 1998 the Affidavit of John O'Reilly filed the 24th

day of June 1998 and the documents and exhibits referred to

therein

And on hearing said Counsel

And the Court having been pleased to reserve its judgment herein

And the matter coming on before the Court this day for judgment in

the presence of said respective Counsel


The Court doth Order and Declare

(i) that persons (whether natural or legal) from whom information

documents or evidence are sought by the Inspectors in the course of

their investigation under the Companies Act 1990 are not entitled to

refuse to answer questions put by the Inspectors or to refuse to provide

documents to the Inspector on the grounds that the answers or

documents may tend to incriminate him her or it

(ii) that the procedures outlined by the Inspectors in their letters dated the

4th day of June 1998 (contained within Exhibits C and D to the

Affidavit of John Blayney and Tom Grace sworn on the 11th day of

June 1998) are consistent with the requirements of natural and

constitutional justice

And IT IS ORDERED that John O'Reilly (the Representative

Respondent herein) and National Irish Bank do recover against the Applicants their

costs of this Issue and Order

And the Court doth make no Order as to the costs of the Minister for

Enterprise Trade and Employment and the Attorney General

REGISTRAR
William Fry
WdlsCts i
Solicitor for Inspectors ^

Matheson Ormsby Prentice A


Solicitors for National Irish Bank Superintendent ofwopy^
O'Mara Geraghty McCourt
Solicitors for Representative Respondent

Chief State Solicitor


Solicitor for Minister for Enterprise Trade and Employment and for the Attorney
General

tcjsnib
tr
SUPREME COURT
(No 235 of 1998)
1998 No 89 COS
Thursday the 21st day of January 1999
BEFORE
MR JUSTICE O'FLAl IERTY
MR JUSTICE BARR1NGTON
MR JUSTICE MURPHY
MR JUSTICE LYNCH
MR JUSTICE BARRON
IN THE MATTER OF NATIONAL IRISH BANK LIMITED (UNDER
INVESTIGATION)
AND IN THE MATTER OF THE COMPANIES ACT 1990

The Motion on the part of John O'Reilly (the representative Respondent)

pursuant to Notice of Appeal dated the 4th day of August 1998 by way of Appeal from the

Judgment and Order of the High Court (Mr Justice Shanley) given and made on the 13th day

of July 1998 (whereby Orders and Declarations were made (i) that persons (whether natural

or legal) from whom information documents or evidence are sought by the Inspectors in the

course of their investigation under the Companies Act 1990 are not entitled to refuse to

answer questions put by the Inspectors or to refuse to provide documents to the Inspectors on

the grounds that the answers or documents may tend to incriminate him her or it and (ii) that

the procedures outlined by the Inspectors in their letters dated the 4th day of June 1998

(contained within Exhibits C and D to the Affidavit of John Blayney and Tom Grace sworn

the 11th day of June 1998) are consistent with the requirements of natural and

constitutional justice) on the grounds and as set forth in the said Notice of Appeal coming on

for hearing before this Court on the 4th day of November 1998

Whereupon and on reading the said Notice of Appeal the said Order of the

High Court the Affidavits and exhibits referred to therein the Judgment in the High Court and
SUPREME COURT
the written submissions herein and on hearing Counsel for the said Representative

Respondent Counsel for John Blayney and Tom Grace the Joint Inspectors appointed by the

High Court on the 30th day of March 1998 and Counsel for the Minister for Enterprise Trade

and Employment and the Attorney General

In the course of the written submissions to the Court on behalf of the said

Representative Respondent it having been intimated that he was only concerned with the

rights of natural persons and in the course of oral submissions to the Court by Counsel on his

behalf it having been intimated that the Appeal against the declaration at (ii) hereinbefore

referred to was being abandoned

It was Ordered that the case should stand for Judgment

And the same being listed for Judgment this day and being called on

accordingly in the presence of said respective Counsel

IT IS ORDERED AND ADJUDGED that the said Appeal be dismissed and

that the said Judgment and Order (including the Order for costs) do stand affirmed

accordingly with the addition thereto of a Statement that a confession of a Bank Official

obtained by the said Inspectors as a result of the exercise by them of their powers under

Section 10 of the Companies Act 1990 would not in general be admissible at a subsequent

criminal trial of such official unless in any particular case the trial Judge was satisfied that the

confession was voluntary

And Counsel on behalf of the Representative Respondent having applied for

an Order for payment of his costs the Court doth make no Order as to the costs of the Appeal
Record No 1998 89 COS

Friday the 19th day of March 1999

BEFORE MR JUSTICE KELLY

IN THE MATTER OF

NATIONAL IRISH BANK LIMITED (UNDER INVESTIGATION)

APPLICANT

AND IN THE MATTER OF

Record No 1998 89 COS

NATIONAL IRISH BANK FINANCIAL SERVICES LIMITED (UNDER

INVESTIGATION)

APPLICANT

AND IN THE MATTER OF

THE COMPANIES ACT 1990

On Motion of Counsel for the Applicants made unto the Court on the

3rd and 4th days of March 1999 pursuant to Noticesdated the 3rd day of March

1999 and the 5th day of February 1999 for

I. An Order pursuant to Order 28 of the Rules of the Superior Courts

granting the Applicants herein leave to amend their Notice of Motion

dated the 5th day of February 1999 by the deletion of paragraph 1 and

the insertion of the following paragraph

An Order directing that the Inspectors should not engage in a Deposit

Interest Retention Tax ("DIRT) compliance investigation of the Bank

which extends beyond effecting such investigation as is necessary to

report upon any issues of unlawful or improper practices that exist or

existed in the Bank from 1988 to date which served to encourage the
evasion of anv revenue or other obligations on the part of the Bank or

Third Parties or otherwise and which relate to the effecting or selling

or marketing in any capacity whatsoever of insurance policies through

the Bank and/or the Company with Clerical Medical Insurance

Company Limited Scottish Provident International Life Assurance

Limited and Old Mutual International (Guernsey) Limited

2. An Order directing that National Irish Bank Limited and National Irish

Bank Financial services Limited be furnished with a copy of all the

transcripts and supporting documentation relating to interviews earned

out by Inspectors with staff and customers of National Irish Bank

Limited and National Irish Bank Financial Services Limited which are

referred to in the Interim Report of the Inspectors dated the 17th day

of December 1993

3. Such further Orders as the Court thinks fit

And the Court being pleased to reserve its judgment and coming on

again for judgment this day

IT IS ORDERED that liberty be given to the Applicant to amend

paragraph 1 of their Notice dated the 5th day of February 1999 in the terms set out

above

IT IS ORDERED that the application for the relief sought in paragraph

1 of the Notice dated the 5th day of February 1999 as amended above

be refused

IT IS ORDERED that the relief sought at 2 and 3 above be refused

IT IS ORDERED that the Inspectors herein and the Minister for

Enterprise Trade and Employment do recover against the National Irish Bank
THE HIGH COURT

Limited (under investigation) and National Irish Bank Financial Services Limited

(under ir"estigation) the costs of the proceedings herein

IT IS ORDERED that execution on foot hereof in respect of costs be

stayed for a period of 21 days from the date of perfection of this Order and in the

event of the Applicants within said period serving and duly entering Notice of

Appeal herein until the Appeal shall have been disposed of

VOD89COS2
Appendix 8: Copy memorandum dated 18 November 1993 from Gerry
Hunt, Head of Financial Control
To: F.BrennanM-Keane,D.Boner
cc: J.Lacey
From: G.Hunt
Date: 18/11/93
Subject: Non Resident Accounts

I have recently received three separate phone calls from senior officials in the Dept. of Finance
and Revenue on the 1993 tax amnesty and they are clearly unhappy about the alleged actions
of a number of bank officials. I am now convinced that the Revenue will commence detailed
audits of the major banks in 1994 with particular attention on non resident accounts. The
U.K. Revenue did a similar exercise on Northern Bank in 1990 and made claims for negligence
based on inadequate documentation..

Over the past 12 months non resident deposits in branches have increased from £80m.to
£110m.(detailed analysis attached)and it is difficult to explain why such a high proportion of
new funds are from non residents. I have spoken with R.Bowden and P.Harte and both share
my concerns that our documentation may be weak in the following areas:

1.c/o branch addresses.

2. Non resident declaration forms missing,incomplete or inaccurate.

3. Unusual addresses that clearly warrant closer scrutiny eg Main St.,Swansey,Wales.

4. Obvious errors eg non res.deposit and resident loan in same name.

It is essential to advise all managers of the immediate risks and the personal penalties. There
can no longer be excuses for sloppiness in this area and we have been given advance warning.

iioM'

c2 —
TO: GERRY HUNT

AT: FINANCE DEPT

RE: BALANCES OF NON RESIDENT SAVINGS ACCOUNTS AT N.I.8. BRANCHES

NON RES DEPOSITS


SEPT 1992 SEPT 1993 % AS % OF
BRANCH TOTAL TOTAL INCR/DECR TOTAL FOR 1993
COLLEGE GREEN 2,905 3,955 36% 9%
BLANCHARDSTOWN 764 681 -11% 7%
FINGLAS 632 1,025 62% 11%
O'CONNELL ST 2,183 3,009 38% 15%
SOUTH CIRCULAR RD 1,567 3,871 147% 14%
WILTON' TCE 0 65 100% 42%
WALKINSTOWN 1,355 1,768 30% 9%
BAGGOT ST 664 624 -6% 3%
DUN LAOGHAIRE 1,000 896 -10% 7%
B,' tBORO 1,637 2,365 44% 18%
B IGGAN 1,018 1,676 65% 19%
Ba...JNAMORE 1,962 2,695 37% 33%
BALLINASLOE 1,142 1,011 -11 % 18%
BALLYBOFEY 1,524 2,061 35% 22%
BOYLE 1,400 1,342 -4% 14%
BRAY 804 1,457 81% 10%
ATHLONE 1,538 1,349 -12% 12%
CARNDONAGH 2,606 2,900 11% 25%
CARRICK ON SHANNON 3,708 3,790 2% 24%
CASTLEBAR 44 3,302 7405% 45%
FERMOY 726 738 2% 14%
CORK 1,021 950 -7% 6%
DRUMSHAM BO 1,889 2,147 14% 25%
DUNDALK 3,608 5,843 62% 49%
DUNGLOE 7,147 9,264 30% 53%
ENNIS 638 1,013 59% 14%
CLONMEL 0 107 100% 3%
GALWAY 1,920 2,205 15% 16%
GWEEDORE 3,445 3,752 9% 57%
KELLS 1,866 2,424 30% 15%
KILKENNY 705 810 15% 12%
K" " RNEY 2,771 3,552 28% 44%
K> COURT 633 1,109 75% 16%
L.. . JRKENNY 2,575 4,427 72% 26%
LANESBORO 604 619 2% 10%
LIMERICK 1,943 3,020 55% 18%
MALAHIDE 1,326 2,000 51% 14%
HOWTH RD. 0 20 100% 3%
MILFORD 1,810 1,384 -24% 12%
MOHILL 3,448 3,209 -7% 31%
MONAGHAN 2,506 5,191 107% 32%
MULLINGAR 925 1,841 99% 15%
NAAS 0 101 100% 38%
RAPHOE- 2,166 2,163 -0% 26%
SHERCOCK 1,421 1,783 25% 22%
SKERRIES 327 1,138 248% 15%
SLIGO 2,511 3,391 35% 29%
SWORDS 1,529 2,412 58% 18%
TERENURE 0 6 100% 24%
VIRGINIA 9% 15%
1,260 1,368 64%
WATERFORD 893 18%
1,465 21%
WEXFORD 880 13%
1,069
[TOTAL || 1 B 0 9 A 6
i \ ' 110^363 j| L 3S%\ 1
Appendix 9: Report on DIRT Theme Audit, December 1994
NATIONAL IRISH BANK
DIRT THEME AUDIT
DECEMBER 1994

Circulation:

B Seymour Executive Director


MKeane General Manager Banking
P Byrne Head of Finance & Planning
P Halpin Head of Treasury & International

Prepared By:

C Lahert - Computer Auditor


A Creamer - Branch Auditor

Approved For Issue By:

PHarte -Head of Audit

Issue Date: 24 /1/95


Note on issue of final report

We issued a draft report on the DIRT Theme Audit to MJKeane, General Manager and to P Byrne,
Head of Finance & Planning. The report findings have been accepted in general terms.

A{ J Keane has raised the following issues which require further consideration, and which are
contributing factors to the findings of the report:

- Confusion regarding product design.


- Absence of product training.
- Conflicting information requirements.
- General complexity.
- Lack of monitoring.

The issues raised in the audit report and the above issues will be discussed at a meeting on 9th
February next. Responsibilities will be assigned and detailed plans of action produced after that
meeting.

P Byrne has stated that Finance will continue to work towards afinal circular covering the whole
DIRT area. Audit and Finance will work together to ensure that the issues raised in the report are
covered in the final circular. The issues raised will be discussed and responsibilities assigned at the
meeting on 9th February.

Both M J Keane and P Byrne have agreed that we should proceed to issue the final report. We have
not included detailed management comments and action plans but these will effectively be produced
following the 9th February meeting.
1. MANAGEMENT SUMMARY

INTRODUCTION

This is our first theme audit; this concept involves selecting a particular theme / area, such as DIRT,
for review on a Bank wide basis.

DIRT compliance issues (principally missing and incomplete documentation) continue to be reported
in branch and other audits on a regular basis. For this reason, it was decided to select DIRT for our
first theme audit to gain an understanding of the extent of DIRT compliance problems. We analysed
the level of SSA and non resident deposits throughout the network and visited 12 branches in total. In
addition, we visited Treasury and we have incorporated DIRT issues raised in previous audit reports
in this theme audit report.

We have had a number of discussions with Finance Department during the course of this audit.
Finance Department have made a significant contribution to the process and many of their
suggestions have been incorporated into this report.

MAJOR FINDINGS

In general, there is a lack of clear and concise guidelines on DIRT compliance issues. Finance
Department are in the process of re-issuing DIRT compliance procedures and we will liaise with
Finance to ensure DIRT problems included in this report are covered in new procedures.

SSA notice requirements are not being properly imposed - 91% of withdrawals reviewed breached the
notice requirements. The profile of this issue needs to be raised again; a number of initiatives should
be undertaken including use of standard documentation. The notice requirementsfinding in this
report should be reviewed by the Pricing Committee as an input to future SSA pricing decisions.

There is some evidence that branches have made progress through ad hoc reviews but an unacceptably
high proportion of declarations were missing or incomplete - approximately 40% of non residents,
20% of SSAs and 53% of charities. Branch responsibilities for DIRT documentation need to be clearly
defined and it is our opinion that Finance Department should co-ordinate a regular review to confirm
that properly completed documentation is held for all accounts not subject to DIRT at standard rate
(27%).

We were surprised tofind a very small number of DIRTfree company accounts in most branches.
This is not a control issue, but branches could improve their customer service by advising more

A significant number of DIRT compliance issues were reported in recent audits of NIIB Deposits
(June 1994) and International (September 1994). During this theme audit we did not perform further
audit work in these areas but we have accepted assurancesfrom management in both areas that
significant progress has been made. We reviewed DIRT compliance in Treasury and found the
standard of DIRT documentation to be good.

CONCLUSION

Results of this audit are vp^ dis^xa^Bu^and management must take immediate steps to improve
the situation. The structure of the whole area can be improved but the level of non-compliance is too
high. It appears that there needs to be an organisation-wide change in attitude to the whole area. This
is a risk area and the penalties for non-compliance at the level shown in this report would be very
significant.

RATING

December 1994 - Unsatisfactory


2. Purpose And Scope

• Audit Objectives

1. Perform theme audit in a range of branches to gauge compliance with DIRT requirements
throughout the network.

2. Review adequacy of procedures for compliance with DIRT requirements.

3. Obtain assurance that properly completed documentation is held for non resident, SSA,
DIRTfree company, pension fund and charity accounts.

4. Obtain assurance that SSA qualifying criteria and notice requirements are being
enforced.

• Selection of branches

Samples were selected with a view to covering the branches with the highest value of SSA and
non resident accounts (excluding branches audited in 1994).

Overall analysis showed that SSAs amounted to £136m and non resident accounts amounted to
£88m in September/October 1994. It was decided to select top 8 SSA branches and top 6 non
resident branches - two branches were selected in both categories so a total of 12 branches were
visited (see list below). Testing covering both SSA and non resident accounts was conducted in
all 12 of the branches visited.

Branches visited represent the following % coverage of these deposits in the network.

Branch SSA Non Residents

£m % £m %

College Green 10 7% 3 3%
Baggot Street 6 4% 0.5 1%
Bray - 5 4% 1 1%
0 Connell Street 5 4% 2 2%
Oundatk ••••• - - • - • 5 - 4% • • 6 • - • 7%
Malahide 5 4% 2 2%
Dun Laoghaire 4 3% 0.5 1%
Letterkenny / Ramelton 3 2% 3 3%
Monaghan / Clones 3 2% 4 5%
Castlebar 3 2% 3 3%
Sligo 3 2% 3 3%
Dungloe 2 1% 7 8%

Total coverage in 12 branches 54 40% 35 40%

Retail - all branches 136 100% 88 100%


• Scope of Audit Testing

Branch sample sizes ^elected were 30 non resident accounts, 30 SSAs and 10 accounts covering
DIRT free companies, pension funds and charities. The sample for SSA notice requirements
consisted of those SSAs selected which had a withdrawal since date of last statement or May 1994
(i.e. date when Livelink on-screen history enquiry facility became generally available).

Testing concentrated for the most part on the following areas:

Non Residents

Ensure that properly completed non resident declaration forms were held for the 30 non resident
accounts. Briefly check that address on declaration form is not at variance with other branch
records.

SSAs

Ensure that properly completed SSA declaration forms were held for the 30 SSAs. Briefly review
listing of branch SSAs for apparent inconsistencies (e.g. sole and joint accounts held by same
person, joint account held by persons not married to each other).

SSA Notice Requirements

Discuss understanding of SSA notice requirements with two members of branch staff.
Review withdrawal notices for selected SSA withdrawals (e.g. notice period, amount of
withdrawal and signature of account holder(s)).

DIRT Free Company / Pension Fund / Charity Accounts

Ensure that properly completed charity declaration forms were held for selected charity accounts
Ensure that a copy of Revenue Commissioners certificate was held for each charity account.

Ensure that an appropriate and properly completed declaration is held for each of the DIRT free
company and pension fund accounts selected. Ensure that company Tax Reference Number was
input to Livelink.
3. General Findings - Retail Network

Major Findings

• Main issues which affect all aspects of DIRT compliance (i.e. non resident, SS A, DIRT free
company, pension fund and charity accounts):

1. Lack of clear and concise guidelines. Procedures do not clearly differentiate between the
different types of DIRT. For example, SSA procedures / conditions are contained in several
circulars and some branches confuse DIRT free company accounts with SSAs.
2. Lack of understanding regarding documentation required for each account category e.g. we
identified instances where charity form was used for a non resident account.
3. There has been no co-ordinated review of all DIRT documentation on a regular basis. In late
1993, Administration Department conducted a review of non resident and DIRT exempt
accounts whereby all branches were required to sign off on DIRT documentation held. This
type of sign off does not guarantee that all DIRT documentation is in order as branch audits
have continued to reveal problems in this area. There has been no formal review of SSA
documentation (some branches have carried out their own reviews).
4. Livelink does not specifically highlight new DIRT Free or 10% DIRT accounts opened for
review.

• In the period 8/93 to 9/94 branch audit reports frequently included a point on interest refunds /
adjustments where DIRT was credited in error due to incorrect usage of I.D. code 36. Branch
audits showed that DIRT collected in error amounted to approximately £48k - incorrect use of
this code reduces Net Interest Income by £48k.

Recommendations

3.1 Finance Department are in the process of re-issuing DIRT compliance procedures. We welcome
this initiative and suggest that Finance Department should withdraw existing DIRT circulars and
issue consolidated procedures (preferably in a format which can be incorporated into branch
procedures manuals at a later stage). Instructions need to clearly distinguish between the various
categories of DIRT compliance; we suggest that the new procedures should have separate sections
for non resident, SSA, DIRT free company, pension fund and charity accounts. The instructions
should emphasise importance of obtaining properly completed DIRT documentation.

3 .2 Finance Department should co-ordinate a regular review to ensure that properly completed DIRT
documentation is held for all accounts. Guidelines should be issued to assist with the review i.e.
type of form required, completion of all sections and dating of the form. In 1995 Branch Planning
Diary, a requirement to review SSA and non resident documentation has been included; this
review should be extended to cover all DIRT categories.

3.3 We support Finance Department's initiative to liaise with IT Ireland regarding the feasibility of
reporting opening of DIRTfree and 10% DIRT accounts on Livelink for next day review. Could
Livelink be used to prompt branch staff to check completeness of documentation?

3.4 Instructions regarding interest refunds / adjustments should be reissued e.g. use of I.D. code 36
automatically collects DIRT which means that this code needs to be used with care.

3.5 Finance Department and Retail should issue instructions regarding uniform filing of all DIRT
declarations in branches; live and obsolete declarations should befiled separately in alphabetical
order to facilitate review. Separate binders should be maintained for SSA, non resident, DIRT
free company, pension fund and charity declarations.
4. Special Savings Accounts

Major Findings

• Withdrawal Notices

91% of SSA withdrawals reviewed breached the notice requirements.

Our review of 136 SSA withdrawal notices showed:

1. Notices were not sighted for 79% of withdrawals.


2. 55% of notices found were invalid e.g. no notice date, notice < 30 days.
3. None of the accounts in breach of the notice requirements had been subject to 27% DIRT
from the date the requirements were breached.
Many branches arefinding it difficult to impose SSA notice requirements due to:
(a) Fear of losing deposits.
(b) No standard procedures / documentation for implementing notice requirements.
(c) Lack of understanding of notice requirements. For example:
- Some branches understood that when afixed term deposit account matures, the account
holder could withdraw deposit without notice (area needs to be clarified).
- Branches were not aware that notice is required for withdrawal of interest once interest has
been capitalised.
- Verbal notification of withdrawal was being accepted by one branch.

We were concerned tofind that notice requirements are not being imposed in many cases as it is
our understanding that the Pricing Committee has agreed to pay higher rates on SSAs on the
basis that notice requirements have the backing of legislation. Properly implemented SSA notice
requirements make it difficult for customers to move funds once they have been deposited with
the Bank.

Details of audit results by branch are set out in Appendix 1.

• SSA Declarations

Approximately 20% of declarations selected contained some errors / omissions.

Our review of 372 SSA declarations showed:

1. SSA declaration forms were not sighted for 7% of accounts.


2. 9% of the declarations were not dated.
3. 5% of the declarations were not properly completed (e.g. no address, no account name).

In addition to the above, 19% of the declarations had an incorrect account number due to:

1. Initial migration to SSA accounts (i.e. Savextra product in early 1993).


2. Switching between variable andfixed term deposits - this will continue to be a problem due
to limitations with Livelink.
3. Branch errors in the administration of fixed term deposits.
In our opinion; incorrect account number on a declaration means that the declaration is not valid.

