GOVERNMENT RESPONSE TO THE TREASURY COMMITTEE'S
SIXTH REPORT, SESSION 2000-01: HM CUSTOMS AND EXCISE: COLLECTION
OF EXCISE DUTIES
(b) The Government owes Parliament an urgent
statement about the scale of the loss of excise revenues between
1994 and 1998, the reasons for the loss, and the steps taken to
prevent such losses occurring again. The Government should also
explain the current status of the Rocques report and indicate
the date by which it aims to secure publication (paragraph 9).
The Comptroller and Auditor General's report of 19
July 2001 confirmed the revenue losses arising from the fraudulent
diversion onto the home market of duty unpaid goods as being £668
million. Another £216 million was accounted for which involved
goods diverted overseas where duty would have been due in the
country of import had the goods not been fraudulently diverted.
These losses occurred between 1993 and 2000 and represent some
1.4% of the revenue collected in respect of alcohol for that period.
By 1995, Customs became aware that the scale of alcohol
diversion fraud was growing and by 1996 the recorded losses were
becoming significant. The Customs' National Investigation Service
recognised the emerging scale of the diversion fraud mainly through
uncovering and pursuing large fraud cases. In his July report
the Comptroller and Auditor General comments that even with hindsight
it is not possible to say whether a policy of greater disruption
of alcohol diversion frauds between 1995 and 1998 would have led
to a lower level of revenue losses.
Customs investigators at the time found that where
suspect consignments were intercepted at an early stage to disrupt
fraudulent operations, fraudsters just moved to another warehouse
to commit further frauds.
Responding to management concerns and reports from
Internal Audit and the National Audit Office, Customs took action
to strengthen controls to tighten up the weaknesses in the system.
As a consequence the level of outward excise diversion fraud had
fallen significantly by early 1998. Key measures taken included:
- Targeting consignments diverted onto the home
market in order to disrupt fraudulent activities,
- Encouraging warehousekeepers to obtain guarantees
from the owners of the goods or hauliers,
- Requiring warehousekeepers and the owners of
goods to be registered,
- Taking part in a European wide Early Warning
System for certain consignments of spirits and tobacco.
- The Roques report was published in July 2001
together with the Comptroller and Auditor General's further report
on excise diversion fraud.
(c) We believe that Customs and Excise should
demonstrate that adequate regulations and procedures are now in
place to provide an effective check on the assessment, collection
and proper allocation of revenue (paragraph 10).
The Roques report made 65 recommendations of which
Customs fully or partially accept 62. The majority of these recommendations
were implemented by July 2001. Key measures include
- A more rigorous approach to the approval of warehouses,
- Tightening the registration procedures for warehousekeepers
and the owners of goods,
- Improving the information on the holding and
movement of excise goods where the duty has not been paid,
- Improving the exchange of information with other
- Increasing the checks on warehousekeepers' compliance
with holding and movement regulations,
- Tightening controls on hauliers,
- Considering the use of tax stamps for alcohol,
- The deployment of additional staff for excise
Together with further actions planned by Customs
these measures will result in tighter controls against fraud,
improved management of investigations of fraudsters and a better
strategic approach to countering fraud.
(d) We believe that the extent of the knowledge
of senior Customs and Excise officials about the scale of diversion
fraud must be made clear. We also believe that the department
must demonstrate that internal procedures and protocols are in
place to ensure proper information reaches senior management and
Ministers (paragraph 11).
The Roques report provides a detailed account and
evaluation of the problem. In the report Roques states that he
"did not criticize any individual Director for the failure
to deal more quickly with the problem of excise fraud" and
both he and the Comptroller and Auditor General concluded that
deficiencies were essentially systemic.
In January 2001, the Department announced a major
restructuring that clarified the roles and responsibilities of
Directors. In addition the Department has given its Principal
Finance Officer responsibility for revenue accounting and controls
and conducted a full review of its internal financial controls.
A statement of internal financial control (SOIFC) will be published
with the Departments Trust Statement for 2000/2001.
Improvements to information systems take time to
deliver, but are also underway.
(e) Significant revenue losses began to build
up as a result of the conduct of excise fraud investigations from
1994. Ministers of the previous Administration do not appear to
have been informed. Customs and Excise had identified these problems
by 1998. Yet it was not until June 2000 that Ministers of the
present Administration were informed. By then, losses had mounted
to several hundred million pounds. We commend Ministers for commissioning
the Rocques inquiry. But there can be no excuses for either losses
on this scale, or for failure to report them to Ministers (paragraph
The revenue losses developed due to weaknesses in
the control regime. These were exposed most notably by the introduction
of the Single Market. Early investigative activity was central
to identifying the problem and providing an initial response based
on enforcement activity. Both the Roques report and the Comptroller
and Auditor General's report of July 2001 acknowledge that Customs'
investigative activity began very quickly with the aim of prosecuting
and convicting the fraudsters and so protect the revenue. An inevitable
consequence of this approach was that irrecoverable arrears of
duty could accumulate in the course of the investigation.
The Comptroller and Auditor General's report establishes
that the balance between revenue protection (through disruption
activity) and prosecution was not assessed at the time of the
investigations, but recognises that "even with the benefit
of hindsight, it is difficult to determine whether a policy of
greater disruption would have led to a lower level of revenue
The growing threat of excise fraud was discussed
at the Public Accounts Committee hearing into Customs accounts
in 1995, although at this stage the scale of the frauds was not
known. The Treasury Minute (CM 3384) of August 1996 in response
to the Public Accounts Committee 35th report (HM Customs
and Excise Appropriation Accounts 1994-95)
highlights this type of fraud as a growing threat which requires
To complement the investigative effort, the Department
devised counter measures and strengthened controls, effectively
bringing this form of fraud under control by early 1998 but at
this stage many investigations were ongoing so the full scale
of the frauds was still not known.
With hindsight, action could have been taken earlier
both to assess the cumulative revenue impact of the separate investigations
undertaken and to bring the losses to account. As a result of
these failings the full scale of the eventual losses was not clear
The Chairman brought the matter to Ministers' attention
as soon as the full scale of the losses became apparent and remedial
accounting action both to account for the losses and to improve
controls was taken without further delay. The Government's response
to the Roques report (CM 5239) sets out in detail many of the
1 HC (1995-96) 291. Back