Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 80-99)



  80. I said fraud prevention, not fraud detection?
  (Mr Tebbit) It is increasing the awareness of the issue generally which helps in prevention because the people we are training are people who should also be applying the controls in their work, ensuring that the five per cent checks happen, ensuring that all of the procedures which we have talked about work, applying the 16 Best Practice Guidelines that we are producing. So it does work at the prevention end as well.

  81. Can I take you now on to some of what I regard almost as account payable problems that you seem to have in chapter three of the report. Can we perhaps start with the problem of invoices. In 3.56, let us start there, it tells of the difficulty that you sometimes only see photocopies of invoices which then could be presented themselves and invoices, even when the originals are presented, are not always cancelled. As somebody who, for my sins, a very long time ago used to be an AP manager, that seems to be an incredibly simple check that ought to have been in place a very long time ago.
  (Mr Tebbit) And it has always been there as a rule. Photocopies are unacceptable, they have always been unacceptable, our rules have always said so, and people should not accept them.

  82. So what you have done since this report to make sure that problem which was raised by the NAO does not occur?
  (Mr Tebbit) As I say, a combination of training, reiterating the rules and—

  83. Are you confident that is no longer occurring?
  (Mr Tebbit) I am trying to remember whether the Best Practice Guidelines that have that in have been issued. We are certainly confident in the establishments visited that it is no longer happening because we have gone back to those three establishments. These are the ones on the basis of which this whole report has been written. We have gone back twice to make absolutely sure that there is full compliance, which there now is. We are also, as I say, including this sort of thing in the blue skies short notice inspections. I do not know if Mr Andrews wants to say more about this area.
  (Mr Andrews) We are producing a Best Practice Guide in that area as well, although that has not yet been published. I would also mention that we have introduced a process of New Works Reviews whereby we carry out formal, detailed examination of the processes that lie behind individual transactions. That is a new initiative which we started rolling out earlier this year and we have something like 27 of those planned as we go through this year. It is all about reinforcing the requirement, making sure that proper processes are applied, making sure that where we are bringing in our IT system, our PROM2 IT system, that that provides the checks to ensure, for example, that invoices cannot be submitted twice. In the same context that you were talking about in that paragraph, rules in terms of the application of discounts, it is reinforcing that IT is making sure that people operating the processes understand it, and not just our people but also those contractors who are involved in the process because this is something which involves our Works Services Managers, our Establishment Works Consultants, as well as our in-house staff on the ground and my own property professionals who are seeking to monitor the processes to make sure they are working properly. It is a multi-faceted response that we have. We are not satisfied with just doing one thing, we are tackling it in every possible way that we can.

  84. Can I move you on then to paragraphs 3.59 and 3.60 where there is a discussion on discounts not being properly passed on. How has that been addressed?
  (Mr Tebbit) Firstly, in contracts. We do now confirm when we let contracts our ability to have sight of all the original documents—by the way, that is another way of countering the photocopy issue—and we are reviewing that process continually to make sure that we do get everything by way of raw material, and that includes the details of trade discounts. We have also Best Practice Guidelines to Property Managers which reinforce this point about discounts. We do not actually have any evidence that people have failed to pass on discounts to us but it is a classic area of concern, not just in the MoD but generally in the industry, which we are trying to cover through the contractual ability to have sight of all the prices that the contractor secures the materials for.
  (Mr Andrews) It is a contractual requirement today for discounts to be passed back to the Department. As one of the actions that we have put in place as part of our response plan we are reviewing the instructions that are in place to see what we can do to reinforce that message. It is covered in fraud awareness training, it is a major feature, in fact, of fraud awareness training. We are—

  85. Can I just stop you there for a moment and can I just come back to the point Mr Tebbit made a moment ago. I think you said you had no evidence that any discounts had failed to be passed on. On page 58 of the NAO's Report the example says: "There have been a number of examples where subcontractors have purchased materials in bulk and have received a substantial discount on the list price. Although a requirement of the contract, these discounts were not passed on to the Department...." That is not theoretical, it sounds as if they have found some evidence.
  (Mr Tebbit) I am reading it too. I am not aware of the evidence. We have no evidence ourselves that we are not getting the discounts passed on, that is all I was saying.