Details of audit results by branch are set out in Appendix 2.


• SSA Account Holders

A high level review of SSAs in the selected branches showed that 29 SSAs Jid not comply with
SSA qualifying conditions (e.g. sole and joint accounts held by same person, joint account held by
persons not married to each other). It should be noted that this was a high leve! review which
would only highlight very obvious inconsistencies.

Details of high level review by branch are set out in Appendix 3.

Recommendations

4.1 Procedures

The SSA procedures (refer 3.1) should include:

1. SSA qualifying conditions and proper completion of SSA declarations.


2. Procedures to be followed in the event of a breach of SSA conditions.
3. Notice requirements:
(a) Procedures to be followed in the event of a breach of notice requirements.
(b) Notice requirements in respect of recently capitalised interest.
(c) Notice requirements for fixed term deposits.
(d) Notice must be given in writing.
4. Procedures regarding changingfrom fixed to variable term deposits (i.e. how to treat
changing account numbers). Procedures should also cover situation where account number
changes due to branch error etc..

4.2 Notice Requirements

A new approach should be devised to assist branches in the implementation of SSA notice
requirements. This should include:

1. Standard SSA notice document. This document should include:


- Date of notice
- Date of withdrawal of money
- Withdrawal amount (or instruction to close the account)
- Signature(s) of account holder(s)
- Brief summary of notice requirements (e.g. 90 / 30 day notice, notice must be in writing) to
ensure notice implications are clearly understood by customers and branch staff.

It may be possible to incorporatefixed term deposit reinvestment and SSA notice instructions
in the same document.

2. Issue of timely reminders to account holders via statements / passbooks about notice
requirements and DIRT penalties in the event of a breach of notice requirements.

3. Standard approach to diarising,filing and retaining notices.

4. Finance Department should consider seeking clarification from tax advisors and/or the
Revenue Commissioners as to whether specific notice of withdrawal is required following
rollover of afixed term deposit (i.e. where term is one month or greater).
4.3 SSA Conditions / Declarations

1. Branches should be asked to review their SSAs (refer 3.2) to ensure:


(a) Each SSA meets the qualifying conditi ,ns. Where accounts do not meet the qualifying
conditions, 27% DIRT should be applied.
(b) A properly completed declaration form is held for each SSA.

2. As an interim measure, where an account number changes on switching to a different


deposit type, the opening entry on the new account statement should show previous account
number to assist in tracing back to original account. The fixed / variable term deposits
procedures should be amended to incorporate this new procedure.

3. In addition, Finance Department should:


(a) Seek clarification from tax advisors and/or the Revenue Commissioners as to whether an
SSA declaration with a previous account number constitutes a valid declaration.
(b) Liaise with IT Ireland to investigate feasibility of changing Livelink to eliminate need to
change account number when switching between deposit types.

4.4 Pricing Committee

Results of the notice requirements aspect of this audit report should be reviewed by the Pricing
Committee as an input to future SSA pricing decisions.
5. Non Resident Accounts

Major Findings

• Non Resident Declarations

Approximately 40% of declarations selected contained some errors / omissions.

Our examination of non resident accounts showed.

1. Non resident declaration forms were not sighted for 12% of accounts.
2. 21% of the declarations had an incorrect account number.
3. 13% of the declarations were not dated.

Details by branch visited are set out in Appendix 4.

• Details at variance with other branch records


Instances have been reported in branch audits where non resident details were at variance with
other branch records. Some branches appear to be of the opinion that once a non resident
declaration form is held there is no obligation on the branch to confirm the residency of the
account holder.
• Statement Despatch Code 'B'

A significant number of non resident accounts had a statement despatchflag of'B' i.e. statement
is sent to branch. (This area was not reviewed in detail as it will be subject to a separate theme
audit later).

• Classification on Livelink

A significant number of non resident accounts were incorrectly classified in 'E' tax deduction
status (see part 6 of this report).

• Deposit Receipts

Non resident deposit receipts balances amounting to £ 18k were examined in three of the selected
branches. Non resident declarations were not sighted in respect of the majority of these accounts.
Most of these accounts have been in existence more than 20 years and have never had a
transaction apartfrom the initial deposit.

Recommendations

5.1 Procedures

The non resident procedures (refer 3.1) should include:

1. Documentation requirements when opening an account.


2. Clarification of branch responsibility for verification of account holder(s) residency e.g.
passport, licence etc..
3. Completion of a separate non resident declaration form for every account flagged non
resident for DIRT purposes. Procedures should specifically state that no account should be
flagged 'N' (for non resident) unless a form for that account is held.

5.2 Non Resident Declarations

Branches should review all accounts flagged 'N (refer 3.2) to ensure that a properly completed
non resident declaration form is held for each account.
5.3 Offshore Accounts

We understand that a number of other NAB Group banks are sending major non resident
accounts offshore in order to reduce documentation risks. We should consider doing likewise for
major non resident accounts. This area needs to be researched before making afinal decision - for
example, there may be a requirement to report the opening of such accounts under Section 230 of
the 1992 Finance Act.

5.4 Statement Despatch Code 'B'

The use of statement despatch code 13' for non resident accounts should be discouraged as it could
be taken as prima facie evidence of resident status. Review existing instructions to branches.

5.5 Deposit Receipts

Legal Department should be asked to advise on situation regarding transfer of dormant deposit
receipt balances to Unclaimed Balances Account.
6. DIRT Free Company / Pension Fund / Charity Accounts

Major Findings

• Charity Accounts

Many branches do not hold charity declaration forms in respect of DIRT free charity accounts.

Our review of 43 charity accounts showed:

1. Charity declaration forms were not sighted for 53% of accounts,


y; J^Rgyenue Commissioners charity certificates.were not sighted for 95% of charity accounts.
/ (Procedures requirelhaTaT*fivenue commissioners charity certificate be held for each charity
! account - Special Circular S9/93).

Details by branch are set out in Appendix 5.

• DIRT Free Company / Pension Fund Accounts

Our review of 38 DIRTfree company accounts showed:

1. DIRTfree company declarations were not sighted for 5% of accounts.


2. 61 % of declarations were not certified on behalf of the Bank.
3. The Tax Reference Number had not been entered into Tax Ref No. field on Livelink for 53%
of accounts.

Other weaknesses are set out in Appendix 6.

In general, there is a very low number of DIRTfree company accounts in most branches; we
intended to select samples of 10 accounts in each branch but most branches did not have this
number of accounts. This is not a control issue but branches should consider advising customers
about DIRTfree company accounts to improve service.

• 'E' Tax Deduction Status Accounts

DIRTfree company, pension fund and charity accounts are the only accounts which should be
classified as 'E' Tax Deduction Status (exempt) accounts.

We examined 141 accounts in 'E' status and over 50% of these accounts had been misclassified:

1. 36% of accounts relate to non residents which should have been classified as non resident
accounts ('N* status).
2. 5% of accounts relate to credit interest bearing resident accounts which should be subject to
27% DIRT. Due to improvements in the validation software in May 1994, this should not be
a problem in the future. (Note: Balances in these accounts were small).
3. 10% of accounts relate to non interest bearing resident accounts. Due to improvements in the
validation software in May 1994, this should not be a problem in the future.

Details by branch are set out in Appendix 7.

Livelink does not perform adequate validation on the opening of an 'E' Tax Deduction Status
account i.e. it is possible to classify a non resident account in 'E' status.
Recommendations

6.1 Procedures

1. The charity account procedures (refer 3.1) should include documentation to be retained by
branch (e.g. Revenue Commissioners charity certificate).

2. The DIRTfree company / pension fund accounts procedures (refer 3.1) should include.
(a) Procedure for certifying declaration on behalf of the Bank (e.g. signed and dated by bank
official).
(b) Documentation to be held in respect of DIRT free company / pension fund accounts.
(c) Input of Tax Reference No. on Livelink.

6.2 'E' Tax Deduction Status Accounts

1. Branches should review all accounts classified in 'E' Tax Deduction Status (refer 3.2) to
ensure:
(a) Properly completed DIRT documentation exists for each DIRTfree company, pension
fund and charity account. Documentation should include copy of Auditors certificate or
charity certificate as appropriate.
(b) Misclassifications are identified and corrected e.g. non residents should not be included.

2. a Finance Department should liaise with IT Ireland regarding feasibility of improving the 7
I validation of'E' Tax Deduction Status accounts i.e. prohibit the opening of a non resident /
I account in 'E' Tax Deduction Status by restricting use of 'E' status to charity and business V
industrial classification codes.

6.3 DIRTfree company accounts

Consider instructing branches to review classification of company accounts (particularly where


the company has interest bearing accounts) and identify customers who may benefit from DIRT
free status. Branches should then advise customers and, where appropriate, obtain the necessary
documentation. This would improve customer service.
DIRT Compliance Issues - NUB Deposits and Treasury & International

NIIB Deposits

In the recent NIIB Deposits audit (June 1994), principal DIRT compliance issues reported were:
1. A significant number of non resident declarations were not held for foreign currency accounts.
2. A substantial number of declarations were not properly completed.
During the course of this theme audit, we did not perform further audit work in Deposits but we have
accepted ongoing assurancesfrom Deposits management that significant progress has been made to
ensure DIRT documentation is in order.

International

In the recent International audit (September 1994), principal DIRT compliance issues reported were:
1. A substantial number of non resident declaration forms had errors / omissions.
2. Non resident declarations were not held for several non resident accounts.

During the course of this theme audit, we did not perform any further audit work in International but
International management inform us that a detailed review of all non resident accounts has been carried
out and good progress has been made in obtaining properly completed non resident declarations. There
are still a number of outstanding declarations which are being followed up by International.

Treasury

We decided to review DIRT documentation in Treasury as no such review had been done in the recent
past.

We reviewed 47 DIRT exempt accounts (i.e. 30 non residents, 11 DIRTfree companies, 6 charities) and
found that properly completed declarations were held for all accounts. However, Revenue Commissioners
charity certificates were not sighted in respect of the charity accounts.

Overall, the standard of DIRT documentation in Treasury was good.


Special Savings Accounts - Notice Requirements Appendix 1

Branch Sample Size Total A %A B %B C %C D %D


(Note) Error Rate

Castlebar 13 100% 13 100% 0% 0% 0%


Baggot St 14 93% 13 93% 0% 0% 0%
Sligo 13 92% 12 92% 0% 0% 0%
Monaghan / Clones 12 92% 11 92% 0% 0% 0%
College Green 14 93% 12 86% 1 7% 0% 0%
Malahide 11 100% 9 82% 0% 2 18% 0%
Dungloe 11 82% 9 82% 0% 0% 0%
Letterkenny / Ramelton 8 75% 6 75% 0% 0% 0%
Bray 11 100% 8 73% 2 1 R%„ 1 3% 0%
Dundalk 9 89% 6 67% 0% 2 22% 0%
0 Connell St 12 100% 6 50% 5 42% 0% 1 8%
Dun Laoghaire 8 50% 2 25% 1 13% 0% 1 13%

Total 136 91% 107 79% 8 6% 5 4% 1 1%

A - No notice held.
B - Notice held - not dated.
C - Notice held - < 30 days.
D - Notice held - no amount specified on notice.

Note: Sample represents SSAs selected for tests in Appendix 2 which had a
withdrawal since date of last statement or May 1994 (i.e. date when on-screen
history enquiry became generally available).
Special Savings Accounts - Declarations Appendix 2.

Branch Sample Size A %A B %B C %C D %D E %E F %F G %G


Note

- Bray 30 5 17% 0% 1 3% 0% 4 13% 1 3% 8 27%


Baggot St 32 5 16% 0% 4 13% 0% 0% 0% 14 44%
Castlebar 30 4 13% 0% 1 3% 0% 0% 1 3% 1 3%
Letterkenny / Ramelton 30 3 10% 1 3% 1 3% 0% 0% 2 7% 4 13%
Sligo 30 2 7% 0% 4 13% 0% 0% 0% 9 30%
Malahide 31 2 6% 1 3% 4 13% 1 3% 0% 1 3% 9 29%
College Green 34 2 6% 1 3% 2 6% 0% 0% 0% 2 6%
Dungloe 30 1 3% 0% 4 13% 0% 0% 2 7% 1 3%
0 Connell St 33 1 3% 0% 5 15% 1 3% 1 3% 3 9% 12 36%
Dundalk 31 0% 0% 4 13% 0% 0% 2 6% 4 13%
Monaghan / Clones 31 0% 2 6% 2 6% 0% 0% 3 10% 3 10%
Dun Laoghaire 30 0% 0% 0% 0% 2 7% 2 7% 3 10%

Total 372 25 7% 5 1% 32 9% 2 1% 5 1% 15 4% 70 19%

A - Missing declaration.
B - Incorrect declaration.
C - Declaration not dated.
D - Declaration not signed by all parties.
E - No account number on declaration.
F - Incomplete declaration (e.g. no address, no account name).
G - More than one account number / incorrect account number on declaration (Livelink problem).

Note: In order to select a minimum of 30 accounts per branch, we had to increase our sample size in
our Audit Interrogation software and this resulted in selection of bigger samples for some branches.
Special -dvings Accounts - Qualifying conditiono not met Appendix 3.

Branch Total A B C D E

Castlebar 6 3 1 1 1
College Green 5 3 1 1
Dundalk 4 2 1 1
Monaghan / Clones 3 2 1
Sligo 3 1 1 1
Baggot St 2 1 1
0 Connell St 2 1 1
Dun Laoghaire 2 1 1
Malahide 2 2
Letterkenny / Ramelton 0
Dungloe 0
Bray 0

Total 29 15 6 3 4 1

A - Account in name of two or more males / females.


B - Customer had a sole SSA and was a party to a joint SSA.
C - Joint account in name of family members which are not married to each other.
D - Customer has more than one sole SSA accounts.
E - Account in name of a Charity.

Note: This review was a very high level review of SSA account names
in branches visited. It has only highlighted very obvious inconsistencies.
Non Resident Accounts - Declarations Appendix 4.

Branch Sample Size A %A B %B C %C D %D E %E


(Note)

Malahide 36 9 25% 1 3% 3 8% 15 42% 1 3%


Dungloe 35 8 23% 0% 10 29% 7 20% 0%
0 Connell St 32 6 19% 0% 6 19% 8 25% 1 3%
Letterkenny / Ramelton 37 5 14% 0% 3 8% 7 19% 0%
Dun Laoghaire 35 5 14% 1 3% 2 6% 7 20% 0%
Dundalk 41 4 10% 0% 5 12% 1 2% 0%
Baggot St 32 4 13% 0% 3 9% 10 31% 3 9%
Sligo 36 3 8% 0% 6 17% 4 11% 0%
College Green 33 3 9% 1 3% 2 6% 9 27% 0%
Castlebar 36 2 6% 0% 1 3% 3 8% 0%
Bray 31 1 3% 3 10% 3 10% 11 35% 0%
Monaghan / Clones 31 0% 0% 9 29% 6 19% 0%

Total 415 50 12% 6 1% 53 13% 88 21% 5 1%

A - Missing declaration.
B - Incorrect declaration {i.e.standard non resident form not used).
C - Declaration not dated.
D - No account number I more than one account number / incorrect account number on declaration.
E - Incomplete declaration.

Note: Basis of sample selection was 30 per branch, however, a significant number of non resident
accounts were misclassified in 'E' status and these accounts have been included in the above sample size.
Charities - Declarations Appendix 5.

Branch Sample A %A
Size
(Note)

Dundalk 0 0 0%
Monaghan / Clones 9 1 11%
Letterkenny / Ramelton 3 2 67%
Dungloe 6 4 67%
Sligo 2 0 0%
Castlebar 2 1 50%
Baggot St 4 4 100%
0 Connell St 2 0 0%
Bray 7 5 71%
Dun Laoghaire 1 1 100%
Malahide 6 5 83%
College Green 1 0 0%

Total 43 23 53%

A - Missing declaration.

Note: Basis of sample was 10 accounts per branch covering


DIRT free company, pension fund and charity accounts.
DIRT Free Company Accounts - Declarations Appendix 6.

Branch Sample Size A %A B %B C %C D %D E %E F %F G %G


(Note)

Dundalk 1 0% 0% 0% 0% 0% 0% 1 100%
Monaghan / Clones 0 0% 0% 0% 0% 0% 0% 0%
Letterkenny / Ramelton 0 0% 0% 0% 0% 0% 0% 0%
Dungloe 0 0% 0% 0% 0% 0% 0% 0%
Sligo 1 0% 0% 0% 0% 0% 0% 1 100%
Castlebar 1 0% 0% 0% 0% 0% 0% 0%
Baggot St 1 1 100% 0% 0% 0% 0% 0% 0%
0 Connell St 6 0% 3 50% 0% 0% 0% 0% 3 50%
Bray 1 1 100% 0% 0% 0% 0% 0% 0%
Dun Laoghaire 3 0% 0% 1 33% 0% 0% 0% 3 100%
Malahide 3 0% 2 67% 0% 1 33% 0% 0% 3 100%
College Green 21 0% 18 86% 0% 0% 1 5% 1 5% 9 43%

Total 38 2 5% 23 61% 1 3% 1 3% 0 0% 0 0% 20 53%

A - Missing declaration.
B - Declaration not certified on behalf of the Bank.
C - Incomplete auditor's cert.
D - No account number specified on declaration.
E - Incomplete declaration.
F - Tax Ref No. on cert is different to one on declaration.
G - Tax Ref No. not input to Tax Ref No. field on Livelink.

Note: Basis of sample was 10 accounts per branch covering DIRT free company, pension fund
and charity accounts. However, it was not possible to select this number of DIRT free company, pension fund
and charity accounts as most branches have a very small number of these accounts .
ht,siew of Tax Deduction Status '£' Accounts Appendix 7.

Branch Sample Size Total Accounts A %A B %B C %C D %D


(Note) Misclassified

Dundalk 15 14 93% 7 47% 7 47% 0% 0%


Monaghan / Clones 10 1 10% 0% 1 10% 0% 0%
Letterkenny / Ramelton 10 7 70% 4 40% 3 30% 0% 0%
Dungloe 10 4 40% 3 30% 0% 0% 1 10%
Sligo 8 5 63% 2 25% 1 13% 2 25% 0%
Castlebar 10 7 70% 6 60% 0% 1 10% 0%
Baggot St 10 5 50% 1 10% 1 10% 3 30% 0%
0 Connell St 16 5 31% 2 13% 2 13% 1 6% 0%
Bray 18 10 56% 6 33% 0% 2 11% 2 11%
Dun Laoghaire 9 2 22% 0% 0% 2 22% 0%
Malahide 12 3 25% 1 8% 0% 2 17% 0%
College Green 13 9 69% 4 31% 0% 1 8% 4 31%

Total 141 72 52% 36 26% 15 11% 14 10% 7 5%

A - Non resident interest bearing accounts classified as 'E'.


B - Non resident non interest bearing accounts classified as 'E\
C - Resident non interest bearing accounts classified as 'E*.
D - Resident interest bearing accounts classified as 'E'.

Note: Basis of sample was 10 accounts covering DIRT free company, pension fund and charity accounts.
Larger sample sizes selected because we found a large number of non resident accounts misclassified in 'E' status.
Appendix 10: Copy Product Features Sheet
CMI PERSONAL PORTFOLIO

Advantages

1. Confideniality/Security

Deposit is transferred out of existing account and re-invested in the names of a


holding company. Therefore clients names does not appear on any account.

2. No Probate requirements

Investment is written in trust i.e. client can decide on day one who the beneficiaries
will be in the event of his death. All the beneficiaries need to supply is a death
certificate and the investment will be released.

3. Cautious Investment

The client can have the funds invested in the exact same deposit account as he is in
presently and at the same rate or he can choose any other sterling deposit account
anywhere in the world.

4. Tax Free

All returns are paid gross.

5. Accessibility

Client can draw an income if he wishes.

6. Quarterly Valuations provided

7. The portfolio can also invest in shares, unit funds, bonds and deposit accounts.

Disadvantages

1. The Charges

Up front charge 1 % of capital invested. Annual management charge 1.6% per annum
of original capital invested. This charge applies for the first 5 years, thereafter there
is no charge.

2. Small delay in getting an income from the investment. Usually allow 5-10 working
days.
Appendix 11: Copy report dated 20 April 1993, prepared by Ms
Patricia Roche, FASD financial services manager
20th April, 1993.

Mr. & Mrs. [name deleted]


C/O National Irish Bank,
Mullingar,
Co. Westmeath.

Dear Mr. & Mrs. [name deleted]


Thank you for meeting with me recently. We discussed a number
of points relating to the investment of non-resident monies and
perhaps it would be helpful if I set these out below.

BANK DEPOSIT ACCOUNT


(A) . Any interest over a certain minimum threshold earned on
U.K. based deposit accounts is returned to the Inland
Revenue. With double taxation treaties and closer co-
operation between the U.K. and Irish authorities, this must
pose a confidentiality problem.
(B). With the introduction of the Special Savings Accounts and
the removal of Exchange controls, it is widely believed
that Irish based non-resident accounts will come under
scrutiny. In addition the treatment of the 27% DIRT
Accounts may also change possibly reverting back to the old
system where the institution returned the interest earned
on each account individually.
(C). In the event of the death of any of the named person to an
account a "Grant of Probate" would be required. This
automatically notifies the Capital Taxes Office of the
existence of certain assets. Despite what you may be led
to believe this formality is normally adhered to as, in the
event of the bank releasing monies without the grant of
Probate, they may find themselves open to litigation both
from the Revenue and from other persons who may be entitled
to the monies. And, indeed, who may have been able to
present a Grant of Probate for same.
As confidentiality and continuity of your capital is of paramount
importance to you, I would suggest that you consider changing
your existing approach to your deposit account. Instead of
holding the deposit account directly in your own names you should
transfer the monies into a Trust, which you own and of which you
would be beneficiaries. The monies remains on deposit but its
treatment from a tax viewpoint changes. This would be set up
through Clerical Medical Trust Co. Limited, which is based in the
Isle of Man.

