APPENDIX 1. Ireland: How New Administrative Powers Helped Close Bogus Nonresident Accounts

Eric Le Borgne, and Katherine Baer
Published Date:
July 2008
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In 1998, a media exposé on widespread use of bogus foreign addresses by Irish bank depositors (to avoid withholding taxes on interest and reporting to the Irish Revenue) led to a major high-profile parliamentary inquiry. Also, during the late 1990s there was a public scandal involving prominent individuals (including a former prime minister) using numbered Irish bank accounts relating to deposits in the Cayman Islands. These developments provided the catalyst for significant new Irish Revenue (IR) powers in the Finance Act of 1999. For the first time the IR was given access to information in financial institutions, including “John Doe” access by which a class of persons, likely to have tax issues, could be identified.

Bogus Account Follow-up

Armed with these new powers, the IR first recovered €225 million in underpaid withholding taxes (plus interest and penalties) from the banks that had facilitated the use of bogus foreign addresses. The IR then pursued the “underlying” tax due from depositors, because the deposits were in many instances “hot” money skimmed from businesses.

The IR decided to offer a period for voluntary disclosure (until November 2001) whereby bogus nonresident account holders coming forward during that time were required to pay full tax, but the interest and penalties were capped at 100 percent of the tax. There was also immunity from publication (the IR introduced a new “name and shame” policy whereby names, addresses, and tax settlement amounts are published in the newspapers) and immunity from criminal prosecution.57

As part of the amnesty, 3,675 voluntary disclosures were made and payments totaling €227 million were received by the November 2001 deadline.

The IR immediately followed up on this by getting John Doe orders from the banks to track down those who did not come forward voluntarily. As of 2004, the IR was still processing some files, but it had already identified, thanks to the John Doe, a further 8,300 persons, and the follow-up generated an additional €356 million in tax interest and penalties. All of these additional settlement cases (above a de minimis amount) have been individually named and shamed, and some have been criminally prosecuted.

The resolve with which the IR pursued these cases—and the public naming and shaming—greatly increased the tax administration’s credibility: people saw that the IR had both the means (powers) and the determination to follow through on these large-scale investigations if the voluntary disclosure window was not availed of.

Offshore Investigations

Aside from keeping the money at home (and using bogus foreign addresses to hide the true identity of the depositor from the IR), tax evasion also involved moving hot money offshore—not just to havens such as the Channel Islands and Isle of Man, but also across the border into Northern Ireland.

In 2002/03 the IR had a breakthrough when a subsidiary of Bank of Ireland in Jersey made money-laundering reports to the Jersey authorities regarding some 260 trusts operated by the bank with Irish settlers and beneficiaries. The IR then persuaded the Irish headquarters of the bank to write to the trust settlers, offering a voluntary disclosure facility if they came forward and paid up by mid-2003. Full tax and full interest had to be paid; the benefits of voluntary disclosure were (1) mitigated penalties (but not for 1993 amnesty years), (2) no “name and shame” applied, and (3) no criminal prosecution. Some 90 percent of the 260 beneficiaries came forward voluntarily and paid more than €100 million.

Again, the IR followed through quickly on beneficiaries who did not come forward voluntarily—this time obtaining the names of the remaining 10 percent directly from the Jersey attorney general (AG). A number of these 10 percent are currently subject to criminal prosecution—the Jersey AG is assisting the prosecution by supplying documentation and other necessary evidence.

The IR conducted a similar exercise in 2003 in relation to an Irish building society with a subsidiary in the Isle of Man.

In 2004, the IR signaled that it was starting a general offshore-related tax evasion investigation—effective from March 29—and invited voluntary disclosures before that date, plus full payment by end-May 2004. Again the benefits were flagged as mitigated penalties, no name and shame, and no criminal prosecution. Full tax and full interest had to be paid.

In large part because the IR had proven its follow-through ability and resolve in the bogus nonresident cases and the Bank of Ireland Jersey affair—and helped also by extensive (free) publicity from the main Irish television station—this voluntary disclosure phase of the offshore investigation was a big success. Some 13,000 people came forward and voluntarily paid up a total of almost €600 million in 2004. A major element in this success was the fact that the Irish banks wrote, in advance of the deadline, to the Irish resident customers of their offshore subsidiaries. (In effect, by doing this they were signaling to their customers that their names would be provided to the IR under John Doe orders if they did not come forward voluntarily.)

The IR is now in the follow-through phase of getting John Doe orders identifying transfers by Irish banks to offshore centers such as Channel Islands and the Isle of Man. This follow-up phase will inevitably extend over a number of years.

Insurance Products Investigation

Many of the disclosures coming to light under the bogus nonresident and offshore investigations indicated that domestic insurance products were a popular safe haven for hot money—in particular, so-called “single premium” policies. (There was no reporting to the IR of such investments.)

The IR therefore decided in 2005 to apply the same voluntary disclosure “business model” to these investors prior to launching a formal investigation. The formula applied was the same: full tax and full interest, but mitigated penalties, no name and shame, and no prosecution for voluntary disclosures before May 23 and full payment by end-July 2005. The IR also asked the insurance companies to write in advance to their customers, but this time one of the biggest (Irish Life & Permanent) refused to do so.

Nonetheless, by the May 23, 2005, deadline, the IR had received some 10,000 voluntary disclosures.

The impressive turnaround in the performance and credibility of the Irish tax administration over the reform period can be seen from indicators such as the ratio of tax arrears to revenue, the outstanding stock of tax arrears (Figure A1).

Figure A1.Ireland: Tax Collection, Tax Arrears, and Ratio of Tax Arrears, 1988–2005

Source: Irish Revenue, Annual Report, 2005.

This was done under the IR’s “care and management” powers: there was no special legislation.

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