COMMITTEE of PUBLIC ACCOUNTS
Sub-Committee on Certain Revenue Matters
Table of Contents
Chairman: The Committee of Public Accounts Sub-Committee on Certain Revenue Matters is now in public session. Witnesses, your attention is drawn to the fact that as and from 2 August 1998 section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act, 1997, grants certain rights to persons who are identified in the course of the sub-committee’s proceedings. These rights include the right to give evidence, the right to produce and send documents to the committee, the right to appear before the committee, either in person or through a representative, the right to make a written and oral submission, the right to request the committee to direct the attendance of witnesses and the production of documents and the right to cross-examine the witness. This Act has been further amended by the Acts of December 1998. In most part, these rights may only be exercised with the consent of the sub-committee.
Jim Mitchell TD
Chairman, Committee of Public Accounts
Sub-Committee on Certain Revenue Matters Hearing
30 November 2000
At the commencement of every public session the Chairman of the Sub-Committee recited the above formalities. The references to witnesses and their rights, rights to produce documents, to cross-examine and so on; to compellability and immunities clearly communicates that something significant was under way. The language, the procedure, the "swearing in" of witnesses all suggests a process of inquiry, acting judicially.
The public Hearings of the Sub-Committee were part of a much larger process. That process included inquiries in private on behalf of the Committee of Public Accounts – again using powers of compellability and the taking of evidence under oath – as well as deliberations in private by the Sub-Committee.
The public proceedings of the autumn of 1999 were also televised live daily by TG4 and there was a simultaneous live webcast on the internet.
The Sub-Committee was a first in Irish parliamentary life. As the Chairman put it in his opening statement at the first day of the Sub-Committee’s Hearings on 31 August 1999, "Today we embarking on a new form of parliamentary inquiry. … this is a parliamentary committee and the rules and procedures of Parliament are the ones that will be followed so long as they are reconcilable with the requirements of justice. The Committee has no doubt about the precedent that it is setting today and the importance that we do this job in a fair, expeditious and efficient manner."
The Sub-Committee’s inquiry involved the first comprehensive use by a House of the Oireachtas – in this case, Dail Eireann – of powers recently granted in law. These powers were given under two Acts, the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act, 1997 and the Comptroller and Auditor General and Committees of the Houses of the Oireachtas (Special Provisions) Act, 1998. The purpose was to enable Members of the Oireachtas to undertake a parliamentary inquiry into matters of grave public disquiet.
What was the matter of grave disquiet that called for the granting of new powers? What was the matter that led to the call to account that characterised the work of the Sub-Committee – not alone of public servants and public agencies, not only private citizens and private bodies but also non-nationals, foreign corporations and Members of the House?
Background – Tax Evasion
In December 1999 the Committee of Public Accounts (PAC) published its First Report on its inquiries into the operation of Deposit Interest Retention Tax (DIRT) in the period 1 January 1986 to 1 December 1998 (the relevant period). The report was the outcome of an inquiry instigated by the PAC into press allegations of tax evasion, first made in April 1998 and repeated in more detail in October of 1998. The thrust of the allegations was that there had been evasion of DIRT by Irish depositors through the use of bogus non-resident accounts (non-resident accounts being exempt from DIRT) in the country's biggest bank, AIB Group.
When the initial press reports appeared in April 1998 the PAC immediately convened public Hearings at which the Chairman of the Revenue Commissioners was examined.
In October 1998 fresh press allegations, much more detailed, appeared, alleging knowledge in the country's biggest licensed bank, AIB Group of a very large-scale problem. The Committee responded, conducting new Hearings on 13 and 15 October. These Hearings produced disturbing evidence of a possibly gigantic tax fraud of which the relevant public authorities were allegedly aware.
The Chairman of the Revenue Commissioners said that Revenue was unaware of allegations of the large-scale use of bogus non-resident accounts. The Chief Executive of AIB said that bogus non-resident accounts were not unique to AIB but were an industry-wide problem. He further contended that AIB had, in 1991, reached an agreement with Revenue that there would be no retrospective liability in respect of interest for accounts 'reclassified' at that point that had previously been "wrongly classified" as non-resident.