CMI PERSONAL PORTFOLIO

The Tax Advantages of an Offshore Investment Trust Fund


The Isle of Man is a highly respected financial centre, with an
enviable reputation for political stability. Its democratically
elected parliament, Tynwald has been in existence for over 1,000
years.
Although the Isle of Man is within the British Isles and has easy
access to the City of London, one of the major world financial
centres, it is governed by Manx law and is not subject to United
Kingdom or Irish Tax regulations. CMI Insurance Company Limited
will not be liable to either Irish or U.K. Income Tax, Capital
Gains Tax or Corporate Tax in respect of the deposits and
investment funds linked to its Personal Portfolios. The Company
is also not liable to any Isle of Man taxes on these funds.
This means that all the deposit interest or investment profits
earned by the holdings in your Portfolio investment fund are able
to accumulate completely tax-free, which greatly increases your
Portfolio's growth potential.
An important feature of the portfolio is the trust facility/
which ensures that a "Grant of Probate" is not required in the
event of death. In addition to this facility there is no tax
imposition on gains made.
What you are achieving by investing your money in this way, i.e.,
in Trust is the following:-

(A). Absolute confidentiality;


(B) . Continuity of ownership without the need to present a grant
of probate either in Ireland or the Isle of Man;
(C). Continued non-resident status in respect of your deposit,
i.e., as a non-resident account DIRT tax of 27% is not
deducted.
Should you require income or capital at any stage, this can be
accommodated in - the normal way as with any normal deposit
account. Any requirements you might have would be channelled
through me and monies would be available within a few days.
Despite this administrative requirement the deposit itself would
continue to remain at your local branch, thereby ensuring your
current banking relationship continues.
We discussed the fund management charges attached to setting up
the Trust. There is a 1% once off setting up charge plus a
quarterly charge of 0.4% per quarter based on the original amount
invested, this regular fee is charged in each of the first five
years. There is no charge after the fifth year, apart from an
annual management fee of £75 per quarter.
Charges are deducted from the interest, therefore, your capital
is not eroded. It is important for me to point out at this stage
that the 1% up front charge may be waived depending on the amount
invested.
I hope the foregoing is clear to you, however, please contact
either me or Michael if anything requires further clarification.

Yours sincerely,

PATRICIA ROCHE,
Manager.
Appendix 12: Copy Investment Checklists
Motional Irish Bank
A member of Financial Advice
National Australia Bank Group & Services Division
7/8 Wilton Terrace
Dublin 2
Tel (01) 785066
Fax (01) 785269

To: FinanciaP^onsultants

From: Patrick Cooney

Subject: Authorisation for Investment Recommendations.

Date: 28th February 1990

Please complete the attached "Investment Checklist"


with the appropriate details for all single premium
investment reccomendations and pass to me before
drafting a report.
In this way I can;-
a. Assist you in reaching a decision and
b. monitor our investments in the various funds.

The Investment Checklist, which should be put on file


at report stage, will enable Linda to process all
application forms received without having to check with
me first.

As always, if you have questions regarding any


investment matter, don't hesitate to ask.

Regards I

Pat.
cc Linda Hughes
Joanne Perry
Nigel D'Arcy.

National Irish Bank Limited


Registered in Ireland No. 65780
Registered Office 7/8 Wilton Terrace, Dublin 2
To: Patrick Cooney From:
Investment Analyst Financial Consultant.

Client Name(s)
1. Investment Amount
2. Is the money declared? Yes/No
3. What is the Investor(s) attitude to risk ?
Cautious?
Balanced?
Aggressive?

4. Does Investor wish to invest Offshore? Yes/No


%
What percentage of investment?

5. Is an income required on the investment ? Yes/No


How much per annum ? £

What Company(s) and Fund(s) have you recommended ?


Co. 1 Fund % Split

Co. 2 Fund % Split

Co. 3 Fund % Split

Co. 4 Fund % Split

Co. 5 Fund % Split

Co. 6 Fund % Split


Has a "Switching Authority Form" been signed. Yes/No

Signed : Date:.
Approved: Date:
To: Patrick Cooney From:
Investment Analyst Financial Consultant.

Client Name(s) [names deleted]


1. Investment Amount £ crour
2. Is the money declared? Y^7no
* e
3. What is the Investor(s) attitude to risk ?
Cautious?
Balanced?
Aggressive?
4. Does Investor wish to invest Offshore? ' Yes/No
What percentage of investment? f*9* %

5. Is an income required on the investment ? Y^?No


How much per annum ?

6. What Company(s) and Fund(s) have you recommended ?


Co. 1 Fund % Split
Co.2 XjUir Fund { Q f f r L j T % Split jfl^/Cr***
Co.3 ' Fund % Split
Co.4 Fund % Split
Co.5 Fund % Split
Co. 6 Fund . % Split
7. Has a "Switching Authority Form" been signed. Yes/No

Signed : /rVAO^A^— Date:.


Approved: Date:.
XHVSSTMSBX CHgCTLTgg

To: Patrick Cooney Fross fgygeLSV '


Investment Analyst Financial Consultant.

Client Name(s) [names deleted]


t. Investment Amount c /toooo
2. Is the money declared?
3. What is the Investor(s) attitude to risk ?
Cautious?
Balanced?
Aggressive?

4. Does Investor wish to invest Offshore? Teg/Bo

What percentage of investment? 5 %

5. Is an income required on the investment ? Tes/^E>


How much per annum ? £_

6. What Company(s) and Fund(s) have you recommended ?


Co. 1 fVOg^'n Fund % Split
Co.2 puS^ttiCyf Fund g-A-TT O/y % Split «*/<=>
Co.3 Afc1^ Jwg-U Fund PfloP' % Split S
Co.4 £77»-> Fund % split n- sy-*
Co.5 N'fA Fund % split r /^.
Co.6 Fund % split : :
7. Has a "Switching Authority Form" been signed. les

Signed : Dates 5/?/7 D '»


ApprovedJ: NoXr'cV V—oOtNt Date? ^/f-fT 6

ly/sfiv 2. 6>T/LA XNl/gSTKOoT


OfiPOfi- M.Gr~i> r
Wk
To: Patrick Cooney From: Ul.
Investment Analyst Financial Consultant.

Client Name(s) [name deleted]


1 Investment Amount
2, Is the money declared? Yes/No
QOP *fP
3, What is the Investor(s) attitude to risk ? [if, to* fx.

Cautious?
Balanced?
Aggressive?

4. Does Investor wish to invest Offshore? Yes /jfal


What percentage of investment? (bl %

Is an income required on the investment ? d^-s^No


How much per annum ? £ '

6. What Company(s) and Fund(s) have you recommended ?


Co. 1 C M . } - Fund ft ^KUfVt % Split ZO.QSOkCfc
Co. 2 Fund % split zrjoKrfei.
t
Co. 3 Fund flttW ' % split '
Co.4 ^ Mtfa Fund Off^ri,ry % split Jr.
Co.5 ft&Wh U^h Fund Sf- % split l°/OW
Co. 6 Fund % Split
7. Has >a "Switching Authority Form" been signed, /ttWNo

Signed : , M a M Date:
Approved: Date:

50,o©o -Hot:

- -K<>T.
To: Patrick Cooney From: W •S
Investment Analyst Financial Consultant.

Client Name (s) _ [name deleted]


1. Investment Amount
2. Is the money declared? YjWS/No

3. What is the Investor(s) attitude to risk ?


Cautious? -\
Balanced? J
Aggressive?

4. Does Investor wish to invest Offshore? ' Yes/No


What percentage of investment? / %

5. Is an income required on the investment ? 7No


How much per annum ? £_

What Company(s) and Fund(s) have you recommended ?


Co. 1 Fund 7°% Split
Co.2 ic r< Fund Split
Co. 3 Fund % Split
Co. 4 Fund % Split
Co. 5 Fund % Split
Co. 6 Fund % Split
e s N o
7. Has a "Switching Authority Form" been signed* /

Signed : N^jM^AnjJJ--' Date:


Approved: Date:

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v

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To: Patrick Cooney From: Ul. M f c e f c o .

Investment Analyst Financial Consultant.

Client Name(s) ' [name deleted]


1 Investment Amount Wo JfaW-j
2. Is the money declared? fi/No t -Hot.

3, What is the Investor(s) attitude to risk ?


Cautious? mm
Balanced?
Aggressive?

Dees Investor wish to invest Offshore? Yes/Kb A/& ffifltti)


What percentage of investment? IM %

5. Is an income required on the investment ? Xes/Ne


How much per annum ? £ M?

6. What Company(s) and Fund(s) have you recommended ?


c/o
Co Fund CfaM % Split loo
Co. 2 Fund % Split
Co. 3 Fund % Split
Co. 4 Fund % Split
Co. 5 Fund % Split
Co. 6 Fund % Split
7. Has<a "Switching Authority Form" been signed

Signed : , tL/'vlm Date


Approved: Date:
(
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dAey ti U'cftfH i Id A M7v/r /a] M.Jd^A^o. t/f ^

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pftlatMKtx /a i Z ^ f t ' . /Uttfifobb N f a s *

rntx&p.Mt. fixkApi ^n aoktd S sJMtt^ as

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Taken by fffUfrmo On /fr / 7^7

Caller's Name AV, [name deleted]

Address
[town]
t!g\ [deleted]

Telephone No. Occupation [deleted]

Prospect Code : 3- Prospect Rating ? ***

Nature of Enquiry M»ne deleted] h f fa ^ jh


[town] ^ ^ * pfpft) &iM<<£ " ftirich t&rt ki_
feicJf to Ihffi. # }yf)H fri b U JLtfel M

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FL.
2 t JUN 1990
NATIONAL IRISH BANK
-narxsl Max a Ser\KOi Z/vsion
Appendix 13: Copy letter dated 30 July 1990 from Patrick Cooney,
investment manager, FASD
N a t i o n a l I r i s h ^ L B a n k

A member of Financial Advice


National Australia Bank Group & Services Division
7/8 Wilton Tenace
Dublin 2.
Tel (01) 785066
Fax (01)785269

Our Ref
Date
30th JULY, 1990

HI GUYS,
Just a brief note to accompany this month's Investment Bulletin
on funds which we should be concentrating on at present.
For all long-term investments where people are cautious, and this
seems to represent a substantial percentage of people, we should
be looking only at Norwich Union Single Premium Endowment Bond.
I think we all know the advantages attached to this product
especially in such times of uncertainty. Added to this, is the
fact that as well as the security attached, it has a very cred-
itable investment performance and is very flexible.
For those people who are a little more balanced in their outlook,
we should invest in a range of managed funds (don't put all your
eggs in one basket) with the main emphasis on New Ireland, fol-
lowed by Standard Life. New Ireland is without doubt the market
leader in terms of performance and this combined with an excel-
lent back up service and superb investment personnel, makes it a
very attractive investment opportunity.
For those guys who are a little more adventurous in their out-
look, we should be investing in offshore markets, where there are
numerous investment opportunities available in worldwide markets
and with leading companies such as Fidelity, Flemings, Gartmore,
Morgan Grenfell, C.M.I., and Eagle Star to mention but a few.
Finally, we have the people who have money invested offshore
already or whose money is "Hot". In this scenario, we should in
almost all cases, direct the monies into our New Bond, "The
Emerald International Portfolio", which is a combination of the
above funds.
If anything should dramatically change in the near future, I will
be in touch with you, while I hope to update the folders of funds
in the very near future.

National Irish Bank Limited 679.^/27.5.MQH


Registered in Ireland No. 65780
Registered Office 7/8 Wilton Terrace, Dublin 2
Appendix 14: The Unauthorised Interest & Fee Amendments Report
National
Australia Group

EUROPEAN AUDIT

INVESTIGATION REPORT

NATIONAL IRISH BANK

UNAUTHORISED INTEREST & FEE AMENDMENTS

DATE : MARCH 1999

Report issued to: Don Price, Chief Executive Officer, National Irish Bank
Philip Halpin, Chief Operating Officer, National Irish Bank
Report copied to: Grahame Savage, Managing Director, Europe
Greg Willcock, General Manager, Risk Management, Europe
Frank Cicutto, Executive Director & Chief Operating Officer, National
Australia Bank

Report prepared by: Colin Dundas, Regional Manager, Banking Audit

Report reviewed by: Adrian Stirrup, Head of European Audit

Report issued by: Robert Thurley, General Manager, Group Audit


TABLE OF CONTENTS

Page
A EXECUTIVE SUMMARY

1 Introduction
1.1 Background 4
1.2 Definitions 4
2 Objective 4
3 Scope 5
4 Assumptions and constraints 7
5 Approach
5.1 Strategy 7
5.2 Interim appraisal 8
5.3 Areas examined 8
5.4 Interest 9
5.5 Fees 9
5.6 Internal Audit oversight process 10
6 Overall conclusions 10
7 Recommendations 14

B INTEREST
1 Approach
1.1 Overview 15
1.2 System 15
1.3 Historic practice 16
1.4 Current practice 17
2 Assumptions and constraints 17
3 Conclusion 19
4 Detailed findings
4.1 System 20
4.2 Historic practice
4.2.1 Review of audit reports 20
4.2.2 Interview process 21
4.2.3 Arthur Andersen findings-five named branches 21
4.2.4 Summary of additional work - remainder of network 22
4.3 Current practice
4.3.1 Interview process 24
4.3.2 Analysis of recent postings (last two years) 24

C FEES
1 Approach
1.1 Overview 26
1.2 System 27
1.3 Historic practice 27
1.4 Current practice 28
2 Assumptions and constraints 28
3 Conclusion 29
TABLE OF CONTENTS (CONT)

C FEES (cont)
4 Detailed findings
4.1 System 31
4.2 Historic practice
4.2.1 Review of audit reports 31
4.2.2 Interview process 32
4.2.3 Arthur Andersen findings - College Green 32
4.2.4 Summary of additional work - remainder of network 32
4.2.5 Customer fee enquiries 33
4.3 Current practice 33

D AUDIT OVERSIGHT PROCESS


1 Approach 34
2 Assumptions and constraints 34
3 Overall conclusion 35
4 Detailed findings
4.1 Independence 36
4.2 Process and coverage 36
4.3 Reporting
4.3.1 Branch audit reports 37
4.3.2 Department audit reports 38
4.3.3 Theme audit reports 39
4.3.4 Quarterly reports 39
4.3.5 National Irish Bank Board Audit Committee minutes 40
4.4 Follow-up 40
4.5 External audit 41

APPENDICES
A. EXECUTIVE SUMMARY

1 INTRODUCTION

1.1 Background

On 23 March 1998 National Irish Bank received a letter from RTE alleging that interest
charges had been increased without legitimate reason and without customer knowledge in
Carndonagh, Carrick-on-Shannon, Walkinstown and Cork branches.

The subsequent broadcast on 25 March 1998 also alleged that customer fees had been
uplifted in College Green branch in November 1989 without customer knowledge or
underlying justification.

Both programmes referred to the practices as being systematic within the Bank and
motivated by a desire for enhanced profitability and career progression. The term
'loading' was used in the broadcast with an implication that this term was both widely
used by Bank personnel and described the unacceptable nature of the practice.

1.2 Definitions

No documented definition of the term 'loading' can be found in the bank's records. From
discussions with personnel at the time it would appear that the term was in general use,
and indeed appears in audit reports from the time, but could be applied to any increase in
charges made to a customer and cover legitimate activities such as pricing for additional
risk.

Therefore, in order to avoid any ambiguity, for the purposes of this report the term
'unjustified loading' has been used to denote any activity of adding unjustified amounts
to a customer's fee or interest charge without their prior knowledge.

2 OBJECTIVE

The primary objective of the investigation was to gain a full understanding of the key
issues relating to the alleged abuse of fee or interest adjustments in order to determine
whether unacceptable activities had occurred and to assist in the development of a
strategy that allowed Bank management to respond appropriately to the allegations.

Additionally, the impact of any unacceptable activities which had taken place,
particularly on customers, needed to be quantified and the areas of responsibility affected
identified.
Specifically, through gaining an understanding of the allegations, the underlying practices
required to achieve the stated outcomes and determining how the occurrence of such
activities in the past could be detected from currently available information, the review
endeavoured to:

1. Assess the integrity of the Bank's systems to establish if unjustified fee or interest
loading would have been controlled through adherence to laid down procedures.

2. Determine whether the Internal Audit process was adequate and effective in providing
oversight, particularly with regard to interest and fee charging.

3. Determine the management response to any reporting of unjustified fee and interest
loading practices historically.

4. Identify the scale and detail of unjustified fee and interest loading in the named
branches (ie those featuring in the audit reports and others mentioned in the media)
and ascertain the extent, if any, of the practice in the wider Network.

5. Review current practices to establish if unjustified fee or interest loading currently


occurs.

3 SCOPE

For practical reasons it has been necessary to apply some restriction to the scope of this
review. This is driven by a desire to keep the work focused on specific issues raised as a
result of the allegations rather than review the whole of the bank's activities in operating
customer accounts, particularly in areas where no suspicions have been raised. That said,
where potentially suspicious activities came to light during the review, they have been
explored further.

The widest potential interpretation of the scope of this review would lead to a need to
review all transactions on all types of account over a period of up to forty years, assuming
one wished to cover the whole period that all current employees had been in the Bank.
However, this would be an inappropriate response to the allegations, which were very
specific and centered around the application of particular types of adjustment to
customers' current accounts held at branches of National Irish Bank.

A broader review of National Irish Bank's activities is being undertaken by Court


Appointed Inspectors and further internal reviews may be appropriate once their findings
are known.

Consequently, the scope of this review has been restricted to examining the specific
allegations made and hence was focused on adjustments made to interest and fees charged
to current accounts held at all branches of National Irish Bank.
The period examined was from the date of acquisition by National Australia Bank in
October 1987 to June 1998. This is a period of nearly 11 years which is in excess of the
seven year period usually associated with limitation of liability.
4 ASSUMPTIONS AND CONSTRAINTS

Significant amounts of supporting documentation for the earlier parts of the period under
review cannot be found. Of itself, this is not a significant issue in as much as this period
is outside the seven year one for which documentation ought generally to be retained.
However, it has impacted on the ability to find documentary substantiation for
transactions processed assuming that such existed in the first place.

Similarly, not all parties present at the time have been available for interview. Those that
have been interviewed have been as part of the fact gathering exercise rather than the
more challenging initial process of the disciplinary route. This has been in recognition of
the separate strategy and activities taking place in this area. Evidence given to other
parties who have greater powers to extract information, particularly under oath, may
differ from that previously proffered.

Consequently, whilst effort has been made to find other and corroborating evidence, there
must remain some uncertainty as to the impact this poor quality of available evidence has
on the overall conclusions.

It has been assumed that the computerised processes for calculating interest and other
'automated' charges have operated effectively throughout the period.

5 APPROACH

5.1 Strategy

The approach adopted endeavoured to ensure that there was no inherent bias towards
assuming guilt unless otherwise established but also to ensure that an objective
assessment was made which would allow guilt to be established where present. It also
needed to be suited to the anticipated nature and extent of the problems likely to be
present.

In deciding the strategy, assumptions needed to be made about the underlying error rate.
Recognition also needed to be given to the quality of available evidence, given that a
considerable amount of time has elapsed since the events which occurred in a large
proportion of the period under review, with the consequent effect on both availability and
completeness. Any conclusions drawn from an absence of supporting evidence alone
could be particularly unsound, as this may represent no more than the effects of the
passage of time.

If the problems were widespread or 'endemic' then this would imply that the systems in
place were either flawed or not operating correctly and hence could not be relied upon.
Hence, the approach would need to be one that endeavoured to substantiate individual
transactions in order to establish the 'error rate' in the population as a whole.
Consequently, the sample sizes would need to be a significant proportion of the
population being tested to give a reliable projection of the total error. The sheer volume
of transactions generated by fee and interest charges over more than ten years is
enormous and such a substantive approach would consume significantly large amounts of
effort.

If the problems were less pervasive then that would imply that the systems in place were
mostly operating effectively and could generally be relied upon. In this scenario, the
approach would need to establish what 'symptoms' would be displayed as a result of the
problems occurring and search for signs of these. This search would be directed towards
all those locations where the risk of occurrence was assessed as being high, which would
be determined through a separate assessment.

In addition to the above specific testing, the basic presumption of an absence of error in
the remaining population would need to be verified through testing, albeit at reduced
levels. Recognising the noted absence of available evidence, positive assurance rates
required would be set to meet appropriately high thresholds rather than achieve complete
verification.

5.2 Interim appraisal

Following a review of the internal audit process and reports over the period under review
and interviews with internal audit staff involved, it was judged that it was unlikely that an
endemic problem existed whereby there were widespread unjustified interest and fee
amendments being applied to customers' current accounts.

Consequently, it was decided to adopt the second strategy outlined above which entailed
pursuing a more targeted approach rather than a fully substantive one.

5.3 Areas examined

Early results of work on recreating the evolution of fee and interest charging practices
over the relevant time period indicated that it was it was necessary to adopt different
approaches to the interest and fee investigations.

This decision was primarily influenced by the differing levels of computerisation in the
interest and fee charging systems. Whilst the interest system was highly automated, there
were significant limitations at that time, brought about by the as yet incomplete
automation of feeder systems, in the ability of the fee charging systems to capture all of
the relevant transactions automatically. The fees system was therefore designed around
the need to make manual adjustments to the computer generated figures produced due to
their inherently incomplete nature.

The review was split into three main areas:


• interest
• fees
• audit oversight process
For each area the approach adopted was to review the general environment, in terms of
both the system of processes used and review of any other available documentation, in
order to highlight whether there were other potential 'weak spots' requiring further
examination.

This approach allowed us to focus quickly on the specific allegations, identify where else
there may be issues and gain a level of overall comfort, or otherwise, as to the extent of
any inappropriate practices.

Specifically, an initial scoping exercise was undertaken to identify in which branches


over which time periods the alleged type of activity may have occurred. This identified
five branches for 'unjustified interest loading'. Little circumstantial evidence could be
found to corroborate suspicions of 'unjustified fee loading' so the branch featured in the
television broadcast was selected for review.

To maintain absolute impartiality, the initial fee and interest work was carried out by
Arthur Andersen. The scope was set to address the specific allegations made both in
terms of time periods and the particular manual adjustment processes that were examined.

A more detailed review of the approach in each area is set out in the sections following,
but for convenience has been summarised below. In all cases the investigation approach
combined a review of available documentation and discussions with relevant personnel.

5.4 Interest

Following the initial Arthur Andersen findings on interest, further specific work was
carried out by the Internal Investigation Team on these branches. The overall approach
developed in these branches was extended to the wider network using a range of
information to identify further branches and generate samples.

5.5 Fees

Arthur Andersen's initial work on fees was also followed up by the Internal Investigation
Team. In the general and anticipated absence of detailed supporting documentation, this
entailed establishing retrospectively whether the account showed sufficient activity to
warrant adjustments being made. This work was particularly labour intensive.

The reassuring results from this review, combined with a lack of internal audit findings in
this area, prompted a sample based approach to the wider network supported by activity
based profile matching for individual branches, using the detailed work undertaken for
College Green as a base. Branches identified as requiring further investigation using a
range of information were subjected to the more in-depth review.
5.6 Internal Audit oversight process

The review of audit oversight activity comprised a thorough review of available


documentation, including reports produced and meeting minutes, together with interviews
of relevant personnel. This incorporated review work performed in Group Audit,
Melbourne.

6 OVERALL CONCLUSIONS

In regard to the specific objectives set for this review, the following can be concluded
from the work performed:

1. Assess the integrity of the Bank's systems to establish if unjustified fee or interest
loading would have been controlled through adherence to laid down procedures.

Full adherence to the bank's laid down procedures would have ensured that
'unjustified loading' of interest and fees could not have occurred. However, the
systems catered for manual adjustments to be made to correct genuine errors and to
apply interest resulting from the practice of 'suspending' customers' cheques to allow
them time to introduce sufficient funds into their account to allow these cheques to be
presented and paid.

