Supplementary Memorandum from HM Customs
1. MEASURES TO
1.1 Spend to Save initiative
By mid-1997, new excise frauds had been identified
in the outward diversion of excise goods and excise drawback fraud.
Under the Spend to Save initiative announced later that year,
the Government allocated Customs funding to deploy an additional
130 staff to combat internal frauds at registered traders and
tackle paper-based fraudssee paragraph 2.1 for further
details. In addition, the Spend to Save initiative enabled the
Government to strengthen Customs resources aimed at tackling Single
Market excise smuggling by an extra 70 officers.
1.2 Alcohol and Tobacco Fraud Review (ATFR)
Following an announcement by the Chancellor
in the July 1997 Budget, Customs carried out a review of alcohol
and tobacco fraud, in partnership with the trade. The Alcohol
and Tobacco Fraud Review (ATFR), which predominantly considered
alcohol diversion frauds and the cross-channel smuggling of alcohol
and tobacco, was published in July 1998 as part of the Comprehensive
Spending Review. The Government allocated an additional £35m
to Customs to fund 145 new front-line and assurance staff to help
tackle smuggling and fraud and set up assurance systems to reduce
alcohol diversion frauds.
1.3 Independent evaluation by Martin Taylor
As Customs tackled alcohol diversion frauds,
large scale tobacco smuggling stated to grow rapidly. By March
1999, the Chancellor announced the independent evaluation of tobacco
smuggling. Martin Taylor was appointed to conduct the evaluation.
He worked with officials from Customs and Treasury and took advice
from other Government Departments, tobacco manufacturers and their
representatives. He reported privately to the Chancellor in November
1999. In his Pre-Budget Report of November 1999, the Chancellor
announced he had immediately accepted two of Taylor's recommendations
and the Government would be funding a national network of x-ray
scanners and introducing fiscal marks.
1.4 Tackling Tobacco Smuggling Strategy
In March 2000, the Paymaster General announced
full details of the Government's Tackling Tobacco Smuggling strategy.
The strategy, which includes the Government investment of £209
million over three years, aims to put tobacco smuggling into decline
within three years. The strategy consists of:
nearly 1,000 more officers to tackle
tobacco smuggling at key ports and inland locations (roughly doubling
a national network of x-ray scanners;
prominent fiscal marks to make identification
of smuggled products easier;
a range of tough new penalties for
those involved in tobacco smuggling;
a major publicity campaign to increase
2. MEASURES TAKEN
Outward diversion fraud occurs when goods held
in a UK warehouse in duty suspension are purportedly sent for
export. Instead of being exported the consignment is diverted
to the UK market without payment of UK duty. In many cases the
owner of the goods rather than the warehousekeeper is the instigator
of the fraud. This type of fraud was particularly prevalent from
1994 to 1998. Customs introduced a number of measures to counter
it as outlined below. As a result no significant new cases of
outward diversion fraud have been identified since April 1999.
Operational and organisational changes
The Import/Export (IMPEX) teams, comprising
130 staff, were formed in late 1997. Their original remit was
to identify and collect UK revenue, which had become due as a
result of diversion or drawback fraud. They are a flexible resource,
not constrained by the normal audit programme, and able to respond
quickly to potential fraud. They liaise closely with warehouses
to identify suspect movements at an early stage. In addition they
undertake promiscuous visits to warehouses outside the normal
Although the teams were unable to recover significant
amounts of revenue, due to their inability to trace the persons
responsible for fraud (usually the owner), they were very effective
in reducing outward diversion. Recognising this benefit, Customs
has since 1998 used IMPEX staff to disrupt fraudsters' activities
instead of adopting an investigative approach to diversion fraud
(other than in limited instances). This operational change is
largely responsible for the reduction in outward diversion fraud.
2.2 Commissioner's Direction
A Commissioner's Direction was signed on 30
October 1997 whereby "the proper officer may impose additional
conditions and restrictions on the removal of any goods from an
excise warehouse in the case of any warehouse in which goods that
are not owned by the occupier are warehoused". Local officers
are now able to prevent suspect consignments from leaving third
party warehouses until specific conditions have been met (eg the
owner of the goods must identify himself to Customs). This Direction
has been widely used by IMPEX and Assurance officers to good effect.
It is recorded as having been used on 39 occasions
between November 1997 and March 1999. It has only been used eight
times since then. This supports Customs' view that the requirement
to submit themselves to official scrutiny under the provisions
of the Warehousekeepers and Owners of Warehoused Goods Regulations
(WOWG) (see 5 below), and the activities of the IMPEX teams, have
encouraged many fraudsters to withdraw from the UK warehousing
2.3 Excise duty drawback
Spirits which had been the subject of drawback
claims (ie the excise duty on them had been repaid) and which
should have been exported, were found to have been diverted onto
the UK market. To address this problem, Customs issued a circular
to operational staff in 1997 reminding them of the checks which
must be performed before excise duty is repaid and highlighting
the relevant risk indicators. In addition, the IMPEX teams were
given responsibility for verifying drawback claims. To place further
obstacles in the path of fraudsters, in 1998 Customs centralised
the processing and payment of drawback claims. This has standardised
the application of the excise drawback criteria and facilitated
identification of fraudulent claims, before repayment has been
made. The combined effect of these measures has been a reduction
in the level of drawback paid on alcohol from £68m in 1996-97
to £26m in 1999-2000.
2.4 Departmental Trader Register (DTR)
The registrations required under WOWG (ie warehousekeepers,
owners and duty representatives) are held on DTR. This allows
Customs staff nationally to access information which was previously
held locally. Customs officers who have concerns regarding goods
intended to be removed from an excise warehouse can quickly check
whether the alleged owner is genuine (ie correctly registered).
DTR also ensures that local Customs staff are aware of, and can
visit for assurance purposes, registered owners whose goods are
stored in distant warehouses.
2.5 Warehousekeepers and Owners of Warehoused
Goods Regulations 1999 (WOWG)
The initial impetus for these regulations was
the need to provide for the approval and registration of warehousekeepers.
Previous policy had been to approve warehouse premises and regard
the occupier as the authorised warehousekeeper. However, this
policy was contrary to Directive 92/12/EEC and could, if successfully
challenged, have compromised our ability to use other legislation
which referred to "the authorised warehousekeeper".
Operational colleagues had cited their inability
to identify the actual owners of goods held in excise warehouses
as a barrier to implementing effective anti-fraud measures.
Many of those perpetrating outward diversion
fraud were shadowy figures who were buying and selling warehoused
goods without the warehousekeepers' knowledge. When irregularities
occurred after the goods were removed from warehouse and enquiries
were made to establish the ownership of the goods (and thereby
the person liable to pay excise duty), the audit trail invariably
led to missing traders.
The Warehousekeepers and Owners of Warehouse
Goods Regs 1999 (WOWG) provide for the authorisation of warehousekeepers.
They also require UK revenue traders (the owners of the warehoused
goods) to be registered with Customs if they wish to deposit duty
suspended goods in an excise warehouse or deal in warehoused goods.
To prevent fraudsters from avoiding the need to be registered
by moving their operations overseas (nominally at least), the
Regulations require UK duty representative to be appointed to
act on behalf of non-UK owners. The benefits of WOWG are:
Customs can identify those persons
dealing in warehoused goods. Credibility checks are carried out
on owners and warehousekeepers by Customs prior to authorising
them. We have an opportunity to reject applications for registration;
a UK based person is always liable
to pay the duty whenever the WOWG requirements are not met.