Today we can see the public hearings of April and October 1998 as the commencement of a major exercise lasting three years that has had to it four phases to date.
The hearings of April and October 1998 constituted the first phase of the inquiry. This was public, preliminary and exploratory. It led to a resolution by Dail Eireann asking the PAC to examine the matter further and to report to the Dail Eireann. The conclusion of the Committee was that it would need additional powers to proceed (using the Office of the Comptroller and Auditor General, C&AG, to carry out an investigation in private on its behalf).
On 16 December 1998 the Comptroller and Auditor General and Committees of the Houses of the Oireachtas (Special Provisions) Act, 1998 was passed, the Bill having been introduced by the Government on 8 December. This enactment complimented the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act, 1997. Following on the enactment of the Act of 1998, the PAC embarked on what was in effect the second phase of its investigations, the inquiry undertaken by the C&AG into the matters in question, using his new powers, and his report to the Committee of his findings.
The C&AG carried out his investigations between December 1998 and July 1999. He reported in July 1999 – Report of Investigation into the Administration of Deposit Interest Retention Tax and Related Matters during the period 1 January 1986 to 1 December 1998.
The C&AG’s report gave a staggering account of a very major scandal. There was practiced, over a long number of years, large-scale evasion. Irish resident depositors established bogus non-resident accounts and these were operated by deposit-takers. The practice was common to all of the licensed deposit takers examined. There was evidence of significant deposit-taker complicity in the operation of these accounts. There was evidence of encouragement by deposit-takers of the technique. There was evidence also of Revenue suspicions and eventually, knowledge of these activities and of Revenue’s pursuit of deposit takers and depositors. There was evidence furthermore of contact at a high level between AIB Group and officers in Revenue, allegedly to discuss a settlement deal.
The C&AG discovered the existence within Revenue of a general order to inspectors of taxes – SIM 263 – instructing inspectors not to use powers of general inspection given to them under the law of declarations of non-residency, thus ensuring that the evasion would persist – unless the banks imposed a code of conduct.
Finally, the C&AG discovered that there was a general awareness at senior level of the public administration of large-scale tax evasion, including problems in the area of evading and avoiding income tax on income from deposit interest and that the issue was not effectively pursued.
The Hearings of Autumn 1999
Following publication of the C&AG's report the Committee decided to develop its inquiry further – to institute a third phase in effect.
It decided to conduct an inquiry into the findings of the C&AG; to have this inquiry undertaken by a sub-committee of the PAC established for this express purpose; to conduct this inquiry in public; and to use in full all of the new statutory powers in conducting this phase of the inquiry.
This third phase of the inquiry commenced 31 August 1999 and lasted for a period of six weeks, concluding on 12 October 1999. The result of this inquiry was the First Report, laid before the Houses of the Oireachtas and published on 15 December 1999.
Our First Report
The broad conclusions of the Sub-Committee, stated in the introduction to the First Report, included inter alia that:
."Deposit-takers knowingly facilitated the practice. Discoveries were made of bank officials organising the opening and operation of bogus non-resident accounts for customers and indeed of establishing them for their own use.
"It is now also apparent that the evasion of DIRT was practiced in a wider culture of more generalised tax evasion. Specifically in addition to the simple evasion of DIRT, bogus non-resident accounts were employed as a means of concealing otherwise taxable income from Revenue so as to ensure the evasion of other taxes due on those monies. This phenomenon of bogus non-resident accounts and the accompanying technique of deposit splitting to evade tax dated in fact from the early 1960s. An allied technique of back-to-back deposit and loan accounts was similarly employed as a means of reducing the full liability to DIRT."
From the Conclusion of the First Report we also quote:
"For deposit takers DIRT is, since 1987, a self-assessment tax. In that it is, this imposes a very significant duty of care on deposit takers. They must make a correct assessment and return and pay across to the Collector General the appropriate sum twice yearly. Failure to do so is a Revenue Offence.
"The duty that is placed on depositors in this context is that they must allow DIRT to be deducted. Failure to allow the deduction of DIRT is a Revenue Offence.