  86. Are you saying that when the NAO did this report they did not tell you what the evidence was they had found?
  (Mr Tebbit) That is correct.

  Mr Rendel: Is that usual practice?

Mr Williams

  87. That is for Sir John to answer, I think.
  (Mr Clarke) As far as I understood it we shared any evidence that we had and gave details of cases, so I am not quite sure looking back at these particular ones.

  88. Could you perhaps check. Are you sure that is absolutely accurate?
  (Mr Tebbit) My information from my staff when I asked about these details was that we had no evidence ourselves and did not get this from the NAO. I hate to end on, as it were, a note of discord but that is the position as I am aware.

  Mr Rendel: If that really is the position may I suggest that this evidence be passed across very quickly because there may still be time to take some action to recover them if there are discounts missing.

Mr Williams

  89. Thank you for that suggestion. Perhaps Sir John could consider it and perhaps towards the end if there is any clarification you could indicate we will call you in at that stage.
  (Sir John Bourn) Yes, I will be glad to do that, Mr Williams.
  (Mr Tebbit) I should just mention in this area that we do actually have a large case pending which does involve this area. When I said we have no evidence that we have not detected and followed up, there is one that we have detected and are following up and we do have a case pending in this particular area, but it is not linked to anything in the NAO Report as far as we are aware.
  (Mr Andrews) It was under investigation before the NAO Report.

  Mr Rendel: I am glad to have that clarification from what Mr Tebbit first said when he said that there was no evidence he knew of.

Mr Leigh

  90. We know from the very first paragraph of the Executive Summary, and indeed this point has been made to you several times today, that the Department made broad estimates suggesting that property management expenditure of up to £180 million a year may be at risk of fraud. My back of the envelope calculations tell me that since 1995 we are looking at very considerable sums which may have been subject to fraud, and yet we see on page 12 in paragraph 1.9 that "Despite the number of cases under investigation, the Department have not taken any cases of suspected property management fraud to the criminal or civil courts since 1995." The truth is that this is a risible record, is it not? If you were a BBC scriptwriter basing a comedy programme on the advice given by a Permanent Secretary to a Minister this would be a suitable item for a sketch, would it not?
  (Mr Tebbit) That is not entirely accurate actually. We have taken at least three cases to court since 1995.

  91. It is not accurate?
  (Mr Tebbit) That is my understanding, yes.

  Mr Leigh: If it is not accurate, what is it doing here then?

  Mr Williams: It is an agreed report.

Mr Leigh

  92. In any event, I do not think three cases since 1995—
  (Mr Tebbit) I think the general point is true that we have not taken a large number of cases to court, that certainly is true. I am sorry, the three cases, I am told, have been since the report was issued.

  93. So the report is right?
  (Mr Tebbit) Since the report was issued. It is difficult because it was 18 months ago when the report was being done, I do apologise.

  94. Either this figure of £180 million a year bears no relation to reality, which I suppose is possible but, again, it has been signed off by the Comptroller and by yourself, or this is a woeful record. Until very recently not a single case was brought to the criminal or civil courts.
  (Mr Tebbit) It is a technical proposition. This is a figure which is based on the extrapolation from visits to three establishments using a risk model which we believe actually to be well based. It is then extrapolating across the whole of the area in the MoD saying "This is the amount of activity which we believe to be at risk and which we have to manage". It is certainly not a figure which we believe to be a loss. It is an area, therefore, where we need to strengthen our controls which is what we have been doing. What I have been trying to do is explain broadly what we are doing to strengthen those controls.

