Select Committee on Treasury Fifth Special Report



(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 Member States,
  • Increasing the checks on warehousekeepers' compliance with holding and movement regulations,
  • Tightening controls on hauliers,
  • Considering the use of tax stamps for alcohol, and,
  • The deployment of additional staff for excise warehouse controls.

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 13).

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 losses".

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)[1] highlights this type of fraud as a growing threat which requires continuing attention.

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 until 2000.

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 actions taken.

HM Treasury
October 2001

1  HC (1995-96) 291. Back

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