"From the moment of its enactment through Financial Resolution No. 12 in February 1986 bankers began to explore means of continuing to pay interest gross on deposits. The use of bogus non-resident accounts – already long established as a means of concealing capital and income from the eyes of Revenue – now took on an added dimension. Bogus non-resident accounts became a route to evading yet another tax, DIRT. Banks facilitated this, as they had long facilitated deposit splitting and bogus non-resident accounts prior to 1986.
"From 1987 Revenue took a view that the climate in Ireland was such that it was inappropriate to push for inspection and access to bank account information. This is most graphically illustrated in the non-issuance of a countermand to SIM 263.
"There is a view that the problem of bogus non-resident accounts receded and reduced significantly from around 1993. However this Inquiry has discovered persistent problems in the operation of non-resident accounts in the deposit taking sector in Ireland. The investigation of the Comptroller and Auditor General also established continuing problems with compliance. The Report of the Appointed Auditor commissioned by the Comptroller indicated that 27.3 per cent of Forms 37 sampled contained ‘declaration exceptions’, in other words were incorrect."
The Sub-Committee considered why might have licensed deposit-takers and State institutions responsible for policy, regulation, supervision and enforcement in this area condoned the evasion?
The Sub-Committee examined two possible theories. We examined the evidence to determine which of these alternatives was the more plausible.
The first theory is that the problem was a recognised and endemic issue. It dated from the 1960s. In the words of Mr. John Keogh, senior executive at AIB "The introduction of DIRT brought new complexities…which in the case of AIB is being worked out slowly but progressively in intermittent dialogue with the Revenue Commissioners. Our customers are, of course, an important constituent in this matter, as is the pace of implementation of Revenue requirements by our competitors and, indeed, the concern of Government overall lest over enthusiastic action by anyone should lead to a flight of funds as Exchange Controls diminish."
We observed in our First Report that
"This is a coherent proposition, even if it sits somewhat uncomfortably alongside the law as enacted. What this theory amounts to is a statement that the phenomenon being investigated represented a recognised problem and was being dealt with over time in a planned and co-ordinated fashion. If such a proposition is to hold, one must be able to demonstrate that the financial institutions understood themselves to be working to such a plan or programme and acted accordingly. One should also find that the State and its Agencies clearly understood themselves to be a party to such a pragmatic workout. And the theory must show that concern about capital flight made sense in the economic circumstances of the period so that there was justifiable cause to act in this phased fashion over time."
The alternative explanation was that there was no coherent plan or understanding on the part of deposit-takers or the State and its Agencies, whether formal or informal. Furthermore there was on the part of deposit-takers and the State and its Agencies incoherent, spasmodic and ad hoc engagement with the problem. In addition, on the part of the State, these spurts of activity were sometimes administrative and sometimes political in origin but they contained no strategic vision or overview. Finally, occasionally, the control systems of deposit-takers triggered corrective action; and competition in the market for deposits continued throughout partly on the basis of connivance with illegality, that is the facilitation of false declarations and the operation of bogus non-resident accounts by resident depositors.
These competing theories clearly carry quite different implications. The first theory suggests rational, strategic management of a problem with its objective, the restoration of compliance and legality in the market for deposits.
Whether such an approach was appropriate is debatable. However if the matter had been successfully dealt with in this manner one would be dealing essentially with history. If the alternative theory was more applicable to the observed facts, then very serious implications arose for the system of public administration and the supervision and the conduct of banking in Ireland.
The Sub-Committee found that there was no coherent or planned approach to the DIRT crisis. It found further that there was an incoherent, spasmodic and ad hoc engagement on the part of the deposit-takers and the State and its Agencies with the issue of bogus non-resident accounts. Finally the Sub-Committee found implausible, the capital flight theory used to support the cautious implementation of the law.
The First Report made 57 recommendations, ranging over all aspects of the problem. While many of the recommendations were specific to particular institutions and players, there also were what might be termed cross-cutting themes. For example, the recommendations included a review of audit practice in accountancy profession. The framework for accountancy regulation and supervision is the responsibility of the Department of Enterprise, Trade and Employment. Therefore that recommendation was directed to that Department, which did not feature prominently in the inquiry. Similarly, in relation to the Central Bank, an inter-departmental dimension came into play as a result of the already in train policy discussion of a single regulatory authority (SRA) for all financial institutions.