  95. Yes.
  (Mr Tebbit) It consists of two different things really. One is to make the existing system work better by improving the procedures, guidelines, training, awareness and all of that. The other is to introduce a completely new system of prime contracting which is the way to go, I am quite convinced, where, as I say, we will be able to transfer a great deal of the risk currently borne by the Department on to contractors in an open book accounting method.

  96. Okay, perhaps I will come back to prime contracting first. We take it that the departmental staff, no doubt because of the fact it is written on pens and everywhere else and you have given speeches, are aware of the policy towards the MoD as no tolerance, prosecutions where evidence permits, but has this been conveyed to the Department's contractors? Indeed, we appear to be advised that it has not been. Surely part of the reason for having such a policy is to deter would be defrauders before they defraud the MoD? How is this going to work if they do not even know about the strict policies?
  (Mr Tebbit) I think you are absolutely right about the past. We tended to bother more about our own staff and not enough about our contractors. We have now informed our contractors and they are fully aware of our conditions. In June last year we sent a note to all of our contractors, 21 of them, as I say, requesting, requiring them to give details of their own fraud awareness strategies, reminding them of our own. More recently the Chief Executive has sent a letter to all of our contractors with a clear policy statement on fraud and theft for construction industry suppliers making absolutely clear what we require of them, what our own policy is and, therefore, what we require of them which is the same, as it were, as we require of ourselves. So, we have taken steps over the last couple of years to be very explicit with contractors about their obligations to us and we say that they must have a statement of ethical behaviour built into their own activities. They must have their own fraud policy statement throughout their organisation and they must have their own fraud response plan about the actions they will take to root out any evidence of this if there is suspicion.

  97. Okay. Now figure two on page 22, the operation to combat fraud did become very complex and desperate. There seems to be a plethora of different fraud units, hotlines, organisations engaged in this struggle. What has been done to simplify this so that property management can easily determine who they should contact in the case of fraud? Why is there not one individual in charge of the fight against fraud in property management?
  (Mr Tebbit) There is now one focal point, as I said. There are now only three boxes rather than four because we have integrated the procurement fraud element into the main fraud activity, the Defence Fraud Analysis Unit. We have also promulgated our policy and response plan, I did this, throughout the Department, to all the Top Level Budget holders requiring them to cascade it down throughout their organisations. Basically it says all staff should report suspicion of fraud to the Defence Fraud Analysis Unit. They can do it through their line manager if they choose but that unit holds the central records, that is the unit with the database. That is the unit which decides whether to hand material over to the police or to deal with it as an internal investigation. We do have one central focal point now, 12 people.

  98. Is there one individual in overall control?
  (Mr Tebbit) There is a head of that unit. Can I ask Mr Andrews to comment further?
  (Mr Andrews) I would also say that as Chairman of the Fraud Prevention Steering Group, which was an initiative that we took some two or more years ago now, that was in recognition of the fact that property management was an area in which we were potentially at risk. It was picking up the recognition that was articulated in the Strategic Defence Review in 1998 that there were weaknesses in our procurement model that we needed to improve. We have brought together this Steering Group which drew on not only all of the principal budget holders in the Department but also all of those agencies who had something to contribute to the fight against the threat of fraud in property management. If you are asking who is the focus for that, it is me as the Chairman of that Group.

  99. Right.
  (Mr Andrews) We have done a great deal both to raise awareness, to improve processes, to take action to convey our policies both within the Department and to industry and I can say with confidence that we are seeing a response from industry to the raising of that awareness. We talked earlier about evidence of increased awareness amongst our own staff. We are seeing clear evidence of raised awareness and a recognition of the need to take action in industry. We have made it clear to industry that only suppliers who are able to demonstrate that they have embraced wholeheartedly the Department's policy on fraud are going to be considered for future business. That is reinforced by the model that we are developing for prime contracting within which contractors will simply not qualify unless they can satisfy us not only over their policy and commitment to root out fraud but also that they have effective processes to make sure that they succeed.

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