Special Assignment

29th November 1998

Passing the buck

Who caused panic in banks?

IS President Chandrika Kumaratunga shooting from the hip, not only in ordinary day-to-day matters but also in vital economic issues involving the stability and credibility of the banking industry.

The Sunday Times and its sister paper the Sunday Lankadeepa reported last week about a state of panic among banks and customers over a request or demand from the Inland Revenue Department for the names and other details of all who had more than Rs. 100,000/- in fixed deposits or savings accounts.

Our report was authoritative and was based on hard facts- photocopies of letters sent by Deputy Commissioners of Inland Revenue, a toughly-worded rejoinder to the IRD by the Sri Lanka Banks' Association and the subsequent response of the Commissioner General of Inland Revenue, O.M. Weerasuriya. In that letter the Commissioner General confirms that such information has been sought on those who have more than Rs. 100,000/- in fixed deposits or savings accounts. He strongly justified his Department's, demand on the grounds that the Inland Revenue Regulations allowed it.

Hours after our story appeared on November 22, President Kumaratunga who is also Minister of Finance told a party convention in Galle that the report in the Sunday Lankadeepa and The Sunday Times was baseless and untrue. She charged that newspapers owned by Ranil Wickremesinghe's uncle were trying to sabotage the economy by causing panic in banks.

To add to the confusion state media quoted the Commissioner General Weerasuriya as saying that he had issued no directive to banks seeking information on those who had more than Rs. 100,000/- in fixed deposits or savings accounts. That is what the Commissioner General said on November 22 after the President reacted.

We publish today official letters from the Commissioner General of Inland Revenue, Deputy Commissioners and from the Banks' Association showing clearly that there indeed was such a directive as reported in last week's The Sunday Times and the Sunday Lankadeepa.

On what basis, then, did the Executive President, the Head of State and Head of Government of the Democratic Socialist Republic of Sri Lanka, make such serious charges against independent newspapers? Was she misinformed?

The official letters published on this page clearly show that a directive was given calling upon banks to disclose who had more than Rs. 100,000 in banks. Perhaps, the President as Finance Minister was unaware of the directive, which top bankers claim is a blatant violation of the vital principle of confidentiality in banking.

The facts speak for themselves:

Translation

Department of Inland Revenue

Regional Office,

No. 15, Beach Road,

Matara.

Manager

....................Bank

Income Tax

Under the powers vested in me by Section 95(4) of the Inland Revenue Act, please furnish me within 14 days information relating to fixed deposits or savings accounts holders having over rupees one hundred thousand (Rs. 100,000/-) in your bank.

1. Name and address of account holder.

2. Account number.

3. Amount in account as at 31.3.98.

(Signed) R.A. D.H. Ranasinghe

Deputy Commissioner.

Note:The date of the letter and the name of the bank have been deleted for purpose of maintaining confidentiality with banks.

Sri Lanka Banks' Association (Guarantee) Limited

Chairman: Mr.C.A.P. Leonard

Secretary General: Mr. Gaston Gunawardena

17/1/1 B Janadhipathi Mawatha ,

Standard Chartered Bank Building,

Colombo 1,

Sri Lanka.

26th October, 1998

Our Ref. No. SG/98/936

Mr. O.M. Weerasuriya,

Commissioner General of Inalnd Revenue,

Department of Inland Revenue,

Sir. Chitthampalam A. Gardiner Mawatha,

Colombo 2.

Dear Sir,

Information called for from some Banks by the Department of Inland Revenue in respect of deposits and debentures

At the request of the members of this Association, I wish to bring to your notice representations made by members in relation to request for information by Deputy Commissioners of Inland Revenue in terms of Section 92(5) read together with Section 140 of the Inland Revenue Act.

Firstly, the information has been called for selectively from certain banks only and by certain Deputy Commissioners only.

Secondly, the information called for is very general and does not relate to a specific tax payer.

Thirdly, the information relates to debentures viz. the names and addresses of persons who have purchased, the amount applied for, the amount allocated, interest rates and the period covered.

Fourthly, information has been requested with regard to persons who had deposited monies in excess of Rs. 100,000/- during the period 1st April, 1996 - 1st August, 1998.

Fifthly, a request has been made to furnish the names and complete addresses of persons who had obtained loans over Rs. 1 million from April 1996 to 31st March, 1997.

Sixthly, particulars relating to Saving Accounts, fixed deposit holders having balances in excess of Rs. 100,000/- have been called for.