Review of implementation of recommendations
The concern of the Sub-Committee at all times was to ensure that its recommendations were being implemented in a speedy and efficient manner. To this end the Sub-Committee decided that there would be an interim stock-taking at the six month stage; a more comprehensive review at the twelve month stage; and a detailed report, outlining progress on the implementation of the recommendations made in our First Report. Both reviews were conducted in public in the form of hearings and again, our powers under the 1997 and 1998 Acts were used.
The interim review was conducted over two days in July 2000. A short, technical second report issued. The second stock-taking was conducted over five days in November/December 2000 and January 2001. These exercises and this report constitute a fourth phase to our inquiry – a follow-up phase.
We are unusual if not unique as a public inquiry in incorporating a follow-up phase into our work. That is not only appropriate, it is in our view a necessary aspect to a parliamentary form of inquiry such as that undertaken by this Sub-Committee.
Tribunals of inquiry – whether under the 1921 Act or otherwise, statutory or non-statutory – can do no more than they are established and asked to do. This is generally to examine a matter giving rise to public disquiet, make findings and make recommendations. The life of the Tribunal is then ended. The ball is then back to the legislature and/or the Government to take action as appropriate.
It seems to the Sub-Committee that the parliamentary mode of inquiry must make provision as appropriate for follow-up – if it is to act with integrity having regard to its inquisitorial powers; the role of parliamentarians as public representatives; and the twin roles of the Houses of the Oireachtas as the legislature and the forum in which government is called to account.
As citizens what particularly probably offends us about the DIRT scandal is the behaviour of the administrative state. It is not simply that there was a policy of "not rocking the boat" at a time of fiscal crisis and economic difficulty. It is that the approach taken was adopted at all – in any circumstance and done so behind closed doors in effect.
1 The following discussion is based on the work of the noted American legal theorist and political philosopher, Ronald Dworkin. In particular it draws on Dworkin’s work, Law’s Empire (paperback edition, Fontana, 1991). See especially chapters five (Pragmatism and Personification) and six (Integrity) of Law’s Empire. The discussion uses Dworkin’s terminology and his definitions as well as availing of the underlying theory of law-based, liberal democracy.
There is the argument that things then were different, that there was a certain climate or attitude that prevailed widely in the then Ireland. In this scenario the administrative system did no more than recognise this reality.
Things were different and a certain climate prevailed – but partly as a result of the behaviour of the administrative state. There were undoubtedly other contributory factors but the administrative state also contributed and its behaviour on the DIRT issue during the relevant period so contributed. As citizens we can say that this offended against concepts and principles such as community, fairness, integrity, impartiality – in a phrase, good government.
Also this is not a dim and distant past that we are examining. We are actually talking about recent times. We are talking about contemporary life and an aspect to its politics that stretches back a long number of years.
The breach by the state of the overarching principle of impartiality – operationally, equality of treatment by ‘officialdom’ and equality before the law (including the law as administrative procedure and process) is central to our sense of offence as citizens
As citizens we constitute a community. However in this discussion, while this is recognised, we also believe that "the community" has a life of its own, distinct from its members. In this, as has been mentioned above, we are following the ideas of the legal and political philosopher Ronald Dworkin. As Professor Dworkin puts it "… the community as a whole can be committed to principles of fairness or justice or procedural due process in some way analogous to the way particular people can be committed to convictions or ideals or projects." Thus "the community has its own principles it can itself honour or dishonour, that it can act in good or bad faith, with integrity or hypocritically, just as people can."
However this idea is not simply – not at all – a metaphorical construct. Dworkin really does assign to our political community (i.e. the state) the quality of "personification". A political community really is some special (personified) kind of entity distinct from the actual people as its citizens. Therefore we (and Dworkin) attribute moral agency and responsibility to this distinct entity, i.e. the state in this "personified" sense.