This process along with the relatively common practice of producing 'redo'
statements, which appears to have been originally motivated by a desire to hide
genuine mistakes from customers in order to present a more professional image,
rendered the interest charging system vulnerable to abuse. It is apparent from the
work performed that some degree of abuse was present and that the control
mechanisms in place were not always sufficient to either detect or prevent this activity.

The fee system required a significant amount of manual adjustments to be made


which, particularly in the earlier periods when there was little automation, was heavily
reliant on the accuracy, judgment and integrity of the individuals processing and
reviewing them. This however was not uncommon for systems in many institutions at
the time.

It is worth noting that, for all processes in any service industry such as banking,
effectiveness of control is heavily reliant on the integrity of the individuals involved.
Any degree of collusion or lack of application, particularly by people in positions of
review or authority, will undermine or eliminate the effectiveness of controls present
in that person's sphere of influence, though the impact of any loss of control will also
be restricted to that same area.

An effective internal audit function will also deter such control breakdown and
through detection reduce its impact.
2. Determine whether the Internal Audit process was adequate and effective in
providing oversight, particularly with regard to interest and fee charging.

The operational effectiveness of Internal Audit in NIB was found to be satisfactory.

Both interest and fee charging practices were part of the regular audit programme
applied for each branch visit and departures from bank policy were regularly reported.
Indeed, the substance of some of the allegations being examined in this review
emanated from internal audit reportsfrom the time.

Independence appears to have been maintained and findings from audits performed
were brought to the attention of management up to Chief Executive level. However,
the 'interest loading' findings in particular were not reported to either the NEB Board
Audit Committee nor Group Audit and this must be seen as a failing.

3. Determine the management response to any reporting of unjustified fee and


interest loading practices historically.

The only significant internal audit reporting of 'unjustified loading' found related to
interest rather than fees. Some lesser findings, requiring no management response at
the time, were also raised with respect to fees. Management appear to have responded
to the 'interest loading' audit findings raised for specific branches by bringing these
unsatisfactory practices to a halt and this is generally confirmed by the absence of
repeat findings in subsequent audits for those branches.

However, no attempts appear to have been made to make good any loss to the
customers affected nor does any disciplinary action appear to have been taken against
the managers concerned.

4. Identify the scale and detail of unjustified fee and interest loading in the named
branches (ie those featuring in the audit reports and others mentioned in the
media) and ascertain the extent, if any, of the practice in the wider Network.

Interest
Over the period reviewed it was not possible to justify completely the interest
amendments made for specific and discrete periods in 13 branches, including the five
examined by Arthur Andersen.

In total, these amounted to £135k though it should be recognised that, because of a


lack of full documentation due to the period of time that has elapsed beyond normal
retention periods, some of this amount could have been justifiable at the time. The
total amount refunded to customers after applying-dae-appropriate indexation is £557k.

No 'unjustified ldading' was found in the remainder of the network.


Fees
Fee charging practices in College Green were found to be reasonable and in line with
procedures at the time. The remainder of the network passed the criteria set with the
exception of three branches where insufficient justification could be found for the level
of fees charged.

Work has still to be completed in the third of these branches but it is anticipated from
the work completed to date that approximately £200k of amendments will be refunded
which will amount to nearly £lm after indexation. The branches concerned also
appear in the list of those where interest refunds have been made.

5. Review current practices to establish if unjustified fee or interest loading


currently occurs.

Interest
The basic system for interest charging and amendment processing has not changed
significantly in the period under review and consequently the ability to hide manual
interest amendments from customers by producing "redo" statements still exists.
Therefore, the system remains vulnerable to abuse.

A review of interest amendments for the recent two year period showed that one small
'spoke' branch was engaging in 'unjustified interest loading' as defined. This practice
has since ceased and the customers affected included in the reimbursement
programme.

The requirement to adhere to laid down procedures has been reinforced by


management who have committed to increased vigilance in this regard. No instance of
'unjustified loading' has been found in the period following the start of the
investigation.

Fee?
The system for fee charging has become significantly more automated since that in
operation at the time highlighted in the allegations. Additionally, increased regulation
requiring fuller disclosure and pre-notification of fees has contributed to the much
increased transparency for customers over what they are being charged for.
Consequently, the scope for abuse is much reduced.

As in any service industry, fees have and will always be the subject of challenge and
negotiation between the provider and the customer and disputes will occasionally arise
as a result. The level of dispute over current fees being levied does not appear to be
indicative of significant systemic overcharging.

In summary, there are clear cases where unjustifiable amendments have been made to
both the interest and fees charged to customers' current accounts. However, these appear
to represent the initiatives of individual managers rather than an institutionalised policy to
defraud customers. Greater clarity on their motivation may emerge once the interview
process has been completed.

There was undoubtedly a strong requirement from senior management to meet


demanding targets and it could be that this was a strong influence on the actions of some
of the individuals involved. However, given the relatively small absolute amounts
involved over an extended period it is unlikely that there was a concerted executive effort
to enhance Bank profitability through the application of 'unjustified loading'.

The total number of branches affected is 14, with approximately £335k of unjustified
amendments being found. After indexation, reimbursements amounting to nearly £1.5m
will be made to customers of which £557k has already been paid.
7 RECOMMENDATIONS

1. All staff should undergo refresher training in the group's core values programme
2. The Business Excellence Achiever programme recently introduced for control risk self
assessment should be strictly adopted, applied and monitored, with action plans being
produced and completed where appropriate
3. The internal interview process should be completed as soon as possible and any
disciplinary action should be vigorously pursued for those personnel identified as
being potentially culpable in applying 'unjustified loading'
4. The remaining fee investigations should be completed as a matter of urgency
and all affected customers should be speedily recompensed
5. The facility to 'redo' statements should be withdrawn and be replaced by a process
which presents the customer with a greater degree of visibility in relation to manual
interest adjustments
6. All interest amendments should be signed off at Area Manager level on a quarterly
basis
7. The target setting process and individual targets for fees should be reviewed to ensure
there is consistency maintained with the customer asset base for individual branches

The above recommendations should be actioned within the overall context of the
migration to 'New Bank' which is currently being implemented and this migration should
be completed as a matter of urgency.
B INTEREST

1 APPROACH

1.1 Overview

The work on the review into 'unjustified interest loading' was governed by the general
principles outlined in section A.5. Within this targeted approach the approach was
further split into three main areas of focus:

• the system in place during the period under review


• the extent, if any, of any 'unjustified loading' historically
• the current position

In order to react quickly to the allegations made, following some initial work by the
internal investigative team, it was decided to engage Arthur Andersen to perform a
review of the interest and fee related allegations. This exercise was scoped to address the
specific allegations made both in terms of time periods and the particular manual
adjustment processes that were examined.

Follow up support work on the initial Andersen findings was carried out under the control
of the Internal Investigation Team.

The work on the remainder of the network, aimed at giving general reassurance on
interest charging practices, was also carried out under the control of the Internal
Investigation Team. The scope for this work was driven by the outputs of the Internal
Audit Report review, the tracking of specific career histories, the interview process and
the customer enquiries line in addition to some random sampling across all branches.

The investigation work combined a review of available documentation and discussions


with relevant personnel and as detailed above was designed to look at three aspects
namely, the system, historic practice and current practice.

1.2 System

The integrity of the system was assessed by recreating the system documentation across
the time period in question thus enabling a retrospective review of the interest charging
process in operation.

The investigation approach focused on the methodology described in the allegations for
processing manual interest amendments. In particular, any definition of or reference to
'interest loading' were sought from contemporaneous documentation.
The management letters of the external auditors, KPMG, were also reviewed for any
references to failings in the interest processing system raised.

1.3 Historic practice

A comprehensive list of all branch audit reports issued over the period was assembled
from available records and the individual reports were reviewed where available. From
this review, combined with the branches named in the allegations, five branches were
identified for immediate review.

Arthur Andersen were engaged on 9 April 1998 to establish "whether additional interest
charges have been debited to customer current accounts at quarter end without any
contractual, statutory or other valid basis for doing so and, if so, the extent thereof at the
following branches":

• Blanchardstown Feb. 91 - May 93


• Carndonagh Oct 87 - Dec 90
• Carrick-on-Shannon Oct 87 - Dec 90
• Cork Jan 88 - Dec 90
• Walkinstown Jan 89 - Dec 90

Following a review of normal interest charging practice and procedures Arthur Andersen
developed the following approach to their work in thefive named branches:

• Review General Ledger records at quarter end charging dates, and for the five days
following, for evidence of manual credit interest adjustments.

• Identify supporting evidence for interest adjustments.

• In the absence of such evidence trace the entry via the Autowaste Journals to the
customer's account and reconcile the total of customer debits to the total of General
Ledger credits.

• Interview available individuals who held management positions at the relevant


branches during the period under review.

• Review the follow up work performed by the Internal Investigation Team, which
consisted of an account by account review of any entries for which no supporting
evidence was available, to establish possible justification for the charge. This review
sought to identify:

1. any instances of holding over cheques pending a pay/no pay decision


(suspending cheques) which would then necessitate manual calculation of lost
interest, or

2. activities requiring a post hoc application of management time, which was


calculated using a matrix compiled from historic charges and standard times.
In order to determine whether any further branches needed to be investigated in more
depth, the findings of the following activities were considered:

• the results of the parallel exercise underway into resolving individual customer queries
into interest charges, and
• potential leads arising from the fact finding interviews being undertaken

Relatively early in the review, the Cork branch was identified as being a potential
common factor linking the branches being more extensively reviewed. Consequently, an
exercise was undertaken to map the movements of all connected personnel of
management grade and add those branches to the list for further review. Tracking the
movements of all managers of branches reviewed was also performed.

The wider review of these identified network branches carried out by the Internal
Investigation Team followed the same approach that Arthur Andersen developed as
described above.

1.4 Current practice


The documentation review and the interview process were also used to gather information
on the quality and integrity of the current system.

Additionally, as part of Arthur Andersen's work, system records were interrogated for the
last two years to establish ongoing instances of manual interest adjustments. The results
of this enquiry were then examined by the Internal Investigation Team to identify
supporting evidence for each charge.

2 ASSUMPTIONS AND CONSTRAINTS

It has been assumed that the computerised processes for calculating interest has operated
effectively throughout the period.

Retained system records of interest charged were only available for the last two years and
work beyond that period necessarily involved a trawl through manual records.

Significant amounts of supporting documentation for the earlier parts of the period under
review could not be found. Of itself, this was not a significant issue in as much as this
period was outside the seven year period for which documentation ought generally to be
retained. However, it did impact on the ability to find documentary substantiation for
transactions processed assuming that such existed in the first place.

Similarly, not all parties present at the time have been available for interview. Those that
have been interviewed have been as part of the fact gathering exercise rather than the
mc/e challenging initial process of the disciplinary route. This has been in recognition of
the separate strategy and activities taking place in this area. Evidence given to other
parties who have greater powers to extract information, particularly under oath, may
differ from that previously proffered.

Consequently, whilst effort has been made to find other and corroborating evidence, there
must remain some uncertainty as to the impact this poor quality of available evidence has
on our overall conclusions.
3 CONCLUSION

Some incidence of interest amendments, which could not be fully justified as interest,
was found in all of the five named branches. In total this amounted to £100,513.
Additional work carried out identified that of this total an amount of £59,275 could have
been justified if it had been charged as a management time fee. This leaves £41,238 with
no evidence of a justifiable charge being due.

The review of the wider network identified incidences of interest adjustments which
could not be justified, as interest, in a further 8 branches totaling £34,816.

The relatively small incidence discovered in the remainder of the network, supported by
the absence of repetitive interest loading findings in Internal Audit reports, indicates that
the practice was not widespread and given the absolute amounts involved that the
motivation was not to enhance Bank profitability. No branches were identified through
the review of external audit management letters.

The review of Internal Audit reports highlighted instances where branches were charging
a management time fee for suspending cheques as interest. Although non compliant with
procedures, on the basis that these charges could be fully substantiated they were not
included within amounts to be refunded.

The system for interest charging was unchanged throughout the period investigated and,
due to interest calculations being made on cleared balances, remains largely invisible to
the customer. The requirement for interest amendments still remains although this
process could be reviewed to give greater visibility to the customer which in turn would
act as a control over the processing of unjustified amounts.

The review of the last two years showed that only one 'spoke' branch, Strokestown, was
not adhering to the laid down procedures for interest amendments by recovering
management charges through amending the interest charge. This amounted to less than
£800 in total.
4 DETAILED FINDINGS

4.1 System
Interest is calculated automatically by the Livelink system based on the outstanding
balance, the base interest lending rate plus margin if applicable, and the time outstanding.

Manual interest amendments are permitted at the end of each charging period where the
system has been unable to capture the full interest applicable.

An example would be where a cheque has not been paid on the due date but is held over
for a day to allow the customer to lodge to cover. The extra interest due requires manual
calculation and is applied as an adjustment at the period end.

The investigation approach focused on the methodology described in the allegations for
processing manual interest amendments and it was found that what was described was an
exact match to the Bank's normal procedures and which were designed to be invisible to
affected customers.

No definition of interest loading was found in contemporaneous documentation.

No references to unjustified interest loading were noted from the review of the external
audit management letters.

4.2 Historic practice

4.2.1 Review of audit reports

In all a total of 172 branch internal audit reports were reviewed spanning the period from
1987 to 1997. A further 55 reports completed during this period were not available for
review due to the practice of holding only 2 historic reports for each branch.

The initial review identified that 'interest loading' had been noted as a finding in reports
for Carndonagh, Carrick-on-Shannon and Blanchardstown.

A number of audit report findings also highlighted a lack of sufficient documentation for
interest amendments however there was no implication that the underlying transaction
involved was not genuine.

Interest loading findings in Sligo and O'Connell Street branches were not identified until
a more comprehensive review was undertaken and they were therefore selected for
detailed review by the Internal Investigation Team.

Further audit reports highlighted that a £5 charge for suspending cheques was being
passed as additional interest. This represented a valid charge however the procedures
were considered to be ambiguous as to whether this should have been charged as fees or
interest. Where this practice existed but there was no other evidence to suggest interest
1
loading, and the amount could be clearly substantiated as being due to the Bank, the
decision was taken not to classify this charge as unjustifiable. Consequently no
quantification has been attempted nor have any refunds have been made for these
amounts.

The lack of further audit findings in this area across the ten year time period supports the
conclusion that the practice of interest loading was not widespread.

4.2.2 Interview process

On receipt of the letter from RTE the immediate discussions with the managers in charge
of the named branches during the specified periods gave an indication that there was
some substance to the allegations.

In subsequent more detailed interviews there was a specific acknowledgment by one of


the Branch Managers that interest loading took place on accounts where the lending was
hard core or where customers had not adhered to conditions of sanction.

The wider and more formal phase of the interview process showed a reasonable level of
awareness of the concept of interest loading among the population selected.

Most of those who were aware of the practice believed that it was used for the collection
of amounts that would have been a reasonable recovery for management time spent if
they had been charged as fees. It appeared that in some cases this method was used when
it was known the charge would have been resisted by the customer.

There was some inconclusive comment that the practice may have been condoned from
Regional Manager level and a suggestion that the practice emanated from Cork branch.

4.2.3 Arthur Andersen findings -five named branches

Full detail of Arthur Andersen's findings together with the follow up work on the five
named branches carried out by the Internal Investigation Team is found in the report to
Matheson Ormsby Prentice dated 8 June 1998. A copy of the Executive Summary is
contained in Appendix 2.

A summary of the initial findings, in the Andersen report, for debit interest adjustments is
as follows:
Number £ Value

Total debit interest 1106 228,713


adjustments found

of which:
Supporting evidence found 332 128,201
Charges relate to management time 200 42,255
Unresolved 574 58,257

Of the adjustments which related to management time, 75% were found in Cork branch.
In all these cases the management time charge for suspending cheques was recorded on
an interest amendment sheet which was not in line with Bank procedures.

The Internal Investigation Team then followed up, on all interest adjustments for which
no supporting evidence had been found by Arthur Andersen, by conducting an account by
account review.

This work led to final summaryfigures in the Andersen report as follows:

Number £ Value

Total debit interest 1106 228,713


adjustments found

of which:

Supporting evidence found 359 132,364

Charges relate to management time 382 55,112

No basis for justification 365 41,237

It should be noted that of the types of activities which would attract a management time
charge only a small number can be clearly identified from a retrospective account review.

The 365 interest adjustments for which there is no basis for justification relate to 171
customers across the five branches. Carndonagh branch accounts for 60% of these
adjustments.

4.2.4 Summary of additional work - remainder of network

In all cases were an interest amendment was uncovered which gave cause for concern the
branch records were examined in detail until the full period involved was determined and
all customers affected were identified.

Based on the same classification used in the five named branches the investigation of the
wider network has produced a total of £34,816 across 9 branches for which refunds have
been made.

A summary of the activities which made up the network wide follows.


Five named branches

The scope of Arthur Andersen's work was limited to the time periods specified in the
allegations and was based on the assumption that the practice ceased following issue of
the Audit Reports.

The internal investigation team reviewed periods outside the defined scope to ensure that
all unjustified manual adjustments had been identified.

As a result of this exercise an additional £3,500 was identified in Cork branch in


November 1987.

Career progression

In reviewing the remainder of the network particular attention was paid to branches which
were controlled by staff who had worked in branches where loading had been identified.

Specific focus was given to officials who had worked in Cork branch where it was
alleged the practice had originally taken place.

Manual interest adjustments were then sampled over the time period the official was in
control of the branch. Where any instances of suspicious interest adjustments were
identified a detailed review took place.

This process identified a total of £4,949 in interest adjustments which could not be fully
justified in Baggot Street branch.

Review of audit reports

As was indicated earlier, this exercise identified interest loading findings in Sligo and
O'Connell Street branches.

A detailed review of manual interest adjustments in these branches was conducted by the
Internal Investigation Team and amounts of £6,326 (Sligo) and £5,909 (O'Connell Street)
could not be fully justified.

Review of two quarters

Further testing across all branches for the quarters ended May 1989 and November 1990
took place. This involved reviewing all manual interest amendments and sourcing
supporting documentation.

No instances of unjustified interest amendments were found as a result of this exercise.


Review of interest amendment sheets

As part of the internal investigation, all interest amendment sheets from 1986 to date
were requested from the branches and retained centrally.

These interest amendment sheets were reviewed by the Internal Investigation Team on a
sample basis for evidence of inappropriate interest charges.

One further branch (Letterkenny) was identified during this exercise and the total of
interest amendments which could not be fully justified was £4,991.

Customer enquiries

In addition to the work detailed above 1,661 customer interest enquiries were logged
which ranged across the full branch network. For each enquiry a complete check of
interest amendments over the eleven year period was carried out.

For many of these enquiries the review involved examination of the branch's general
ledger accounts which would have identified any significant incidence of manual interest
adjustments.

Of these enquiries two branches, Waterford and Limerick, were identified and the total
amounts which could not be fully justified were £12,851 (Waterford) and £350
(Limerick).

4.3 Current practice

4.3.1 Interview process

There were no indications in the interviews conducted that the practice of making
unjustified interest amendments was still in existence, even from those managers who
were aware of the practice historically.

4.3.2 Analysis of recent postings (last two years)

Particular focus within the Internal Investigation was given to examining the integrity of
current interest charging practices. A comprehensive review was undertaken of all
manual interest adjustments network wide for the last two years. This utilised a CAAT
developed by Arthur Andersen during their initial scoping review to interrogate the
system records network-wide for the last two years to establish the current incidence of
manual interest amendments.
The total amount and number of debit manual adjustments identified was as follows:

Adjustments Number £ Value

Under £500 334 6,458


(round sum amounts)

Over £500 120 765,558

A comprehensive examination of all these adjustments showed that interest amendment


sheets detailing acceptable reasons existed in all cases with the exception of one period in
Strokestown sub-branch where interest adjustments had been used to mask the charging
of referral fees and arrangement fees.

Further investigation revealed that this practice had been in existence at the branch since
November 1995. The total of interest adjustments which could not be fully justified was
£774.
C FEES

1 APPROACH

1.1 Overview

The work on the review into 'unjustified fee loading' was governed by the general
principles outlined in section A.5. Within this targeted approach the approach was
further split into three main areas of focus:

• the system in place during the period under review


• the extent, if any, of any 'unjustified loading' historically
• the current position

In order to react quickly to the allegations made, following some initial work by the
internal investigative team, it was decided to engage Arthur Andersen to perform a
review of the interest and fee related allegations. This exercise was scoped to address the
specific allegations made both in terms of time periods and the particular manual
adjustment processes that were examined.

Follow up support work on the initial Andersen findings was carried out under the control
of the Internal Investigation Team.

The work on the remainder of the network, aimed at giving general reassurance on fee
charging practices, was also carried out under the control of the Internal Investigation
Team. Based on the high satisfaction level achieved for College Green the work on the
wider network was at first restricted to ensuring a common approach had been taken to
that used by the management in College Green.

The scope for this work was later widened to ensure that all branches achieved a
minimum threshold of justification on a sample of fees derived from customer account
queries. A matrix was developed based on the management time fees levels that applied
in College Green and other branches were measured against this.

In branches which had been 'named' in the interest allegations, and in branches which
failed the matrix test, more extensive testing of a wider customer sample was carried out.

The investigation work combined a review of available documentation and discussions


with relevant personnel and as detailed above was designed to look at three aspects
namely, the system, historic practice and current practice.
1.2 System

The integrity of the system was assessed by recreating the system documentation across
the time period in question thus enabling a retrospective review of the fee charging
process in operation.

The investigation approach focused on the methodology described in the allegations for
processing manual fee amendments. In particular, any definition of or reference to 'fee
loading' were sought from contemporaneous documentation.

The management letters of the external auditors, KPMG, were also reviewed for any
references to failings in the fee processing system raised.

1.3 Historic practice

A comprehensive list of all branch audit reports issued over the period was assembled
from available records and the individual reports were reviewed where available. From
this review, no further branches were identified for immediate review.

Consequently, it was decided to concentrate on the branch referred to in the RTE report,
which by then had been identified as being College Green, for the period shown being the
period ended November 1989. As the report for the period in question was not available
for examination the period following, February 1990, was selected.

Arthur Andersen were engaged on 9 April 1998 to establish "whether fees had been
debited to customer current accounts at the College Green branch without any
contractual, statutory or other valid basis and, if so, the extent thereof for the February
1990 quarter posting date".

Following a review of the normal fee charging practice and procedures, Arthur Andersen
developed the following approach to their work:

• Examine all manual amendments to the Fees to be Applied Report.

• Review the Fees to be Applied and related reports for supporting annotation and
explanation.

• Review individual customer files and other sources of documentation for supporting
explanations.

• Interview individuals who held management positions at College Green during the
period under review.
Following Arthur Andersen's review, the Internal Investigation Team conducted a
detailed review of all accounts where Arthur Andersen had identified fee amendments
greater than £3.00. The objective of this exercise was to see if the uplift could be
justified by calculating an applicable management time charge.