While this Association is aware of the powers vested in the Inland Revenue Act under Sections 92 (5) and 95(4) we as bankers under the common-law owe a strict duty of confidentiality towards our customers. This duty of secrecy and the extent of this duty has been laid down in several judicial decisions.

The Banking Act No. 30 of 1998 has also statutorily imposed the duty of confidentiality between a banker and its customer.

While there are exceptions to the statutory duty of confidentiality recognised in law, we are of the view that the relevant sections cited in the notices forwarded by the Deputy Commissioners of Inland Revenue do not entitle the right to call for names, addresses, account numbers etc., of a bank's customers.

We are also of the view, based on legal advice obtained, that in terms of Section 92(5)(b) the Deputy Commissioner is entitled to call upon persons to furnish documents which are specified in such notice.

The notices served do not specify any one or more documents.

Should the banks disregarding Section 77 of the Banking Act furnish such information, both the bank and its officer or servant are guilty of an offence which is punishable with imprisonment and/or fine.

In the circumstances the reluctance on the part of our membership to furnish the information called for is I believe understandable.

I shall be pleased if you will kindly instruct your Officers to refrain from calling for information under Sections 92(5) and 95(4) until such time as this matter could be judicially resolved.

Yours faithfully,

Sgd

Gaston Gunewardena

Secretary General.

Department of Inland Revenue,

Inland Revenue Building,

P.O. Box No.515,

Sir Chittampalam A. Gardiner Mawatha,

Colombo.2.

Sri Lanka.

Your No.SG/98/936

My No. AC7 12/7

November 16,1998.

Mr. Gaston Gunawardena,

Secretary General,

Sri Lanka Banks' Association,

17/1/1B, Janathipathi Mawatha,

Standard Chartered Bank Building,

Colombo.1

Dear Sir,

Information called for from some banks by the Department of Inland Revenue in respect of Deposits and Debentures

I write with reference to your letter of October 26, 1998.

2. Section 92(5) of the Inland Revenue Act No. 28 of 1979 was amended by Amendment Act No. 14 of 1984, so as to enlarge its scope. The section as amended empowers a Deputy Commissioner to require any person, by giving notice in writing -

"to furnish within the period specified in such notice such information as may be called for in that notice in relation to any transaction between such person and any other person or class of persons". The amendment further provides that a person to whom such a notice has been given ".... shall comply with the requirements of such notice notwithstanding anything to the contrary in any other law prohibiting the furnishing of such information", and that "for the avoidance of doubts, it is hereby declared that reference in this subsection to "any person", includes a reference to a banker".

I see no ambiguity in this language. A Deputy Commissioner is empowered to call for, from any banker, " information in relation to any transaction" - such as for example, deposits of over Rs. 100,000 loans of over Rs. 1 Mn, purchase of debentures, etc. - and the banker "shall comply.... notwithstanding anything to the contrary...".

3. According to my understanding nothing in Section 77 of the Banking Act, No. 30 of 1988, stands in the way of any commercial bank in complying with Section 92(5) of the Inland Revenue Act. The pledge of secrecy referred to in that Section is subject to three exceptions set out in paragraphs (a), (b) and (c) of that section. The effect of paragraph(c) is that ".........in order to comply with any of the provisions of this Act, or any other law," the pledge does not constitute any bar. Clearly, "any other law" in this context includes the "Inland Revenue Act" and therefore I see no legal objection to a banker complying with a notice given order Section 92(5) of the Inland Revenue Act.

4. If you wish to discuss this matter further, please see me by prior appointment. In the meantime I would request you to advise your membership to comply with the notices.

Your faithfully,

Signed

O.M. Weerasooriya,

Commissioner General of Inland Revenue.

Meanwhile The Bankers Association is awaiting a letter from the Inland Revenue Department on the Government's decision regarding the tax problem.

However Chairman HNB Rienzie Wijethilake told The Sunday Times after Minister G L Peiris raised the issue in Parliament last week, they were positive that the issue will be solved.

"The Association will take necessary action once we get the letter. Earlier we decided not to oblige with the request and that was our stand until the minister intervened," he said.

Minister Peiris on Wednesday raised the issue in Parliament after Karunasena Kodithuwakku moved an adjournment debate on the newspaper reports of the letters sent by the Inland Revenue Department.

Minister G L Peiris replying stated that two Deputy Commissioners had issued notices on Banks requiring them to furnish information pertaining to customers.

The minister added he will give instructions to the Association that such information will in future be sought only in cases of absolute necessity and that no more Notices with general applications will be issued.

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