Critically in this system, in a liberal democracy operating under the rule of law there is the right of expectation on the part of citizens – the expectation that the state will act in good faith, with integrity and with impartiality. The state acts through its officials (it may be noted that Dworkin uses the term to include not simply public servants but also politicians, ministers and the judiciary). Officials and the organs of the administrative state, in this system of thought, act as agents for the community (the state) in acquitting their responsibilities.
Public officials are of course individually responsible in the sense in which anyone is. However public officials must be guided by rules of group responsibility. In Professor Dworkin’s words "the community as a whole has obligations of impartiality towards its members". Officials therefore have a group responsibility: as agents of the community (or the state) in acquiting its responsibility or obligation towards its members (citizens), they must at all times act with impartiality.
This is an enormously demanding standard, one that does not apply in the private sphere. We can see this from a brief look at individual or personal behaviour. Any conception of justice in personal behaviour will of course limit the area of personal freedom. We will argue over that area of personal freedom or "self-preference" and the limits to its limitation. However no conception acceptable to most of us will eliminate personal freedom entirely. On the other hand once we cross over to the public sphere (the behaviour of officials as agents of the state) as Dworkin puts it
"We allow officials acting in their official capacity no such area at all. They must, we say, treat all members of their community as equals, and the individual’s normal latitutde for self-preference is called corruption in their case."
This attitude to officials and officialdom isn’t simply about the transference of ordinary rules of individual responsibility to the circumstance of being a public official.
"Some officials have very great power. But so do many private individuals, and we do not believe that a citizen’s sphere of personal freedom necessarily shrinks as his power and influence grow. … We apply the strictest standards of impartiality even to officials whose power is relatively slight and subsequently less than that of many private citizens; we have no sense that an official’s duty of equal concern wanes as his power diminishes."
We would add to this that where officials have great power and are dealing with private individuals or private bodies of great power we still have no sense that officials may depart from their duty of equal concern or that it diminishes. The legitimacy of the State and the authority of politics are undermined by such a breach of the norms of the overarching principle of impartiality – operationally, equality of treatment by ‘officialdom’ and equality before the law (including the law as administrative procedure and process). Furthermore public cynicism and alienation are encouraged.
One aspect of group responsibility is that there is in it an inevitable logic of individual political rights against the State. This aspect – in terms particularly of legally entrenching these political rights through, for example, the right to sue and for damages – does not concern us here. It is not operationally relevant. What we are interested in at this point, in this inquiry and in the case that we are examining is the implication for group responsibility.
Group responsibility is logically prior to the individual responsibility of officials. Even if we cannot identify the individuals responsible for a particular course of action – even if there are actually no individuals responsible – we can still say that individuals did not comply with canons of group responsibility – and that the body or bodies in question did not comply.
Two Themes in this Inquiry
There are two broad aspects to the DIRT scandal. One is the proximate cause of the investigation – the tax evasion engaged in by residents, assisted by licensed deposit takers who had a duty in law to collect this tax and for whom, after 1987 DIRT also was a self-assessment tax. This was law-braking on a large scale that went on for years and cost the exchequer untold hundreds of millions of pounds.
The other aspect to this scandal has a deeper level to it. This second aspect is the behaviour of Institutions of State. During the relevant period the administrative state knew of the DIRT problem, knew of bogus non-resident accounts and knew that these phenomena were in a context of more generalised tax evasion.
Part of the generalised evasion was the evasion and avoidance of income tax liability on deposit interest. The issue of deposit interest was a matter of periodic policy discussion over many years. In the end, the response was Deposit Interest Retention Tax. In other words DIRT was contemplated and introduced as an anti-evasion measure. This effectively was its raison d’être.
Deposit takers and depositors immediately began to look for ways around the legislation giving effect to the new withholding tax. They did so separately and together.
However the State also immediately prevaricated. It developed a preoccupation with the theory of capital flight. Officials developed a concern to not "rock the boat". And in the Revenue, a general order was issued putting the inspection provisions introduced in respect of DIRT on hold.