The process used by the Internal Investigation Team and the results produced were then
reviewed by Arthur Andersen prior to inclusion in their report.

In addition, a sample of 12 branches were selected for a detailed review of a significant


number of fee amendments for one quarter. This sample was biased towards branches and
time periods which had been found to include unjustified amendments in the work on
interest.

The approach taken was to identify all manual amendments for the accounts selected on
the Fees to be Applied report and conduct an account review identical to that carried out
by the Internal Investigation Team on the College Green amendments.

A higher level review of fee amendments in the remaining branches was carried out by
the Internal Investigation Team.

Based on the satisfaction levels achieved in College Green a matrix of reasonable fee
uplifts, by account type and account activity level, was developed. This matrix was then
applied across all customer fee enquiries for one quarter to achieve further satisfaction of
fee charging practices on a branch by branch basis.

Those fee enquiries which failed this test were subjected to a detailed account review for
the quarter in question to establish whether adequate justification for the fee uplift
existed.

1.4 Current practice

The current system was reviewed to assess its integrity in the application of management
time charges. The interview process was also used to gather information on the
operation, quality and integrity of the current system.

2 ASSUMPTIONS AND CONSTRAINTS

It has been assumed that the computerised processes for calculating transaction based fees
has operated effectively throughout the period.

The clearer customer visibility of fee charging practice whereby tariffs were published
and transactions, and quarterly fee charges, were listed on statements allowed a more
restricted approach to the work on fees. This was reinforced by the view expressed in
management interviews that customers regularly challenged, and negotiated adjustments
to, fees charged on their cun*ent accounts.
The basis of testing for one quarter only was that, across a wide population, customer
behaviour remains reasonably constant and the level of management time spent on
accounts would not vary significantly except for one off events such as new lending
propositions which should be charged for at the time.

Considerable amounts of supporting documentation for the earlier parts of the period
under review could not be found. Of itself, this was not a significant issue in as much as
this period was outside the seven year period for which documentation ought generally to
be retained. However, it did impact on the ability to find documentary substantiation for
transactions processed assuming that such existed in the first place.

Similarly, not all parties present at the time have been available for interview. Those that
have been interviewed have been as part of the fact gathering exercise rather than the
more challenging initial process of the disciplinary route. This has been in recognition of
the separate strategy and activities taking place in this area. Evidence given to other
parties who have greater powers to extract information, particularly under oath, may
differ from that previously proffered.

Consequently, whilst effort has been made to find other and corroborating evidence, there
must remain some uncertainty as to the impact this poor quality of available evidence has
on our overall conclusions.

3 CONCLUSION

The fee charging process in place at the time of the allegation involved a series of three
reports and required manual intervention for the application of management time charges.
The approach taken in College Green branch, namely making manual amendments to the
Fees to be Applied Report, was typical across the network.

While many of the activities which would warrant management time charges are invisible
to a retrospective account review, the results of the work carried out in College Green
gave a high level of satisfaction with their fee charging practices at the time of the
allegations.

Work carried out across the remainder of the network confirms that there was no
widespread abuse of fee charging practices. However Cork, Carndonagh and Waterford
branches have been identified as having low justification levels for fee uplifts applied
during certain time periods. Whilst the full quantification of the position in Waterford
has not yet been completed, it is anticipated that the total amount of fees that will be
refunded will be approximately £200k before indexation.

System developments in the periods since the allegations were made have resulted in
improvements in the capture of administration and management time and, as a follow on,
in enhanced transparency to the customer.
The introduction of detailed pre-notification of fees in August 1996 gives a high level of
comfort with the integrity of current fee charging practice.
4 DETAILED FINDINGS

4.1 System

The system for charging quarterly fees relies on two major components. The central
calculation of is transaction charges based on mainframe generated activity levels and a
range of publicly advertised tariffs.

The addition of management or administration time historically required management


intervention which was accommodated for, and prompted by, the cycle of reports which
issued for branches.

The system supporting the calculation of management time has evolved significantly over
the period under investigation. At the time of the allegations made against College Green
there was little supporting evidence kept detailing how the charge was arrived at.
Typically the changes were made directly to the Fees to be Applied Report which gave a
customer listing of transaction fees. The combined fee was then entered to the central
system for processing.

In 1992 Customer Information Pads were introduced which prompted managers to record
management time as it occurred thus giving an improved support for the amount applied
at quarter end.

This system was further enhanced by the weekly capture of management time on the
mainframe and then in 1995 by the introduction of Pre-Notification of fees which
provides the customer with a detailed breakdown of fees prior to the charging date.

No definition of fee loading was found in contemporaneous documentation.

No references to unjustified fee loading were noted from the review of the external audit
management letters.

4.2 Historic practice

4.2.1 Review of audit reports

In all a total of 172 branch internal audit reports were reviewed spanning the period from
1987 to 1997. A further 55 reports completed during this period were not available for
review due to the practice of holding only 2 historic reports for each branch.

There were no findings relating to unjustified uplifts in customers fees.

No branches were selected for specific examination as a result of this review.


4.2.2 Interview process

Managers interviewed, including those who admitted an awareness of the practice of


interest loading, believed that the Bank's fee charging process required the manual uplift
of charges and that all amendments were a reflection of genuine management time
expended rather than an unjustified method of increasing income.

4.2.3 Arthur Andersen findings - College Green

Arthur Andersen identified a total of 886 debit amendments amounting to £48,496. Of


this figure one amendment accounted for £37,202 and upon investigation was found to
have never been debited to the customers account. This left a residual of 885
amendments totaling £11,294 for detailed examination.

As Arthur Andersen's approach consisted of seeking supporting documentation and the


common practice at the time was not to record detailed reasons for fee amendments, their
initial work was generally inconclusive.

The Internal Investigation Team then conducted an account by account review for each
customer identified by Arthur Andersen who had a fee amendment greater than £3.00
during the quarter. By applying standard times for certain identifiable management
activities to the appropriate cost per hour, a calculation of management time cost was
compared to the fee uplift.

The outcome of this exercise, which was subsequently reviewed by Arthur Andersen, was
as follows:

Business Personal Total


No £ No £ No £

Fee amendments 214 8,454 671 2,840 885 11,294

Examined 214 8,454 335 2,197 549 10,651

Justified 214 8,454 225 1,504 439 9,958

It should be noted that the list of activities likely to require intervention which would
warrant a management time charge indicates that only a small percentage would be
identifiable from the review of transaction activity carried out.

4.2.4 Summary of additional work - remainder of network

The results of the review of branches selected for detailed examination showed
acceptable satisfaction rates for all except Cork and Carndonagh. Further work was
carried out on these two branches but no significant improvement resulted and it was
apparent that the charging practices for the periods examined were not in line with the
remainder of the network.

Following a further detailed analysis, 519 fees amounting to £92k cannot be justified in
Cork and 341 fees amounting to £50k cannot be justified in Carndonagh. Following
indexation the amounts of the applicable refunds will be approximately £75 5k.

The career histories of the managers involved in these two branches were tracked and
more detailed samples were reviewed in other branches they had managed.

The review of Waterford indicated potential problems and the sample rate was increased
further across the entire period to establish the scale required for a comprehensive review.
This showed that while personal customer fee uplifts were within the parameters set for
acceptability, the business customer fees showed an unacceptable number which could
not be justified in the sample exercise.

A comprehensive review of business account fee charges has now commenced which
covers the period August 1990 to May 1996. This involves reviewing 2,400 charges
relating to 286 customers and is estimated to complete in mid April.

Through the remainder of the network, a minimum often amendments over two quarters
were examined in detail to establish if the uplifts were justifiable. This exercise produced
a network satisfaction rate of 84%.

4.2.5 Customer fee enquiries

A total of 1,445 fee enquiries ranging across all branches was tested using the College
Green matrix. Based on the findings of this exercise combined with the general
satisfaction level network wide, branches were closed off one by one as having
satisfactory fee charging practices.

4.3 Current practice

The introduction of an automated system for daily/weekly capture of


administration/management time against specified activity categories has resulted in
much greater discipline in this area both in data capture and audit trail.

The detailed pre-notification of fees to customers which was introduced in August 1996
has resulted in improved transparency for both transaction and management time charges.

There were no indications in the interviews conducted that the practice of making
unjustified fee amendments was currently in existence.
D AUDIT OVERSIGHT PROCESS

1 APPROACH

In line with Group policy, NIB had an established Audit Committee and Internal Audit
function whose purpose was to provide assurance through overseeing the proper
application of management control to the bank's business systems. Therefore, it should
be reasonable to rely on the Internal Audit process to have picked up any significant
deviation from the bank's laid-down policies and procedures during the period under
review. An absence of Internal Audit reporting on this topic would indicate the absence
in NIB of an endemic practice of unjustified interest and fee 'loading'.

The objectives set for this part of the review were aimed at establishing:

• whether the Internal Audit process was adequately designed.


• whether the Internal Audit process was complied with.
• whether Internal Audit was effective in providing oversight.
• the extent and nature of the reporting of the interest and fees loading practice noted
above.
• the nature and extent of follow-up actions to exceptions found.

The review focused on the overall operation of the Internal Audit related functions in NIB
over the period from the date of acquisition (ie 1987) to last year.

Whilst the review was essentially general in nature, covering the wider aspects of the
function's operation, particular attention was paid to the audit of Interest and Fees,
particularly with respect to potential overcharging practices.

2 ASSUMPTIONS AND CONSTRAINTS

A significant period has elapsed since the period relating to the allegations, which means
that it was not possible to review the systems in situ. Consequently, historical evidence
has had to be gathered through the following means:
• Review of surviving contemporaneous documentation (eg work programmes, reports
produced, meeting minutes).
• Fact-finding interviews of personnel from Internal Audit over the period.
• Review of available reports produced by external independent parties (eg KPMG).
3 CONCLUSION

Overall, the effectiveness of the Internal Audit process for the period was found to be
satisfactory.

The most significant findings identified surround the reporting of interest and fee issues
to the Board Audit Committee. Although the four interest 'loading' issues discovered
were reported to appropriate line management up to and including the Chief Executive,
neither executive management nor the then Heads of Audit chose to raise them
specifically to the Board Audit Committee's attention. General concerns surrounding the
adequacy of documentation supporting interest amendments throughout the network over
the period were also not raised, though results from audit testing undertaken at the time
does not indicate that this shortcoming led to unjustifiable charges being made.

The Internal Audit programmes appear to have been comprehensive, covering, inter alia,
tests on amendments to both interest and fees, diligently applied on a cyclical basis across
the network, and reported upon to appropriate line management. Recommendations were
generally aimed at correcting non-compliance with policy, rather than rectifying any
incorrect treatment already applied, as can be seen from the absence of recommending the
refund of the unjustified interest adjustments found. However, where unacceptable
'loading' practices were found and reported upon they stopped thereafter.

Internal Audit were not subjected to adverse pressures on their independence, over and
above the normal level of management challenge, and in this context had free reporting
lines into the Board Audit Committee (BAC), which comprised independent and non-
executive directors. Consequently, if Internal Audit had discovered widespread practices
of unjustified interest 'loading', it should have reported thereon to the BAC. Similarly,
Executive Management who also regularly attended the BAC should have raised any
issues in this area causing them concern.

In the 172 branch reports examined, four instances of interest 'loading', and one of fee
'loading', were found and these were reported individually to branch, senior and
executive management at the time. It follows that, by only reporting on this issue on
these few occasions, the practice was not widespread or endemic to the whole network.
This conclusion is reinforced by the findings of the Internal Audit staff interviews.
4 DETAILED FINDINGS

4.1 Independence

All staff in Internal Audit since 1986, remaining in NIB, have been interviewed. This
totaled 15 people and included all the Heads of Audit over the period, namely:
• Hilary Flood (1986 - May 88)
• EndaCarberry (Mar 90 - Mar 93)
• Paul Harte (Apr 93 - Mar 97)

No concerns were expressed by the interviewees about the audit process undertaken or its
independence. The interviewees also stated that they had no concerns at the time about
any of the allegations subsequently made.

Peer reviews of the audit process were undertaken within the Group with no major
concerns being expressed about NIB audit. Global responsibility for the banking / branch
audit programme was developed with co-ordination from Melbourne thus ensuring group-
wide alignment of the banking audit process.

An independent second review process was available to the NIB audit team through
Group Audit in Melbourne and the Chief Auditor of National Australia Finance (UK),
who was based in London.

4.2 Process and coverage

The Internal Audit process for the period, as derived from the interviewees and a review
of available reports from the time, comprised the following main features:
• branch audits based on standard audit programmes
• branches selected on a cyclical basis to achieve total network coverage over a two or
three year period
• recommendations to correct deficiencies agreed with branch management
• all audit reports passed to Chief Executive Officer and appropriate senior management
• continuing process issues raised with executive management for action / correction
(although this was not done prior to 1993)
• significant issues were elevated to Board Audit Committee and Group Audit in
quarterly report at the discretion of the Head of Audit

The audit programme for 1992 is the only version that has been found but the audit staff
interviewed confirmed that this programme was broadly similar to that used prior to and
since 1992. The Inspection process was in place up to 1994 when there was a move to a
more risk based approach, which was subsequently refined in 1996.
The audit process was determined by Group Audit who would have maintained a close
oversight. Audit programmes would have been tailored locally for National Irish Bank
specific processes but approved by Group Audit.

The audit programme was split into four 'cores' covering all major areas of branch
activity. Interest and fees were covered and the validity of amendments processed in both
areas was specifically tested. Testing was based on samples, which would be extended if
problems were discovered during testing (for interest amendments this would often result
in all of the population being tested).

Branches were covered on a two year cycle basis up to 1993, and then three year cycle up
to 1997. If a branch was rated as 'Poor' then a follow-up visit was scheduled within 12 to
15 months. The applicable audit programme was rigorously applied to each branch
visited, no matter the results of the previous audit.

No audit work papers can be found for most of period. This is not unexpected as it is in
line with policy at the time which states that working papers should be destroyed
following the subsequent audit visit.

Departmental audit programmes were individually developed to cover the specific risk
profile present there. Theme audits were developed later in the period (1994), in
conjunction with Group Audit, and covered the examination of a common topic (eg
interest amendments) in the network.

No adverse comments were made on the Internal Audit process by the external auditors.

4.3 Reporting

Individual reports produced covered Branches, Departments and Themes (from 1994).
Quarterly Reports were produced for the Board Audit Committee and Group Audit. The
Group Audit retention policy for reports is 7 years.

4.3.1 Branch audit reports

172 reports were reviewed over the period 1987 - 1997, as follows:

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Reports 6 12 12 18 16 20 19 20 20 18 11
examined

55 reports prior to 1990 (ie beyond retention period) could not be found and were
therefore not examined. The reports examined appear to be comprehensive and follow a
standard format.
Issues identified from the review of audit reports are as follows:

Number of report Number of lesser


items raised significance items
raised
Interest 'loading' 4 0

Fee 'loading' 0 1

Interest & fee amendments not 109 70


adequately documented (note 1)
Other interest & fee issues (note 2) 30 106

Notes
1. The number of interest amendments reported as being inadequately documented does not
imply that interest 'loading' was present. Auditors interviewed confirmed that justification
was sought for the underlying transactions and would have been separately reported as
'loading' should this have been present. Thefindings could also relate to the Debit Interest
Report not being updated with amendments made (this is used to produce the Interest
Certificates).
2. Other interest & fee issues contain threefindings of incorrect capitalisation periods being
applied but these all relate to credit interest on savings accounts (& hence to bank's
disadvantage). Remaining issues surround non-issue of facility letters *.o customers.
3. Interest 'loading' reported on at Carrick-on-Shannon, Carndonagh, Sligo and Blanchardstown
branches.
4. Fee 'loading' was reported on at Sligo branch as a 'lesser importance' item.

The findings show that the incidents of 'loading' found were isolated, though against a
background of a poorly operated system, particularly with respect to supporting
documentation produced. This issue of poor documentation could have been raised to the
Board Audit Committee on the basis of being a consistent finding across the whole
network.

In summary the picture painted by this review is one of a system that, whilst not perfect,
was also not systematically bad.

4.3.2 Department audit reports

25 such reports were reviewed covering the period 1987 - 1997. None of the reports
reviewed related to interest or fees or indeed contained any major findings directly related
to customers.
4.3.3 Theme audit reports

Two theme audits, Control of Interest Amendments (July 1996) and Fee Income
(November 1996), over the period 1987 - 1997 were reviewed. The findings can be
summarised as follows:

Control of Interest Amendments (July 1996)


This review resulted in 'Poor' rating being given for this subject. The reasons supporting
this were:
- the processes were fragmented
- authorisation procedures lacked clarity
- reporting requirements were not clearly communicated
- account closing process were cumbersome and error-prone
- product information and interest codes not easily identified and were often
inconsistent
No comment on interest 'loading' was noted.

Fee Income (November 1996)


This review resulted in 'Poor' rating being given for this subject. The reasons supporting
this were:
- the recording of administration time was inconsistent
- fees waived / reversed / blocked were not subject to standard overview /
approval processes
- a lack of effective management information on commission / fees
- an inability to monitor fees that were waived / reduced
- there was a significant number of exempt accounts with no reason given and
no on-going review being performed
No comment on fee 'loading' was noted.

4.3.4 Quarterly reports

Quarterly reports were prepared by the Head of Audit and contained a summary of:
• Department Audit Reports
• Branch Reports, analysed by overall outcome (ie Satisfactory / Unsatisfactory)
No branch audit finding trends were identified until reasonably recently (post 1993).
Quarterly reports could not be found for March 1990, June 1989 and March 1989, all of
which are outwith the Group retention period.

Specifically, interest and fee 'loading' issues not raised as significant items. It has been
stated in interview that there was mention made of 'interest amendments' regarding
Blanchardstown in the supplementary section of the August 1993 quarter's report, but no
documentary evidence is available to support this claim.
4.3.5 National Irish Bank Board Audit Committee minutes

The minutes were reviewed for the period December 1988 to February 1997, when the
committee was disbanded in favour of the European Board Audit Committee.

The overall quality of reporting improved significantly over the period, particularly
following Paul Harte's appointment as Head of Audit in April 1993. However, from this
review, none of the identified reported findings on interest and fee 'loading' were raised
to the Board Audit Committee. As noted in the previous section, it has been stated that
the findings relating to interest amendments processed in Blanchardstown branch were
raised at the September 1993 Board Audit Committee meeting although they were not
emphasised and the 'loading' aspect was not mentioned at all.

A comment made in the June 1994 minutes by the Board Audit Committee Chairman, is
as follows:
"The Chairman noted that it is now accepted that there have been serious
shortcomings in the management of our branch system for some time - together
with poor discipline and slack procedural controls. He expressed concern that this
had not been brought to the attention of the Audit Committee by executive
management, internal or external auditors. He indicated to KPMG that the
Directors expect them to identify significant malaise and to plan their audit
accordingly."

4.4 Follow-up

All findings in audit reports had accompanying suggested actions. These could be
characterised as normally being of the 'stop it' type rather than 'correct it'.

Responsibility for ensuring actions were implemented for the network rested with the
Head of Retail, who followed up individual audit reports with specific instructions to the
branch manager. The branch manager had then to confirm that the specified actions had
been taken. Progress would have been monitored through Regional Manager visits.

A quarterly return to the Head of Audit was issued by the Head of Retail to advise on the
progress made in implementing required actions in the network. This return was not
presented to the Board Audit Committee.

The interest 'loading' issue was highlighted in May 1990 to Regional Managers by the
General Manager following the Carrick-on-Shannon audit report. It has not been possible
to confirm whether any remedial action was taken by Regional Managers as a result of
this communication.
For major audit issues arising from Departmental and Computer Audits, the relevant
management were responsible for ensuring resolution. Progress was tracked through the
Quarterly Audit Report.
Generally, no specific follow-up of implementation of agreed actions by management
was performed by Internal Audit. This was in line with Group Audit policy.
Confirmation that the action had been taken was covered through subsequent audit visits
when a full audit programme was applied.

4.5 External audit

The external auditors of National Irish Bank were Touche Ross (1987 - Oct 1990) and
KPMG (Oct 1990 - date).

The scope of the External audit work would be directed at providing an opinion on the
financial statements and would therefore cover an examination of all systems producing
significant figures therein. Consequently, external auditors would have examined both
interest and fees for material overstatement and would have relied upon Internal Audit
work in this regard.

It must be recognised however, that external audit terms of reference are not
comprehensive regarding system review and state that the work is not aimed at looking
for fraud etc, being just for the purposes of signing the accounts. Consequently
considerations regarding materiality apply, though this would not mean that major fraud,
if present, would not be detected.

No qualifications to the financial statements were issued for period since acquisition
(1987). Management letters were prepared each year, arising out of issues which had
come to the external auditors' attention only, and these were reviewed for years except
1987 and 1988 for which no documentation could be found.

No reference to interest or fee 'loading' was noted in any of the management letters
reviewed. The only issues raised with respect to interest or fees were in 1986 and 1991
but these points were not about overcharging. One can presume that if the external
auditors had been particularly concerned about an endemic interest or fee 'loading'
problem then they would have raised it strongly in the management letters.

Indeed, KPMG made various statements to the Board Audit Committee about the quality
of control environment. A quotefrom the minutes of February 1991 is as follows:
"Auditors, at the request of the Committee commented generally on the Bank, its
records and controls. They stated the overall view obtained by them was one of:
- tight management
- where management is in control of what is happening
- where controls though commented upon does not indicate management is
lacking in their application
- management takes the audit recommendations seriously
- a good internal control system "

No other regulatory report submitted by external auditors expressing any material


concerns. No adverse comment on quality or coverage of Internal Audit were raised by
the external auditors in either the Board Audit Committee minutes or management letters.
1 Diagrammatic representation of investigation steps taken

2 Arthur Andersen report - executive summary

3 Analysis of unjustifiable amendments by time


Diagrammatic representation of investigation steps taken
Chart 2

Arthur Andersen report


Arthur Andersen report - executive summary
ARTHUR

Private and Confidential

Report to Matheson Ormsby Prentice


in connection with the investigation of certain
matters relating to National Irish Bank Limited

8 June 1998
1. Executive Summary
1.1 Terms of Reference

In accordance with the agreed terms of reference, which are described in greater
detail in Section 2, Arthur Andersen has investigated the following matters:

(i) Whether additional interest charges have been debited to customer current
accounts at quarter end without any contractual, statutory or other valid basis
and, if so, the extent thereof at the following branches of National Irish Bank
Limited ("the Bank") for the following periods:

Branches subject to specific allegations, with respective periods:

Carndonagh October 1987 to December 1990


Carrick-on-Shannon October 1987 to December 1990
Cork January 1988 to December 1990
Walkinstown January 1989 to December 1990

Additional branch requested by National Australia Group Europe - Internal


Audit ("IA"), identified in an internal audit report:

Blanchardstown February 1991 to May 1993

(ii) Whether fees have been debited to customer current accounts at the College
Green branch of the Bank without any contractual, statutory or other valid
basis and, if so, the extent thereof for the February 1990 quarter end posting
date.

The period identified by the Bank as being the subject of specific media
allegations was the half year to December 1989. However, we were informed
by the Bank that the only copy of the relevant "Fees to be Applied" Report is
believed to be held by RTE and hence is unavailable. The February 1990
quarter end posting date was therefore selected by the Bank for review as it is
the quarter closest to the period actually subject to allegation.
This report should be read in its entirety. The Executive Summary provides an
overview of the work performed by Arthur Andersen and of our findings. The
summary information included in this Executive Summary is based on the more
detailed analyses which are included in Section 3 (for fees) and Section 4 (for interest)
and which are derived from the detailed spreadsheet analyses included in the
Appendices.

In relation to both fees and interest, as described in Section 1.3 and Section 3 as well
as Section 1.4 and Section 4 respectively, our work comprised a detailed review for
documentary evidence supporting the fee amendments and interest adjustments
made for the relevant branches and the relevant periods.

The Executive Summary also provides an overview of the work performed by IA and
its findings. This is described in more detail in Sections 3 and 4.

Fees

Arthur Andersen Findings

Arthur Andersen identified and classified a total of 896 manual amendments to the
"Fees to be Applied Report". We reviewed this report and other related reports for
any supporting annotation and explanation. We also reviewed other potential
sources of documentation, principally individual customer files, for supporting
explanations. The results of the Arthur Andersen review are indicated in Table 1.1
below and are detailed further in Section 1.3.2.

Certain documentation gaps exist which are described in Section 3 of this report.
Documentation was identified, indicating activity on certain accounts, which because
of the nature of the activity, may provide support for the identified manual fee
amendments on these accounts. However, the documentation did not provide
unambiguous support for a specific amendment except in two instances.

IA Findings

Following Arthur Andersen's review, IA conducted a review, the focus of which was
to seek support for the fee charged and to identify the reason for a specific fee
amendment. The IA procedures are described in Section 1.3.3. and involved a post
hoc application of charges for management time allowed for specific tasks identified.
The results of the IA review are outlined in Table 1.1 below and detailed further in
Section 1.3.3.

As Table 1.1 indicates, 885 debit amendments totalling IR£11,294 were posted. Of
these, 214 amendments, totalling IR£8,454, were posted to business accounts. IA
have examined these amendments and consider them justifiable in the context of a
post hoc application of charges for management time allowed for specific tasks
identified (see Note (iii) to Table 1.1 below). Of the remaining 671 fee amendments
to personal accounts, which total IR£2,840, IA have examined approximately 50% of
these amendments, representing approximately 80% by value, and have concluded
that approximately 70% (by value) of these amendments are justifiable in the same
context as for the business accounts. By 8 June, the date of issue of our report, a total
of 110 amendments (IR£693 by value) are unresolved and 336 amendments (IR£643
by value) had not been examined by IA.

The procedures adopted by IA were, in our view, reasonable given the focus of their
review and the results reflect the consistent application of these procedures.

Interest

Arthur Andersen Findings

Arthur Andersen reviewed available documentation and classified interest


adjustments according to information contained in this documentation. Certain
documentation identified as a potential source of information for interest
adjustments was not available for review and such documentation gaps are
described in Section 4 of this report. The results of the Arthur Andersen review are
indicated in Table 1.2 below and detailed further in Section 1.4.2.

Out of a total of 991 adjustments identified, Arthur Andersen noted that 332 were
supported by specific detailed explanations. A further 200 adjustments were
indicated as being in respect of management time charged as interest according to
the available documentation reviewed by Arthur Andersen.

IA Findings

Following Arthur Andersen's review, IA conducted a review, the focus of which was
to seek support for the interest charged and to identify the reason for the specific
interest adjustment. The scope of the IA review covered those adjustments which
were not classified above by Arthur Andersen in the 332 items supported by specific
explanations and in the 200 in respect of management time.

The IA procedures involved a review of individual customer account activity and a


post hoc application of charges for either specific reasons or for management time.
IA concluded that 27 adjustments could be considered justifiable on the basis of
specific transactions identified by IA in its review. IA concluded that 182
adjustments could be considered justifiable in the context of a post hoc application of
charges for management time based on account activity but which were not charged
as fees. The remaining 365 adjustments in respect of which no basis was identified
were classified accordingly by IA.

The procedures adopted by IA were, in our view, reasonable given the focus of their
review and the results reflect the consistent application of these procedures.
Summary Analysis of Interest Adjustments

As indicated in Table 1.2 below, 991 adjustments totalling IR£226,491 were posted to
a total of 382 customer accounts. A summary analysis of these adjustments
indicating the results of the reviews by Arthur Andersen and IA, which are described
above, is set out below for ease of reference.

No. Value
Review by Arthur Andersen IR£

Supported by specific detailed explanations per 332 128,202


Arthur Andersen review

Adjustments, in respect of management time charged


as interest rather than fees per documentation

reviewed by Arthur Andersen 200 42,255

Review by IA
Considered justifiable by IA on the basis of specific 27 4,163
transactions

Adjustments, less than a charge for management


time which would, on the basis of the review by IA,
have been justified based on account activity but
which were not charged as fees 182 12,857

Less combined items/ credit adjustments (115) (2,224)

Adjustments with no basis identified by Arthur 365 41,238


Andersen or I A, posted to 171 customer accounts

Total adjustments 991 226,491


Our findings are set out in summary at Section 1.3.2 and IA's findings are set out in
summary at Section 1.3.3. A combination of these findings is summarised as follows:

Table 1.1 Overall Summary of Manual Fee Amendments

Personal Accounts Business Accounts (Note (i)) Total


Review by Arthur Andersen No. Value No. Value No. Value
IR£ IRE IR£
Total debit amendments 671 2,840 215 45,656 886 48,4%

Less: Customer C
(amount not ultimately charged
to customer) - - (1) (37,202) (1) (37,202)
671 2,840 214 8,454 885 11,294
Average fee amendment 4.23 39.50

Analysed as:
Documentation indicating account
activity (Note (ii)) 260 1,136 89 3,187 349 4,323
No documentation obtained 411 1,704 125 5,267 536 6,971
671 2,840 214 8,454 885 11,294

Personal Accounts Business Accounts Total


No. Value No. Value No. Value
IR£ IR£ IRC
Review by IA

Examined and considered justifiable 225 1,504 214 8,454 439 9,958
by IA (Note (iii))

Examined, not yet resolved 110 693 - - 110 693

Not examined 336 643 336 643


Average fee amendment 1.91
671 2,840 214 8,454 885 11,294

Notes:

(i) 'Business Accounts' comprises both 'basic' accounts and 'negotiated' accounts.

(ii) 'Documentation indicating account activity' - activity on certain accounts which, because of the
nature of the activity, may provide support for identified manual fee amendments on these
accounts.

(iii) 'Examined and considered justifiable' by IA reflects post-hoc application of the then current
standard charge for management time (IR£10 per hour) to the standard times currently
allowed for specific tasks, where these are evident from a review of a customer's account
activity (but which were not computed by the Bank's IT system and charged in the automated
fee charge to the customer account). Consequently, IA have considered this to be a valid basis
for making a charge.
Our findings are set out in summary at Section 1.4.2 and IA's findings are set out in
summary at Section 1.4.3. A combination of those findings is summarised as follows:

Table 1.2 Overall Summary of Manual Interest Adjustments

Number of Adjustment
Adjustments Amounts
Arthur Andersen review IR£
Specific detailed explanation available 332 128,202

Documentation indicates 'management time' 200 42,255

Other 572 58,258

Credit adjustments 5 (2,224)

Combined items, i.e. where adjustments are


included in more than one classification above (118) -

Totals 991 226,491

IA review
IA personnel reviewed the 'Other' category above, and have analysed the
adjustments as follows:

Number of Adjustment
Adjustments Amounts
IR£
Adjustment justified for a specific reason 27 4,163

Interest adjustment is less than a charge for


management time which could have been
justified (based on account activity) but was not
charged as a fee 182 12,857

No basis identified 365 41,238

Combined items (2) -

Totals 572 58,258

The 365 manual interest adjustments identified as having 'no basis' above: were
posted to a total of 171 customer accounts.
1.3 Fees

1.3.1 Arthur Andersen Procedures

Our work performed in relation to the manual amendments to fees in College Green
for the quarter ended February 1990 is described in detail in Section 3.1.2 and
involved the following principal steps:

• The identification of all manual amendments made to fees in the College Green
Branch for the quarter ended February 1990.

• A detailed review of the "Fees to be Applied report" and other fee related reports
to identify any annotation on the reports which may explain the reasons for fee
amendments made.

• The identification and examination of available supporting documentation


relating to these amendments, with the assistance of Bank personnel.

• Interviewing certain individuals who held management positions in the branch


during the period under review.

• Reviewing the work performed by IA.

The principal documentation reviewed by Arthur Andersen comprised the "Fees to


be Applied Report", the "Amended Fees Input report", the "Fees Applied report"
and individual customer files.

We were informed that, in accordance with the Bank's policy for destruction of old
documents, certain documentation, identified as a potential source of support and
explanation, had not been retained. This documentation included the general file of
customer correspondence for 1990; costings sheets for the quarter under review;
agency fee files for that quarter; and records of management time for that quarter.

The documentation reviewed and the related documentation gaps are more fully
described in Section 3.
The results of our work are summarised below and described in detail at Section 3.

A total of 896 manual amendments to the "Fees to be Applied Report" were


identified, which related to three account types - "Personal", "Basic" and
"Negotiated". The number and monetary value of the amendments are summarised
as follows:

Table 1.3 Summary of Manual Fee Amendments


-Business
Personal Accounts Basic Accounts Negotiated Accounts Total
No. Value No. Value No. Value No. Value
IR£ IR£ IR£ IR£
Total 677 2,822 133 39,539 86 (52,871) 8% (10,510)
amendments

Of which - Credit
Amendments (6) 18 (4) 58,988 (10) 59,006

Customer C effect (1) (37,202) (1) (37,202)


(see below)
Debit 671 2,840 132 2337 82 6,117 885 11,294
Amendments

The account types are described as follows:

Personal Accounts: Represent personal current accounts. Prior to an IT system change in


1991, personal accounts were described as "student" accounts - see
Section 3.2.1.
Basic Accounts: Represent all business accounts for which no specific fee arrangement
has been negotiated with the customer.
Negotiated Accounts: Represent business accounts for which a fee arrangement has been
agreed with the customer.

Our review of the "Fees to be Applied Report" and supporting documentation


resulted in the identification of correspondence and documentation indicating
activity on certain accounts which, because of the nature of the activity, may provide
support for the identified manual fee amendments on these accounts. However, we
were able to identify only two instances where the documentation reviewed
provided unambiguous support for a specific amendment identified. Details of the
types of amendments identified and the nature of supporting documentation found
are set out below.

"Customer C effect"

An amount of IR£37,202, out of the total amendments of IR£39,539 under Basic


Accounts relates to a single customer, Customer C in Table 1.3 above.
Review of Fees to be Applied Report

We reviewed the "Fees to be Applied Report" and have classified the amendments
recorded in the following summary table. This classification is based solely on our
analysis of the information available in the "Fees to be Applied Report" and does
not reflect the result of our review of any supporting documentation.

Table 1.4 Summary Classification of Manual Fee Amendments

Personal -Business-
Accounts Basic Negotiated Total
Accounts Accounts
Classification No. Value No. Value No. Value No. Value No. Value
IR£ IR£ IRC IR£ IRC
Debit Credit
Amend. Amend.
Amended fee equates to
previous quarter fee 64 293 23 283 17 807 104 1,383
Amended fee equates to
gross fee 283 1,050 33 363 5 787 321 2,200
Amended fee equates to
an amount within 10p of
gross fee 68 407 3 22 71 429
Fees waived 6 (18) 6 (18)
"Being costed" annotation 14 378 14 378
"P%" charged, not calculated
by system 2 364 158 4 522
"P%" changed during the
quarter 148 1 148
Fee and Interest Group 25 1 25
Agency fee charged 1,238 1 1,238
Fee basis changed during
quarter 60 4 60
Customer A (i) 1 (52,484) 1 (52,484)
Customer B (i) 1 (5,643) 1 (5,643)
Customer C (ii) 1 37,202 1 37,202
Other - not possible to
classify 256 1,090 57 927 51 2,894 2 (861) 366 4,050

677 2,822 133 39,539 82 6,117 4 (58,988) 8% (10,510)


Less: Customer C (1) (37,202) (1) (37,202)
Less: credit adjustments (6) 18 (4) 58,988 (10) 59,006

671 2,840 132 2,337 82 6,117 885 11,294


(i) In relation to Customers A and B we were informed that the P% charged was
incorrectly input to the IT system and that the amendment was processed in
order to apply the correct fee charge to the customer account.

(ii) The fee amendment made to the account of Customer C, as noted on the Fees to
be Applied report, was not subsequently charged to the customer's account and
there is no explanation as to why the manual amendment was made.

Note that "P%" refers to a specifically defined percentage of account credit turnover
which forms the basis for negotiated fees.

Each of the classification captions described above is explained more fully at Section
3 below.

Review of Supporting Documentation

Our review of supporting documentation involved the examination of Fee


Amendment Sheets and current and historic customer files.

Fee Amendment Sheets

Our review of the Fee Amendment Sheets identified only two sheets which
supported amendments made to the "Fees to be Applied Report". These are detailed
in the spreadsheet at Appendix 1.

Costings Sheets

A file of costing sheets for the quarter was not available. Costing sheets were located
in 17 customer files during our review.

Fees Applied Report and Amended Fees Input Report

A small number of amendments identified from the Fees to be Applied Report were
not processed through the Fees Applied Report and Amended Fees Input Report.
These included the IR£37,202 described above as relating to Customer C.
Customer Files

Details of the documentation identified, by customer, are included in the spreadsheet


at Appendix 1. The following table summarises the results of our review of customer
files by classifying the documentation and correspondence identified by us under
each of the customer account types. In a number of cases, our review identified more
than one item of potential support for an amendment on file and accordingly there is
overlap between the classification types and it is not meaningful to provide column
totals in this table.

Out of the total of 896 amendments reviewed, the number of amendments for which
no items of relevant documentation or correspondence were located on the related
customer files or where the related customer file could not be located amounted to
536.

Table 1.5 Summary Classification of Documentation and Correspondence Identified


in Review of Customer Files

Personal Business
Accounts Basic Accounts Negotiated Accounts Total
Amendments
Debit Credit
Classification No. Value No. Value No. Value No. Value No. Value
IR£ IR£ IR£ IR£ IR£
Notices to Customers 51 166 12 138 8 590 1 (700) 72 194

Costings Sheets 1 2 3 95 13 760 2 (5,804) 19 (4,947)

Mortgages 39 190 - - - - - - 39 190

Limits Marked 138 629 28 355 19 1,117 1 (52,484) 186 (50,383)

Facilities in place 168 753 33 710 24 1,183 1 (52,484) 226 (49,838)

File Notes 84 367 20 617 17 823 - - 121 1,807

No documentation 411 1,704 82 1,290 43 3,977 _ _ 536 6,971


found*

*Accounts for which there was no documentation or correspondence on file or the file was not located.

Notes:
"No." refers to number of customer accounts to which classification applies
"Value" refers to monetary value of amendments made to customer accounts

See over for Classification Key.


Classification Key

"Notices to customers" refers to those accounts for which notices were issued during the
quarter

"Costings sheets" refers to customer files on which a relevant costings sheet was located

"Mortgages" refers to those customers who had a mortgage in place during the period

"Limits marked" refers to those accounts on which a lending limit was established or
renewed during the quarter

"Facilities in place" refers to those customers who had an overdraft facility in place during
the period

"File Notes" refers to those accounts where indicators of performance were identified during
the period

Interviews

I n d i v i d u a l s identified b y IA as h a v i n g b e e n involved i n the m a n a g e m e n t of the


b r a n c h d u r i n g the relevant period, w h e r e available, w e r e interviewed. T h e results of
the interviews are set o u t in Section 3.2.4 below. Each of the i n d i v i d u a l s i n t e r v i e w e d
indicated that the principal reason for fee a m e n d m e n t s w a s to reflect a d m i n i s t r a t i o n
or m a n a g e m e n t t i m e w h i c h w a s n o t c a p t u r e d automatically b y the s y s t e m - b a s e d fee
c h a r g i n g system.
1.3.3 National Australia Group Europe, Internal Audit review procedures

Following our review and classification of the fee amendments, IA personnel


reviewed each of the debit fee amendments which had been identified as relating to
business customers ("Basic" and "Negotiated" accounts) and a significant number of
fee amendments, relating to personal customers. This review was conducted by
reference to individual customer account microfiche records during the quarter
ended February 1990 and sought to identify a basis for each fee amendment.

During the period the standard charge for management time was IR£10 per manager
hour. Standard times for specific tasks were not introduced until July 1992. IA has
used the standard times currently applied combined with the appropriate hourly
rate for the period, where such tasks were evident from a review of a customer's
account activity (but which were not computed by the Bank's IT system and charged
to the customer account), to support the charges. The procedures adopted by IA
were, in our view, reasonable given the focus of their review and the results reflect
the consistent application of these procedures.

The percentages shown under the column "Examined by IA" represent the
percentage of the total number of amendments which were reviewed by IA
personnel. The percentages shown under the column "Considered justifiable by IA"
show the percentage of the accounts reviewed by IA in respect of which they
considered that the fee amendment was justifiable in the context of the post hoc
application of standard times and charges to tasks identified.

The following table summarises the results of the IA review :


Table 1.6 Summary Results ofIA investigation of Debit Fee Amendments

Total Examined b y Considered N o t yet r e s o l v e d


IA justifiable b y IA b y IA
Classification No. Value No. Value No. Value No. Value
IR£ IR£ IR£ IR£
Amended fee equates 104 1,383 72 1,314 64 1,268 40 115
to previous quarter fee
Percentage of total 69% 95% 89% 96%

Amended fee equates 321 2,200 172 1,957 126 1,730 195 470
to gross fee
Percentage of total 54% 89% 73% 88%

Amended fee is within 71 429 49 332 27 175 44 254


lOp of gross fee
Percentage of total 69% 77% 55% 53%

Others, excluding 389 7,282 256 7,048 222 6,785 167 497
customer C
Percentage of total 66% 97% 87% 96%
Total 885 11,294 549 10,651 439 9,958 446 1,336
Percentage of total 62% 94% 80% 93%

Analysed as:
Personal 671 2,840 335 2,197 225 1,504 446 1,336
50% 77% 67% 68%
Basic 132 2,337 132 2,337 132 2,337 - -

100% 100% 100% 100%,


Negotiated 82 6,117 82 6,117 82 6,117 - -

100% 100% 100% 100%


885 11,294
1.4 Interest

1.4.1 Arthur Andersen Procedures

Our work performed in relation to interest adjustments is described in detail at


Section 4.1.2 and involved the following principal steps:

• The identification and extraction of all manual credit interest adjustments posted
to the 'Interest Charged on Current Account' (General Ledger Account) and the
'Interest Charged and Paid Account' (General Ledger Account) on the date of the
quarter end automated interest posting.

• The analysis of all manual credit interest adjustments identified above by


agreeing them to individual debit postings made to customer accounts.

• The identification and examination of any available supporting documentation


relating to these adjustments.

• Interviewing certain individuals who held management positions at the relevant


branches during the periods under review.

• Reviewing the work performed by IA, who conducted a review of the interest
adjustments made to certain customer accounts.

Certain documentation, identified as a potential source of support and explanation,


was not available for review. The documentation gaps are described at Sections 4.1.2
and 4.3, and principally comprise the following:

• Red debit vouchers, autowaste reports, red duplicate statement books and
interest amendment sheets, all of which represent potential sources of
documented annotation a n d / o r explanation, were not available for significant
parts of the periods under review.

• More specifically, the documentation gaps relate to:

Interest amendment sheets, red duplicate statement books, general ledger


vouchers and debit interest applied to accounts reports for Blanchardstown.

Interest amendment sheets and debit interest applied to accounts reports for
Carndonagh.

Debit vouchers for Carrick-on-Shannon.


Autowaste reports or interest amendment sheets for Walkinstown.

A reconciliation of the Carrick on Shannon bulk posting on 27 November


1987.

The scope of our work was extended to include the following additional procedures:

• Our review of manual interest adjustments was specific to each quarter end
posting date within the relevant periods. In a number of situations no manual
bulk posting was processed to the "Interest charged and paid account" or the
"Interest charged on current account" on the quarter end date for the branches
and periods under review. As a result, it was agreed to extend our scope to
search for any bulk postings processed within 5 business days of the quarter end
posting date. We identified only two manual bulk postings within this "cut-off"
period and therefore it was agreed that a Cork bulk posting on 23 February 1990
and a Walkinstown bulk posting on 28 May 1990 should be analysed, reconciled
and reviewed as outlined above.

• Review of "debit interest applied to accounts" reports. These reports were


identified as an additional source of potential explanation for manual interest
adjustments.

• Review of the "general ledger" vouchers. These vouchers were identified as an


additional source of potential explanation for manual interest adjustments.

1.4.2 Findings

The results of our work are summarised below and described in detail at Section 4.

A total of 991 manual interest adjustments were identified amounting to IR£226,491.


These adjustments were recorded in 382 individual customer accounts. Included in
the total is a single adjustment amount of IR£100,631 on a business customer account
for which supporting documentary evidence is available.

Our review of the available documentation indicated that similar explanations


applied to a number of these manual interest adjustments. These additional interest
charges have been classified below according to the explanations contained in the
available documentation.

The classification captions used are described below under 'Classification Key'.
Classification Key

A Detailed explanation obtained from certain available documentation.


B Certain available documentation indicated additional charges were
made for 'management time'.
C Certain available documentation describes additional charges as
'loading'.
D Available documentation does not provide a specific detailed
explanation - for example the narrative description on the available
documentation is 'Int Adj', ' 1 / 4 Int Adjustment', 'Additional Int', 'Int
Amend', 'Amend', 'Adj', 'Int', 'Interest', 'Interest Amend', 'Int
Amendment', 'Additional Interest Charge', 'Interest Amendment', 'Int
Append' or there is no narrative description on the available
documentation.
E Interest amendment sheet indicated an additional £10 charge for each
suspended payment.
F All manual interest adjustments (debit) not falling within the
classification types described under A through E are included under
this caption. It was not meaningful to classify these adjustments into
further captions based on our review of the available documentation.
See detailed sheets in Appendices.
G Represents credit interest adjustments to customer accounts for which
the available documentation does not indicate that the credit is exactly
offset by an equal debit.
Table 1.7 Summary Classification of Manual Interest Adjustments by Number

f f v - - -, — r '! V.v-t'i
i [ tms
| rjn.fji.Ttt t.' • (t ('.y i > '
. . L
A 2 - 15 315 - 332
B - - 171 29 200
C - - 110 - - 110
D 21 261 33 27 70 412
E - - - 23 - 23
F - 10 6 10 1 27
G - -
2 3 - 5
Total 23 271 166 549 100 1,109
Less combined - - (2) (116) - (118)
items
Total number of 23 271 164 433 100 991
adjustments
Total customer 19 106 66 157 34 382
accounts

Notes:
(i) The number of adjustments is greater than the number of accounts to which these adjustments
were made as a number of customer accounts were subject to an adjustment at more than one
period end.