Partly the Revenue explained the order (SIM 263) in terms of the need to establish internal rules and procedures for the use of the new powers of inspection. However there was more to it than that. There was also the fact that in Revenue, there was a view that the powers were not the power it had actually wished and were unlikely anyway to yield much information. There was furthermore the statement of the then Minister for Finance in 1987, Mr. Ray McSharry, and the gloss put on it within Revenue. The preoccupation with capital flight theory did also have an impact in Revenue.
One impact of SIM 263 was in effect to change the law, the Finance Act, 1986. This change in the law was not enacted by the Oireachtas. It was an administrative action undertaken by the Revenue Commissioners. Yet under our Constitution, only the Oireachtas may make or change legislation.
On the ground, evasion of DIRT grew, developed and spread through the entire deposit-taking system. The principle means of evasion was the use of bogus non-resident accounts by residents. These accounts were established by residents by making false declarations. Deposit-takers accepted these declarations, sometimes knowingly but also within an administrative framework that had no system of checking for warning signals of residency.
It was argued in evidence to the Sub-Committee that the introduction of DIRT (a withholding tax applied to interest at source) was an improvement on the situation that existed prior to its introduction. It led to an enormous increase in the tax yield from deposit interest. However another effect of SIM 263 in precisely this context was, as a matter of fact, to create inequality of treatment in respect of taxation – between those engaged in creating bogus non-resident accounts and compliant taxpayers. This offended principles of fairness and of group responsibility of public officials.
Furthermore, the ability of Inspectors of Taxes to tackle the issue of evasion (of DIRT and, through the use of bogus non-resident accounts, other taxes also) was inhibited. Inspectors (public officials) were forced into breaches of their ‘oaths of office’.
As was stated in our First Report the Sub-Committee found no evidence of Ministerial involvement in what happened. The evidence is in respect of the administrative state. The political implications of this behaviour of the administrative state are enormous. This behaviour of the administrative state arguably amounted to an undermining of democracy, the Constitution, [
and] the principles of the rule of Law and of fairness.
"In the long run, the exercise of non-existent authority, the "surreptitious" (to quote one of the commentators) introduction of family assessment, the disregard for clear principles of law, the sustained proffering of incorrect advice, the reluctance to acknowledge mistakes, the tardiness in the Department'’ dealings with the Ombudsman’s Office – all of these can only undermine public confidence in government and in our democratic institutions and call into question whether the present arrangements facilitate efficient, open and accountable government. From the point of view of the Oireachtas to which this report is addressed, the issue is whether its intentions, as expressed in legislation where honoured as befits its constitutional status."
Nursing Homes Subventions.
An Investigation by the Ombudsman of Complaints Regarding Payment of Nursing Home Subventions by Health Boards
Since the Sub-Committee concluded its public hearings there has been published by the Ombudsman a report Nursing Homes Subventions. An Investigation by the Ombudsman of Complaints Regarding Payment of Nursing Home Subventions by Health Boards 2
The report is a most damning indictment of our public administration system, in this case the Department of Health and the Health Boards in the context of their administration of an aspect of care for the aged. The severity of the Ombudsman’s criticism cannot be understated. The above extract conveys the general tenor of the report. The report also made references to and drew from our First Report.
The specific subject matter of the Ombudsman’s inquiry is not an issue for this Sub-Committee. However in Chapter 8 there is a wide-ranging discussion of parliamentary accountability. Although inspired by the findings of the Report the discussion in Chapter 8 is in general terms and there are in it echoes of our own deliberations. Indeed there is implicit in the discussion of Chapter 8 – as there is in the approach of the Ombudsman’s Inquiry – an acceptance of the concept of group responsibility as we have set it out in this Chapter.
The Sub-Committee feels that it is appropriate to reproduce in edited form and as an appendix to this chapter of our final Report the general observations of the Ombudsman. We do so on the grounds that the Report of the Ombudsman provides us with another example of a breakdown in good government in the broad sense in which we use it. We also publish it to promote and assist public debate on a hugely important topic – and which may in part contribute to what is the ambition of all of us, a restoration of the standing of politics in Ireland.
2 The report was made and submitted to the Dail and Seanad in accordance with Section 6(7) of the Ombudsman Act, 1980. It was completed in January 2001 and submitted to the Houses of the Oireachtas. It was published at the beginning of February.