(ii) "Combined items" refer to situations where a single additional interest adjustment applied to a
customer account is analysed into more than one classification caption based on our review of
the available documentation.
Table 1.8 Summary Classification of Manual Interest Adjustments by Value

Ci lSSlluMlldil 7

A 102,893.17 630.89 24,677.46 128,201.52


B 31,555.00 10,700.00 42,255.00
C 7,215.00 7,215.00
D 2,298.93 25,116.87 1,685.00 2,071.19 15,507.47 46,679.46
350.00 350.00
425.67 309.50 3,223.41 54.69 4,013.27
(79.13) (2,143.94) (2,223.07)
Total 105,192.10 25,542.54 9,761.26 59,733.12 26,262.16 226,491.18

Notes:
(i) Included in Classification A for Blanchardstown is a single specific amount of IR£100,631.05 on
a business customer account for which supporting documentary evidence is available (see
above).

(ii) In compiling the summary classification 'F' for Cork, the effect of two debit adjustments and
one corresponding credit adjustment, each in total amounting to IR£32,558.28, arising on a
number of linked customer accounts, was excluded as the net effect is zero.

(iii) No other credit interest adjustments within the bulk postings reviewed were identified
showing instances where the available documentation indicates that the credit adjustment
offsets a debit interest adjustment for the same amount.

Interviews

Various individuals who were identified by IA as having held management positions


in the branches during the relevant periods (see Section 4.1.2) where available were
interviewed. However, none of the Branch Managers for the relevant periods were
available for interview. In general, interviewees could not recollect any specific
information.
1.4.3 National Australia Group Europe, Internal Audit review procedures

As outlined in Section 4.1.4,1A reviewed each of the interest adjustments included by


us in Classifications C through F and reclassified the amounts based on their work.
The procedures adopted by IA were, in our view, reasonable given the focus of their
review and the results reflect the consistent application of these procedures.

The classifications used by IA are as jbllozvs:

1 IA are satisfied, based on their work, that the interest adjustment is


justified for a specific reason, e.g. additional interest due to the Bank
caused by cheques held in suspense.
2 IA are satisfied, based on their work, that the interest adjustment is less
than a charge for management time which could have been justified
based on account activity but which was not charged as a fee.
3 IA are unable to identify a basis for the interest adjustment.

The tables below summarise the results of the IA review:

Table 1.9 - IA Classification of Manual Interest Adjustments by Number

12 51 62 41 16 182
217 81 53 365
Total 23 271 149 59 72 574
Less combined
(2) (1) (2)
/ add split items
Total number of 21 271 149 60 71 572
adjustments

Notes:

(i) "Combined items" refer to situations where a single additional interest adjustment applied to a
customer account is analysed into more than one classification caption during the IA
classification process.

(ii) "Split items" refer to situations where a single additional interest adjustment was analysed into
more than one classification caption based on our review, and these analysed classifications
were combined into one single amount during the IA classification process.
The 365 manual interest adjustments included in classification 3 above were posted
to 171 customer accounts as follows:

Number of Number of
adjustments customer
accounts
Blanchardstown 6 6
Carndonagh 217 89
Carrick on Shannon 81 36
Cork 8 8
Walkinstown 53 32
365 171

Table 1.10 - IA Classification of Manual Interest Adjustments by Value

1 539.61 232.90 309.50 2,666.63 414.77 4,163.41


2 1,163.00 2,883.53 4,140.00 2,220.00 2,450.00 12,856.53
3 596.32 22,426.11 4,760.00 757.97 12,697.39 41,237.79
Total 2,298.93 25,542.54 9,209.50 5,644.60 15,562.16 58,257.73
Analysis of unjustifiable amendments by time
Unjustifiable charges (excluding Waterford Fees)

Year Interest Fees *

1987 8,192.32 12,809.74

1988 26,592.70 37,048.71

1989 54,460.32 37,083.59

1990 34,620.24 24,529.05

1991 6,624.28 31,181.66

1992 2,417.25 7,806.88

1993 585.45

1994 55.00

1995 330.00

1996 884.97

1997 109.98

1998 75.00

Total 134,947.41 150,459.63

* Waterford fees excluded as yet to be quantified


Appendix 15: Copy Bank letter dated 10 April 2001 to Inspectors
outlining proposed further review of interest charges
National Irish ^ Bank
A Member of Head Office
National Australia Bank Group 7/8 Wilton Terrace
Dublin 2
Tel (01)6385000
Fax(01)6385198

Date
10 April 2001

The Honourable Mr Justice John Blayney


And Mr Tom Grace
Joint Inspectors
C/o PricewaterhouseCoopers
Wilton Park Hse
Wilton Place
Dublin 2

Re: Further Interest Review Project Ref: Your Letter dated 19/2/2001

Dear Inspectors,

I refer to your request dated 19 February 2001 for details of the further review of interest currently
underway and your subsequent letter dated 15/3/2001.

The Bank has embarked on a programme to review interest postings across the branch network for the
period 1/10/1987 - 5/4/1998. The programme comprises four phases and includes reviews of the
following interest postings:

• Phase 1 - Quarter end adjustments in branches where interest refunds have previously been
made, to ensure four calendar quarters have been reviewed before and after the calendar quarters
in which refunds have been made as a result of the IA and AA reviews conducted during 1998

• Phase 2 - All interest discrepancies reported by Livelink in excess of £5, where the HI2000
Closed accounts reports are available.

• Phase 3 & 4 Sampling of all remaining postings to the interest income accounts within the
general ledger, for all branches.

As with the AA & IA reviews, the work is incremental in structure, with the scope of phase 3 and 4
being based on the outcome of phase 2.

While initial reviews have been completed of the transactions within phase 1, work is not yet complete
in respect of this phase. It is envisaged that the review will be completed by the Autumn of 2001.
However the completion of the review is dependant on the sampling rate selected for phase 3 & 4
which will not be determined until phase 2 is completed, which we expect to complete by the end of
June 2001.

Yours sincerely

Jc
Programme Director

National Irish Bank Limited


Registered In Ireland No. 65780
Registered Office 7/8 Wilton Terrace. Dublin 2
Appendix 16: Copy memorandum dated 24 July 1992 from Dermott
Boner, Head of Retail, with attachments
v r ^ 7

W L
'MEMORANDUM

To: rs && Staff


2 8 JUL 199^A11 Branch ManaJ£RS Staff

From: D Boner Head of Retail

Date: 24 July 1992

Re:
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
1t******************.****:
Following discussions at the recent Managers Strategy Conference a new charge sheet
for monitoring and charging Management Time will be introduced shortly (copy
attached).

Our efforts for increased fee income should be concentrated in this area to ensure a
realistic level of fee income for Staff and Management Time.
Attached is a guideline for charging Management Time. The charge should be applied to
11 accounts that are troublesome and time consuming.
Accounts should be monitored daily with details of services provided recorded on the
new St. E0020. These charges should be processed on a quarterly basis by way of
fee adjustment to the fees to be applied report.

We should be mindful of our competitors system of applying the charge for Management
Time. It has come to our attention over the last few months that one of our large
competitors apply a charge of £25 to business customers for sending one letter re.
account within the quarter.
As you are aware increasing fee income is one of our key targets for the present
financial year. Managers and Branch staff should be constantly vigilant when dealing
with customers of the need for Management Time cost recovery. Each Branch Manager
should now set a target for Management time for the quarter ending September '92.
Branch staff should be advised of this target at staff meetings and branch progress
monitored throughout the quarter.

While I realise that setting a target for Management Time in addition to our present
"ee target may appear very stretching, it can be achieved when we consider our recent
success on Referral fees - Income to date E 295K.

Enc: Copy 3t E0020


Guideline for Management Time
Estimated cost of Slip Letters
National Irish ^Bank

CUSTOMER ACTION PAD


lATE : ACCOUNT NUMBER

CHARGE £

CUSTOMER'S NAME:

PHONE NUMBER:

IUSTOMER Q U E R Y / R E Q U E S T • MGT. TIME • BUS. OPP. | |


PLEASE TICK APPROPRIATE BOX

lETAILS :

r ACTIONED BY CHARGE AUTHORISED BY (MANAGER)


- eooRO
Estimated Total cost of Processing A Slip Latter

Branch - Day 1 Referral


Time in Standard
Grade Minutes Costs
Managers Morning Meeting
- Example P8VL Manager 3 1.44

M£ke Credit. Decision:


(1) Pay Cheque - no further action
except apply referral charge

(2) Take the following course of action:


- contact customer, no lodgment expected Officer 5 -&P&V
- Retrieve uebit (i) suspend Officer 8 i.92
(ii) Return unpaid
- apply charge
- Update M & M SBO 5 1.20
- Prepare Slip letter Manager 15 7.20
- Have Slip Letter typed, checked JBO 15 1.50
and forwarded to R/O Manager 5 2.40

Regional Office Day 2


Examine Slip Letter Asst. Mgr. 5 1.60
- Check customers file for account history
- Based on account history and Managers
recommendations
(i) pay debit Asst. Mgr 15 4.80
(ii) excess refused

- Relate decision to Branch at 11.30am Asst. Mgr. 5 1.60


- Confirm instructions on slip letter
and return to branch. SBO 15 3.60

96 . 28.46

Notes.--
The above does not account for limits in excess of E250K which must be referred to
Cr.d i t desk .

No fixed costs ? g. Bank rent, Computer costs. Stationery. Courier charge etc. are
included in the above calculations.
lidelines for charging Management Time

Min '.mum
Cha *ge

Standard pre-printed letters

eg. St 188 overdrawn accounts £3.00 per letter

Short letters (5_- 7 typed lines)

to Customers, their Accountants or Solicitors. £7.JO per letter

Letters (7 - 20 typed lines)


to customers their Accountants or Solicitors. £12.00 per letter
Interviews with customers, their Accountants £12.50 per 1/2 hour
r Solicitors with the exception of normal review, £25.00 per hour
interview or request for additional funds.

Phone calls re account activity


Local calls (approx 40 miles) £2.00
Long distance calls £5.00

Constant / frequent requirement for slip letter


communication to Regional Office £25.00 per S/L

The above are guidelines to assist branch staff and should not specifically
be advised to customers.
.,o provision made for time, incurred obtaining knowledge of the customer.

Assumed Average Time Costs:-

Per Hour Per minute-


IRE IRE
Manager 26.70 0.48
A/Manager 19.00 0.32
Officer 14.37 0.24
S.B.O. 14.37 0.24
J.B.O. 6-00 0.10
Appendix 17: Copy Bank paper - Fees Review 2001
Fees Review 2001

Background
Reviews of fees charged to customers during the period November 1987 and April 1998 have been
conducted by Internal Audit and Arthur Andersen, arising from allegations of overcharging in the media.
The media allegations resulted in customer enquiries regarding the fees charged on their accounts,
(approx 1800). Whilst some of the enquiries were specific in nature and in the form of a complaint, the
majority sought assurance that the appropriate fees had been charged to their accounts.
The investigation completed following the media allegations examined the fee charging practices within
the bank, and found them to be broadly acceptable. This review is best described as a Network Assurance
Review.
The investigation identified 3 branches where for certain periods the fees charged were out of line with
the norm, and more detailed reviews revealed 1030 customers where, based on the available information,
a reason for the fee charged could not be documented.
The Bank made a commercial decision that the most appropriate response to these findings was to refund
amounts involved to customers totalling £213k, including an amount to reflect the time value of money
resulting in refunds of 883k

Resolution of Customer Enquiries

The Bank initially envisaged resolving the enquiries received from customers on a customer by customer
basis, however it became apparent that this approach was not sustainable as the volume of queries
increased. This was further compounded by the general nature of the enquiries.
In response to this analysis, the Bank placed reliance on the outcome of the network assurance review,
and adopted a graded approach to the resolution of the customer enquiries, based on the following broad
principles
• Specific enquiries were responded to in a specific manner, supported by detailed research
• General enquiries were responded to based on the network assurance review results,
indicating that charging practices at the branch where the accounts were held had been found
to be acceptable.
• Where an account was examined within the network review and other work, and the fee
charged was found to be adequately documented, the response to the customer indicated that
their account had been sampled for a period and found be correct.
• Customers at the 3 branches' where the fee charging was found to be outside the norm where
responded to on the basis of the outcomes of the detailed review work conducted at this
branches.
Whilst this approach enabled the Bank to address the concerns of the enquiring customers, in a timely
manner, a number of issues have arisen following reviews of the work completed by both internal and
external review teams.

• Customers whose individual accounts did not achieve the acceptable threshold within the
network assurance review have been given assurance on the basis of that the fees charged at
their branch were reasonable, notwithstanding the results of the work on their accounts.
• Where a branch passed the network assurance review, outstanding issues identified within
work in progress on their specific accounts have not been resolved.

' VValerlbrd Branch was initially incorporated in the general response process, however following further risk analysis was included in the
detailed due diligence review.
•' I ligh Court Appointed Inspectors
• The text of the letter sent to customers does not always reflect the work on which the
response was made.
• The review periods quoted in the Due Diligence response letter to customers does not
accurately reflect the underlying work completed by the research teams.
Arising from these issues it has been decided to instigate a further review, to examine the outstanding
matters from the existing reviews.

In addition to the further work within the scope of this paper, the Bank will establish a customer contact
process to enable customers to address any issues which arise following the publication of the report of
the inspectors appointed by the High Court. The structures and approach adopted during this review will
be the framework on which all further enquiries will be resolved.

Scope of Proposed Fee Review

The review will examine the following areas in detail:

• Ensure that the all customer enquiry files contains evidence of a specific review, and that the
outcome of that review meets the appropriate criteria for resolution of the enquiry;
• Review all files where an issue within the test results remains unresolved, and resolve such
issues:
• Review all files where the 80% threshold was not achieved within the internal audit reviews
(including the College Green Branch Review), and determine the appropriate action (both
customer enquiries and other selected amendments)
• Review all further requests for a review of the fees charged.
• Review customers enquiries from the 3 due diligence branches to ensure that the due
diligence work adequately addresses the customer query.

The review will exclude the following areas


• Fees charged to large corporates;
• Fees charged to accounts after the introduction of the pre-notification of fees;
• Examination of system generated fees;
• All fee periods covered by the due diligence review at Cork Carndonagh and Waterford;
• Amendment amounts of £10 and less will not be examined, even in cases where existing
work has not resolved the amendment.
Whilst the Bank continues to rely on the overall outcome of the Network Assurance Review, this review
will include a further examination of the results of each branch to determine if there are any further
branches where a Due Diligence review is appropriate

Methodology

The methodology is outlined in Appendix A. In general the approach adopted will mirror that adopted in
the past. Three levels of testing will be considered on an account level as follows:

• Level 1 - Sample identification of amendments


Examination of Fees Applied /to be Applied to determine if the system generated fee was
subject to amendment. To examine the fees of accounts over time, individual quarters will be
examined at approximately 2 year intervals ( Feb 88, May 90,Aug 92, Dec 94). Where an
amendment is identified level 2 testing will be completed
• Level 2 - Resolution of amendments with the sample periods
Each amendment identified during level 1 testing will be examined in detail to determine if a
reason to explain the amendment can be identified. In the event that any of the selected
quarters cannot be adequately explained, level three testing will be completed.

• Level 3 Testing - Full examination of Fee for the account


Where an explanation for the charging of a fee can not be identified, the quarters before and
after the affected quarter will be examined to identify other instances where this is the case
for the account. This work should be continued until 4 unaffected quarters have been
identified before and after the quarter concerned.

In addition to the testing conducted at a customer level, the outcomes of each branch will be
benchmarked against the network as a whole to determine if there are any branches which will require
more detailed examination.

Review Outputs
The results of the reviews will be reported to management and the anticipated outcomes are as follows:
• In cases where the text of any previous letter sent to customers did not accurately reflect the
testing conducted, but that the account passes the review criteria, no revised letter will be sent
to the customer.
• In cases where a customers fee, was not amended or where an amendment is adequately
documented by the review, no further action will be taken.
• In cases where the review is unable to document the reason for an amendment, the customer
will be passed into the normal refund process.
Js Branch =
: Check All Fee Queries; .--Existing Reviews
: Camdonagh or . Yes—>|
(1800) Sufficent
\Waterford/"

Yes
T

: No Further Action ;

• 1s the file m a r k e d
- Y e s — R e s e a r c h issues in file
Sticky

.' No Further Action j

File
•WThreshold\ , Commence Further
RE viewed
achieved Review Work
. by IA ? --

J No Further Action '

Detemfne Testing
• Stickys other
undocumented £ go to
level 3

Specific Queries, .Level 1


examine specific ; Prepare Template & Examine Fees Applied I '"Ame ndme n t s \ ^ _ _ Issue Detailed Check j
-No
quarters Identify periods for ;/ To be applied ; , Found Letter
1 review

General Quenes '


examine 1 quarter per :
2 years

Level 2
i Prepare L2 Templates i_ t ; Examine reasons for ^ Reasons
; for review Documented .

Level 3
i Complete due Reasons
-Yes-
: diligence until4qtrs Documented .
cleared each way

^ Consider if eligible for, ^ debtordLlved > No Refund Customer


! R e f u n d • ltd co ;

Yes

* : •

Analyse Br by Branch 1 Distribute as


Results to determine ! appropiate, NIB or
exception Branches ! Chief State Solr

linal Draft J:\H C I\HCI31052001 attach.doc 26"'July 200i


Appendix 18: Summary, changes at NIB since 1998
Appendix 18

SUMMARY, CHANGES AT N I B SINCE 1998

At the Bank's request, the Inspectors in October 2000 attended a presentation from senior
executives of the Bank on changes in organisation, management and procedures since the
appointment of the Inspectors.

The Inspectors were informed that many of these changes would have taken place as part
of global developments in the National Australia Bank Group, but that there had been
special emphasis on compliance issues in Ireland as a result of the news media reports of
improper practice at NIB. Changes were outlined under a number of headings:

General

• The Board and senior management of the Bank have been re-organised.
• An early retirement scheme resulted in many managers aged 50 and over taking early
retirement.
• All branch and business centre procedures manuals were reviewed, rewritten and
reissued to branches between November 1999 and May 2000.
• Additional resources have been applied to training - including refresher training on
Group values and ethics - supplemented by the appointment of three compliance
training managers (former internal audit staff), with the role of inspection, coaching
and reporting findings to senior management.
• New customer complaints procedures were launched in September 2000; a booklet is
now displayed in branches entitled "Resolving your complaints", outlining the Bank's
procedures and setting out the role and address of the Banking Ombudsman.

DIRT exempt accounts

• Control of DIRT compliance, including the holding of records, was centralised in


November 1998.
• The Bank's auditors in December 1998 compiled a new tax manual on all areas of
taxation, including DIRT, sections of which were circulated to branches.
• A tax compliance manager has been appointed, responsible for co-ordinating all
taxation initiatives in NIB.
• In May 1999, each branch was required to nominate a DIRT compliance supervisor as
liaison with the central unit and as a local controller.
• Account opening procedures have been rewritten, and authorisation to assign tax
exempt status is issued centrally, following review of documentation.
• Intensive training on account opening, non-resident requirements and SSA procedures
took place in July and August 1999.
• Ongoing compliance is monitored by the compliance training managers.
• Non-financial amendments to non-resident accounts are centrally monitored for risk
indicators of return to residence.
• Revised instructions and guidance on the six-monthly branch confirmations on non-
resident accounts were issued in July 2000.

Financial Services

• New management appointments have been made, including the appointment of an


Operational Risk and Compliance Manager who took over as Head of European
Compliance in April 2000.
• The Compliance Manual, outlining all policies, procedures, and competence
standards for staff has been rewritten.
• The complaint handling procedures have been upgraded.
• Offshore insurance policies are no longer sold.
• Current products have been examined for suitability and approval.
• A more detailed "factfind" has been introduced to establish the investment
requirements of customers.
• Ongoing performance monitoring of investment advice in respect of new sales has
been introduced.
• Staff remuneration is linked, inter alia, to compliance.
• There is additional emphasis on training and staff qualifications.

Special Savings Accounts

• Branch procedures have been simplified.


• The number of SSA products has been reduced.
• The SSA withdrawal process has been redesigned to include use of a multi-part
withdrawal form.
• The branch is required to review SSA withdrawals each day to ensure no unexpected
SSA withdrawals appear.

Interest adjustments

• Since November 1998, all quarterly interest charges have been pre-advised to
personal customers.
• From August 1999, customers have been routinely advised where interest errors have
occurred and the practice of retyping statements to hide such mistakes has been
discontinued.
• Interest adjustments are shown separately on customer statements; from February
2001 a more detailed advice will identify standard and default charges.
• All interest amendments must be authorised by Area Managers.

Fee charging procedures

• The Fees and Costing Manual has been rewritten, setting out clear policy and
procedural guidelines in relation to the application of operating fees, and was
distributed to branches in April 2000.
Training workshops have been held for branch staff.
Quarterly charging instructions are routinely issued, referring branch staff back to the
procedures manual.
Compliance with fee charging procedures is now audited by non branch staff.
Redesigned fee notices and leaflets have been made available in branches.
Since August 1999, all fee adjustments have been entered on a summary form and
overviewed by the branch manager and Area Manager, and copied to Head Office.
All "end of period" amendments in excess of IR£10 are approved centrally.
Appendix 19: Copy Bank "Reaction Paper" dated 24 March 2004
-REACTION PAPER-

DATED 24 MARCH 2004* +

TO
DRAFT REPORT ON INVESTIGATIONS INTO THE AFFAIRS OF NATIONAL IRISH BANK LIMITED
AND NATIONAL IRISH BANK FINANCIAL SERVICES LIMITED
BY HIGH COURT INSPECTORS MR JUSTICE BLAYNEY AND TOM GRACE FCA
APPOINTED 30 MARCH 1998 AND 15 JUNE 1998
DATED 31 JULY 2003

*Figures in table on page 4 revised on 26 May 2004


""Appendix V revised 26 May 2004 and on 25 June 2004
CONTENTS

Page No

Reaction Paper (1)

Index of Schedules (6)

Schedule I List of Communications between the Bank and the Inspectors since (7)
receipt of the Draft on 1 August 2003

Schedule II "Policies and Controls in National Irish Bank as at December 2003 (9)
Relating to Matters under Investigation by High Court Appointed
Inspectors"

Presentation made to the Inspectors on 10 December 2003

Schedule III "Summary, Changes at National Irish Bank since 1998" - Update to (26)
Appendix 18 of Draft

Presentation made to the Inspectors on 10 December 2003

Schedule IV Settlement Details - Deposit Interest Retention Tax and Special (31)
Savings Accounts

Schedule V "National Irish Bank Fees and Interest Refund Programme" (33)

Presentation made to the Inspectors on 28 January 2004

Schedule VI Payments to Customers and Procedural Changes in relation to (49)


Offshore Investors' Settlement Programme

Schedule VII List of Regulatory Authorities who the Bank wish to be furnished (50)
with the High Court Inspectors' Report
REACTION PAPER

1. On 1 August 2003 the Joint Inspectors (the "Inspectors") appointed by the High Court by
Order dated 30 March 1998 to investigate the affairs of National Irish Bank Limited and by
further Order dated 15 June 1998 to investigate the affairs of National Irish Bank Financial
Services Limited delivered a draft document entitled "Report on Investigations into the Affairs
of National Irish Bank Limited and National Irish Bank Financial Services Limited by High
Court Inspectors Mr Justice Blayney and Tom Grace FCA appointed 30 March 1998 and 15
June 1998", dated 31 July 2003 (the "Draft") to National Irish Bank Limited (the "Bank")1.
The Inspectors' work deals with a ten year period from 1988 to 30 January 1998 (the
"Investigation").

2. Since 1 August 2003, the Bank has had the opportunity to consider the Draft.

3. The Bank was informed by the Inspectors that they proposed to finalise their report as soon as
they received the Bank's reaction to the Draft. It was explained to the Bank that the
Inspectors' final report would issue without further consultation with the Bank.

4. The Bank has, since receipt of the Draft, communicated with the Inspectors by letter, in
meetings and by way of written papers delivered to the Inspectors. Details of these
communications between the Bank and the Inspectors between 1 August 2003 and 5 February
2004 are set out in the attached Schedule I.

5. The media allegations that were the catalyst for the High Court ordering the Investigation
suggested a failure by the Bank to operate appropriately in the retail banking market and in
and about the provision of financial services and/or advice.

6. Given the fact that the Inspectors were charged to investigate allegations which span a
timeframe from 1988 to 1998 and that they had powers to do so beyond any powers of the
Bank, it was considered inappropriate to try to duplicate the Investigation. Rather, the Bank
determined to review the retail banking operations and financial services and advice
operations that were affected by the allegations to ensure that its business was equipped to
operate as a fully functioning member of the Irish financial community and that it had systems
in place which are in line with the appropriate standards. The Bank has sought to ensure that,
going forward, events of the type suggested in the allegations could not occur. The Bank has
also focused or addressing customer issues and settlement of liabilities with the Revenue

1
This document represents the reaction of National Irish Bank Limited and National Irish Bank Financial
Sendees Limited to the Draft referred to above.
Commissioners. The Bank explained this approach to the Inspectors in the course of their
Investigation and the approach taken has been the subject matter of a number of presentations
and documents delivered to the Inspectors. The first presentation was made by the Bank on
18 October 2000 and was summarised by the Inspectors at* Appendix 18 of the Draft. After
receipt of the Draft, the Bank made a further presentation to the Inspectors, on 10 December
2003, at which two documents were delivered to the Inspectors. The first outlined the
"Policies and Controls in National Irish Bank as at December 2003 Relating to Matters under
Investigation by High Court Appointed Inspectors" and is attached at Schedule II. As part of
the same presentation to the Inspectors the Bank provided the Inspectors with a version of
Appendix 18 of the Draft marked up to reflect the updated position since the first presentation
had been made in October 2000. This is attached at Schedule III. In short, the documents
provided to the Inspectors describe the implementation of structures and processes that have
been designed to guard against activity of the kind described in the allegations. The Bank
believes that its retail banking operation is now compliant with all appropriate laws,
regulations and other codes governing banking practice.

7. In respect of allegations that interest bearing deposit accounts were wrongly designated2 for
the purposes of the deduction of Deposit Interest Retention Tax ("DIRT") the Bank
investigated and scoped the extent of this issue. The Bank also investigated and scoped the
extent of the issue in respect of Special Savings Accounts ("SSA"s). Separately, an
investigation was undertaken by a sub-committee of the Committee of the Public Accounts of
Dail Eireann ("PAC") into the Bank and other financial institutions in the State on the subject
of compliance with the legal regimes that governed DIRT and SSAs. In addition, the Revenue
Commissioners carried out an investigation into the alleged failures to return DIRT and
operate SSAs in accordance with the regulations governing such accounts. The Bank has co-
operated fully with the Revenue Commissioners and the PAC and believes that it has settled
all of its liabilities with the Revenue Commissioners that are asserted to flow from the
inappropriate treatment of such accounts. Full details of the settlements are contained in
Schedule IV.

8. The possibility that there were fictitious and incorrectly named accounts had been identified
by the Bank prior to the appointment of the Inspectors. Such practices, which were
unauthorised by the Bank, were always contrary to the Bank's internal policies.

9. In respect of the allegations concerning the charging of fees or interest on retail bank accounts,
the Bank decided that it was appropriate to review the account population affected by the

2
These are sometimes called incorrectly classified non-resident deposit accounts.

2 (2)
allegations and to refund any charges that could not be justified by the review. An initial
review dealt with specific allegations made. In response to the broader findings by the
Inspectors a comprehensive new programme has been developed and is being applied. The
Inspectors have been informed of the new programme and the principles it applies. By way of
overview, this programme includes the assistance of two outside agencies to ensure objectivity
and appropriate checks and balances to ensure its robustness. The details of this programme
were notified to and explained to the Inspectors on 16 December 2003. This was followed by
a written presentation to the Inspectors on 28 January 2004. The written presentation and the
rollout of the programme is set out in Schedule V. The Bank offers this new programme as a
proportionate and appropriate response to the issues that arise in respect of fees and interest
allegations. The programme was a response to the Inspectors' findings in respect of the fees
and interest matter. The objective of the programme is to ensure that the Bank retains no
financial benefit from the deficiencies identified in the fees and interest charging practices.

10. Following the allegations, the Bank received complaints and set up a programme to address
complaints by Irish resident customers who bought offshore products, commonly referred to
as "CMI", through the Bank's former Financial Advice and Services Division in respect of
losses arising as a result of sales by Bank employees to these customers. Details of this
programme, which is ongoing and has been in operation since January 2001, are set out in
Schedule VI.

11. On the appointment of the Inspectors the Bank committed itself to afford the Inspectors every
assistance both in terms of encouraging its staff to give evidence to the Investigation and in
terms of providing access to and copies of the Bank's documentation. The Bank would like to
record its appreciation of the professionalism with which the Inspectors have dealt with it over
the period of the Investigation and the understanding they have shown towards the logistical
problems involved in dealing with the Inspectors' requests for information regarding matters
that relate on many occasions to events that date back 15 years. As might be expected in such
an extended investigation legal issues have arisen from time to time which have led to
applications to Court in order to have those issues determined. The Bank hopes that its
motives in seeking clarification of these legal issues will not be misconstrued. The Bank
estimates that well in excess of 25,000 working days have been committed to assisting the
Inspectors in the Investigation. The Bank considers it appropriate to commend the co-
operation that its employees have given to the Inspectors.

12. The Bank accepts that it is right and proper that allegations that improper practices occurred in
the Bank at times in the past be investigated. It is essential that an independent report be
available to record this Investigation and to provide for closure on an unhappy chapter in the
Bank's history. When a report issues the Bank will ask that it be made available to all relevant
regulatory authorities set out in Schedule VII.

13. The Bank's commitment to addressing the issues identified in the Investigation, as outlined in
paragraph 6 above and in paragraph 14 below, has resulted in costs being incurred by the Bank
together with further anticipated costs.

Area Cost Status See Schedule


€m
Revenue Audit DIRT/SSA Settlement 6.7 Paid IV

Fees and Interest Refund Programme 1.9 Paid to date V

Fees and Interest Refund Programme 10.6 Anticipated V


12.5
Offshore Investors' Settlement 8.9 Offers accepted VI
Programme
© r
00 ko

Offshore Investors' Settlement Further offers VI


Programme made

High Court Inspectors' Costs 5.3 Anticipated —

Sub-Total 35.3

Legal and Bank costs relating to 28.7 Paid


investigations and programmes outlined
above

TOTAL 64.0

The costs of the fees and interest refund programme include an estimate of approximately
€10 million in respect of the new programme referred to at paragraph 9 above and described in
Schedule V. The final costs of this programme have not yet been quantified. Costs to date for
the Offshore Investors' Settlement Programme reflect offers made to over 40% of the affected
Bank customers.

The expense of engaging with the Investigation has been substantial. Whilst the terms of the
report to the High Court remain to be finalised, the terms of the Draft are of the utmost
gravity. Accordingly, the Bank's view is that the Taxpayer should not be liable for the
Inspectors' costs and the Bank will, therefore, offer to discharge the Inspectors' reasonable
taxed costs of the Investigation. A provision of €5.3million in respect of those costs is shown
in the above table.

14. The costs of the Investigation continue to escalate. The Bank is committed to such expenditure
as is required to conclude these matters. This obligation is owed to its customers, its staff, the
public at large and those responsible for its regulation. As stated in paragraph 6 above, the
Bank and its owners believe that it is imperative that the Bank be restored as a fully
functioning member of the Irish financial community. The Bank believes that the efforts
described above are consistent with that goal.

15. It is a matter of the deepest regret to the Bank that during the period under investigation events
took place which fell short of the standards customers and third parties dealing with the Bank
were entitled to expect. The Bank is profoundly sorry that these events could have occurred,
and apologises to all those who have been affected by these events. The Bank believes that
the programmes put in place for those affected by reason of the practices described by the
Inspectors have remedied or will remedy any disability they may have unfairly suffered as a
result of the events described. The changes made in the operational structures of the Bank
which have been explained to the Inspectors are designed to ensure that the Bank operates at
all times to high standards of governance. The Bank considers that it is also appropriate to
mark the debt it owes to its employees who have had to work under the shadow of the
Investigation. Their dedication has been an essential building block in creating a new bank and
maintaining customer confidence.

/ John Trethowan
Chief ( g r a t i n g Officer & Project Director
National Irish Bank

24 March 2004

5 (5
INDEX OF SCHEDULES

TO REACTION OF THE BANK


DATED 24 MARCH 2004

SCHEDULE I List of Communications between the Bank and the Inspectors since receipt
of the Draft on 1 August 2003

SCHEDULE II "Policies and Controls in National Irish Bank as at December 2003


Relating to Matters under Investigation by High Court Appointed
Inspectors"

Presentation made to the Inspectors on 10 December 2003

SCHEDULE III "Summary, Changes at National Irish Bank since 1998" - Update to
Appendix 18 of Draft

Presentation made to the Inspectors on 10 December 2003

SCHEDULE IV Settlement Details - Deposit Interest Retention Tax and Special Savings
Accounts

SCHEDULE V "National Irish Bank Fees and Interest Refund Programme"

Presentation made to the Inspectors on 28 January 2004

SCHEDULE VI Payments to Customers and Procedural Changes in relation to Offshore


Investors' Settlement Programme

SCHEDULE VII List of Regulatory Authorities who the Bank wish to be furnished with the
High Court Inspectors' Report
SCHEDULE I

LIST OF COMMUNICATIONS
BETWEEN THE BANK AND THE INSPECTORS
SINCE R E C E I P T O F T H E D R A F T O N 1 A U G U S T 2003

1 CORRESPONDENCE

1 August 2003 Letter - Inspectors to Bank


23 September 2003 Letter - Bank to Inspectors
9 October 2003 Letter - Inspectors to Bank
15 October 2003 Letter - Bank to Inspectors
16 October 2003 Letter - Matheson Ormsby Prentice to Inspectors
16 October 2003 Letter - Matheson Ormsby Prentice to Inspectors
31 October 2003 Letter - William Fry to Matheson Ormsby Prentice
26 November 2003 Letter - Matheson Ormsby Prentice to Inspectors
28 November 2003 Letter - Matheson Ormsby Prentice to Inspectors
2 December 2003 Letter - Matheson Ormsby Prentice to Inspectors
5 December 2003 Letter - Inspectors to Matheson Ormsby Prentice
5 December 2003 Letter - Inspectors to Matheson Ormsby Prentice
15 December 2003 Letter - Matheson Ormsby Prentice to Inspectors
19 December 2003 Letter - Inspectors to Matheson Ormsby Prentice
7 January 2004 Letter - Matheson Ormsby Prentice to Inspectors
21 January 2004 Letter - Inspectors to Matheson Ormsby Prentice
2 February 2004 Letter - William Fry to Matheson Ormsby Prentice
5 February 2004 Letter - Inspectors to Matheson Ormsby Prentice

2 MEETINGS

16 October 2003 Meeting between Bank and Inspectors


14 November 2003 Meeting between Bank and Inspectors
10 December 2003 Meeting between Bank and Inspectors
16 December 2003 Meeting between Bank and Inspectors
Paper presented to the Inspectors: "Policies and Controls in National Irish
Bank as at December 2003 relating to Matters under Investigation by High
Court Appointed Inspectors ".
Marked up version ofAppendix 18 of the Draft provided to the Inspectors.
28 January 2004 Meeting between Bank and Inspectors
Paper presented to the Inspectors: "National Irish Bank - Fees and Interest
Refund Programme ".

3 COURT APPEARANCES

4 November 2003 Matter mentioned in High Court before Kelly J


4 February 2004 Matter mentioned in High Court before Kelly J
S C H E D U L E II

"POLICIES A N D C O N T R O L S IN N A T I O N A L IRISH B A N K A S A T
D E C E M B E R 2003 R E L A T I N G T O M A T T E R S U N D E R I N V E S T I G A T I O N BY
HIGH COURT APPOINTED INSPECTORS"

( P R E S E N T A T I O N M A D E T O T H E I N S P E C T O R S O N 10 D E C E M B E R 2 0 0 3 )
POLICIES AND CONTROLS IN NATIONAL IRISH BANK AS AT DECEMBER 2 0 0 3

RELATING TO MATTERS UNDER INVESTIGATION

BY HIGH COURT APPOINTED INSPECTORS


CONTENTS

Page No

1 Policies and Controls Relating to DIRT 1


2 CMI - Offshore Insurance 4
3 Interest 8
4 Fees 9
5 New Policy and Procedures 11

(in
1 POLICIES AND CONTROLS RELATING TO DIRT

In December 1998 KPMG completed a review of all tax procedures at National Irish Bank. A
Tax Policies & Procedures manual coverinp these processes was compiled and circulated to
business units and branches. The manual is reviewed periodically in line with taxation
changes with updates or new sections on DIRT, SSA, SSIA, TRS & Stamp Duties.

An experienced Chartered Accountant was appointed as Tax Compliance Manager for Ireland
in October 2000. This senior manager is responsible for ensuring compliance with all product
related tax legislation and plays a lead role in initiatives such as the introduction of TRS, and
DIRT audits. The Operational Tax, Finance unit reports to him.

The Tax Compliance Manager ensures a focus on local taxation requirements and that all
matters relating to tax are co-ordinated by one person. He has a dual reporting line to the
Head of Financial Governance for National Australia Group in Europe and to National
Australia Group's European Tax Management Function in London.

Controls

Control of DIRT compliance has been centralised to increase the level of control and
specialist knowledge in those dealing with tax related matters.

The Operational Tax, Finance unit was set up in 1998. The Dublin unit comes under the
supervision of an experienced manager who has undertaken this role for a number of years in
Northern Bank. It deals with, or overviews most aspects of Non Resident Accounts (NR), Tax
Relief Scheme (TRS) for Mortgage Interest, tax-concessionary savings products and the
collection and administration of both Stamp Duty and Encashment Tax.

All declarations for NR, SSA and other tax-exempt accounts were centralised in this Unit by
March 1999. A review of all Non Resident declarations was then carried out against account
records using five basic checks:

• existence of form
• name
• address
• country
• signature verified

A check on the date of the declaration was subsequently added.

All SSA declarations were centralised in early 1999 and reviewed during Summer 1999 and
checked for the following:

• existence of forms
• account name on form
• address on form
• signature
All Company, Charity and Pension Trust declarations (i.e.: DIRT Free or gross interest
paying) were centralised during Autumn / Winter 1999 and checked for the following:

• existence ^f declarations

• Revenue letter held (*)

• Auditor letter held (*)

(*) certain declarations required a formal Revenue Commissioners' letter and / or Auditors letter to be
attached. Note that Revenue have since advised that the requirement for these declarations and
supporting letters has been removed.

Subsequent Revenue initiatives such as management and control of Tax Relief Scheme (TRS)
for Mortgage Interest, SSIA, Stamp Duty and Encashment Tax have also been placed with
this Unit.

Control of DIRT processes was further tightened through a number of direct interventions:

(i) In May 1999, each Branch was required to nominate a DIRT Compliance Supervisor
(now known as Tax Compliance Supervisor) as a direct point of contact with
Operational Tax, Finance. All Branches continue to have a nominated Official as a
liaison point and a local controller. Since early 2001 Operational Tax, Finance has
undertaken a series of presentations / workshops involving branch staff on operational
tax issues e.g. SSIA training, TRS training, DIRT compliance. The latest formal
training was undertaken during September 2002.

(ii) Account opening procedures have been rewritten to ensure DIRT compliance and
compliance with the Bank's Account Opening conditions (i.e. production of picture
ID and proof of residential address). All accounts are now opened as tax paying until
formal application to and approval from Operational Tax, Finance has been sought to
treat as tax exempt. The option to amend an account flag to DIRT Exempt or SSA
reduced DIRT rate status has been controlled centrally since May 1999.

(iii) Since June 1999, Operational Tax, Finance monitors the report which details static
amendments (non financial) transactions on Non-Resident accounts to ensure that no
evidence of a return to resident status appears on the transaction profile of accounts
(e.g. change of address). This has been extended to cover financial transactions since
15 April 2002.

(iv) Procedures for dealing with transactions on SSA accounts at branch counters were
also simplified to ensure compliance.

(a) The number of SSA products on sale in the Bank was reduced from 21 to 2
by end October 1999. Sale of these products was ceased under legislation at
5 April 2000.

(b) The SSA withdrawal process was redesigned to minimise risk of breach of
30-day notice. A new three-part form was introduced for SSA withdrawals in
August 1999. This form is to give written notice of withdrawal and the top
copy is retained by the Customer, the second part is retained by the Branch
and the third part is sent to the Account Management Services (AMS) in
Belfast, for the transaction to be completed in 30 days tine. Since October
1999, DIRT Compliance Supervisors (with sign off by Branch Managers) are
required to check the savings account withdrawals each day to ensure that no
unexpected SSA withdrawals appear. Where a customer makes a withdrawal
and does not give the required notice, the account is closed. In Sept 2000 this
monitoring was centralised in the AMS with new reports for AMS and
Operational Tax, Finance.

(c) A 'laminated guide' was produced for counter staff to assist them identify the
21 SSA products already in existence and to give guidance with procedures to
be followed.

(v) In June 2001 NIB introduced a €10,000 minimum balance for NR accounts. Any
balances below that level become DIRT paying irrespective of residency status. A
monthly review is carried out to identify and reset such accounts. If a customer
subsequently wishes to have NR status restored he is required to complete a fresh
declaration.

(vi) For accounts above this €10,000 threshold which continue to enjoy tax exempt status,
an exercise was carried out to validate, the residency of these Non-Resident account
holders. A small number that no longer warranted this status were revised to DIRT
paying accounts. Following the "spring clean" of Non-Resident accounts a final
settlement was agreed with the Revenue Commissioners for the period after the DIRT
Audit i.e. 6 April 1999 to 5 April 2001.

(vii) The current Revenue Commissioner DIRT Guidelines recommend that the Bank
undertake an annual review of all our Non Resident customers. Within the current
2003 review, the Bank wrote to all Non Resident customers and requested them to
confirm their status by signing and returning a declaration and also provide the Bank
with copies of valid identification and valid proof of address. Circa 150 customers
failed to reply to at least 2 letters and their accounts were reclassified to DIRT paying.

(14)
3
2 CMI - OFFSHORE INSURANCE

Where appropriate references have been included in the following text to the general
principles and section numbers of the Central Bank of Ireland, Code of Conduct for
Investment Business services of Credit Institutions, to show the standards that are now
required.

Insurance and Investment Sales - Structure and Management

General Principle 1.1; acts honestly and fairly in conducting its investment business services
in the best interests of its clients and the integrity of the market.

The Financial Advice and Services Division (FASD), responsible for the CMI sales, has
ceased to exist A new wealth management unit has been embedded into National Irish Bank,
and is now run on common lines with similar businesses in National Australia Group's
worldwide operation.

The long-standing Head of FASD left the Bank in November 1998. An experienced Senior
Manager was put in charge of the unit, which was further strengthened by the appointment of
an Operations Manager who previously had compliance responsibility for a similar unit in one
of the Group's UK subsidiaries. Ongoing management is now the responsibility of the Head
of EFA Sales (Europe) based in Glasgow. A Senior Manager from Clydesdale Bank Insurance
Brokers has been engaged to provide guidance and support to the NIB Area Manager to
further align NIB's processes with group practices.

The Unit's processes and practices are progressing towards full alignment with the standards
set by the Financial Services Authority (FSA) in the UK environment. These have been
tailored recently to ensure compliance with the Insurance Act requirements, introduced in
April 2002, and are well placed to meet any further requirements of the emerging regulatory
framework in the Republic of Ireland.

Products

General Principles 1.2; acts with due care skill and diligence in the best interests of its clients
and the integrity of the market.

All Offshore Insurance products were withdrawn from sale in February 1998.

A Product Panel was set up in March 1999 and further revised in October 2001. Initially all
existing products were reviewed and approved for sale by the panel. The product approval
panel consists of the Area Manager, the Operations Manager and a legal representative. All
new products are approved prior to sale.

All existing Agency Agreements with Insurance/Investment suppliers were revisited and
approved by the Operations Manager and the Bank's Legal Department, and since March
1999 all new agency agreements are approved by both parties before any business is
conducted

Policy and Procedure

General Principles 1.3; has and employs effectively the resources and procedures that are
necessary for the proper performance of its investment business services.
Between January 1999 and April 1999 a Compliance Manual was introduced. This was
followed by the introduction of manuals covering Competence Standards and a Training &
Competence (T&C) Scheme. Together these manuals stipulate the standards to be followed
by both sales and back office staff, and are fundamental to controlling the actions of the
Financial Planning Managers. The Competence Standards manual and T&C scheme have
now been merged into the current T&C scheme which is managed by the National Australia
T&C Department based in Glasgow. The drafting of the revised policies and procedures war,
based on FSA standards applicable in the UK and meets regulatory requirements in the
Republic of Ireland.

The Training and Competency Scheme is being aligned with that in place for UK based IFAs
and the Compliance Manual has been revised to take account of the introduction of the
Statutory Code of Conduct for Investment Business in Credit Institutions introduced in April
2002.

Operations

General Principles 1.3; has and employs effectively the resources and procedures that are
necessary for the proper performance of its investment business services.

Management Information Systems (MIS) to monitor activity and adherence to standards have
been reviewed and improved. This provides valuable control mechanisms to the management.