WEDNESDAY 28 NOVEMBER 2001

__________

Members present:

Mr Michael Fallon, in the Chair
Mr Nigel Beard
Mr David Laws
Mr John McFall
Mr George Mudie
Mr David Ruffley

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MS DAWN PRIMAROLO, Member of Parliament, Paymaster General, HM Treasury, MR MICHAEL HANSON, Director of Strategy, and MR DEREK HODGSON, Head of Analysis, HM Customs and Excise, examined

Chairman

  1. Minister, welcome to the Committee. Perhaps you could identify yourself and your colleagues.
  2. (Ms Primarolo) I am Dawn Primarolo. I am the Paymaster General. With me I have Michael Hanson, who is the Director of Finance and Strategy, and Derek Hodgson, who is Head of the Analysis Division.

  3. Can I thank you for coming today, not least because, as I understand it, you do not now have responsibility for Customs and Excise, although you had at the time. That is the position, is it not?
  4. (Ms Primarolo) That is correct. I thought it was appropriate, given I discussed it with the Committee before and I commissioned the report, that you may want to return to this issue with me. I am sure there are many other issues you may want to return to.

  5. We understand that and appreciate it. Can we start generally with the Roques Report? Do you accept it?
  6. (Ms Primarolo) Yes. The recommendations in the Roques Report, 62 of them, have been implemented and I think that it provides a very thorough analysis of the issues around the diversion of fraud, and indeed the NAO report concurs with that which was published alongside it.

  7. When you say that you accept the recommendations, do you accept the findings of the report as well?
  8. (Ms Primarolo) Yes, and indeed that is why I commissioned such an investigating to look at the issues surrounding the loss of the revenue over a period of time and to address how that occurred and what changes needed to be made to respond to that disclosure. Obviously there was difficulty in some respects in that the inquiry period covered a period including of the previous government, and I felt that Parliament would want to know how it happened, why it happened and how much and that it would not happen again.

  9. One of the findings, and we took evidence from Mr Roques, was that the original estimate of losses was some 670 million, but Mr Roques told us, and I quote: " The actual losses were almost certainly much, much larger than that. I estimate an order of magnitude of 500 million a year." Do you accept that?
  10. (Ms Primarolo) Can I be clear exactly what part of the Roques Report you are asking me to comment on there because the recommendations, and indeed endorsed by the NAO Report, were firstly to focus on the specific issue of the alcohol diversion of fraud and the losses that had not been accounted for by the Department in its accounts over a number of years. Mr Roques then went on to make recommendations generally about fraud estimates and the exposure to revenue loss to the Department. With regard to the figures, specifically on diversion of fraud, the figure is in the region, as Mr Roques has confirmed and the NAO, I think it was of 500 million and separately there are questions of other frauds which the Department published as part of the PBR yesterday and details of those fraud estimates with the methodology of how they came to those conclusions. So there are two different sets here: for the loss as a result of diversion of fraud through those warehouses, the figure is in the region of the figures that Mr Roques identified and the NAO confirmed, yes.

  11. That is not 500 million; it is 500 million a year. That is correct, is it not?
  12. (Ms Primarolo) No. Can I turn to the published figures on fraud so that I do not mislead the Committee here unintentionally. There were two publications yesterday: One was Tacking Indirect Tax Fraud, and the other was Measuring Indirect Tax Fraud. There were up-to-date estimates covering cross-Channel, missing trader VAT fraud, some oil fraud and alcohol. If we look specifically at the question of alcohol fraud, I think this is probably where the impression of 500 million occurs; it is the diversion of duty on suspended spirits for sale at full price on the domestic retail market costing in the region of 450 million in 1999/2000. Mr Roques identified that he believed there had been a shift in the fraud from the diversion of fraud, which triggered the inquiry, and this is what is called inward diversion. It is of a large nature but it is a different type of fraud. I am happy to explain what the difference is, if that would be helpful to the Committee.

  13. I just wanted to be clear who is talking about what. Mr Roques, when he appeared before this Committee, said: " The actual losses were much larger. I estimate an order of magnitude of 500 million a year."
  14. (Mr Hanson) Mr Roques audited our estimates of fraud losses back for a particular kind of fraud back to 1994; that came to 668 million. That was agreed. I suspect what he is talking about is the continuing losses each year, and we agreed that broadly speaking it is about 500 million a year.

  15. That is a huge amount lost. Who is responsible for the failures that allow losses on that kind of scale?
  16. (Ms Primarolo) The inward diversion fraud is spirits that are released from bonded warehouses outside the UK coming to the UK, supposedly going to another warehouse which is bonded, with no duty on it, and they do not reach the warehouse and enter the domestic market. Clearly, in looking at the recommendation, and indeed what the reports here identify, is the need to tackle that and Mr Roques identified the need for agreements with our European partners that this is an issue across the European Union. We are responding on the basis of improved intelligence, increasing checks on spirits entering the United Kingdom, which are supposedly under duty suspension, and obviously they are trying to make sure that we stop that inwards. But what we also need is better co-operation with the warehouses the goods are released from, which are outside of the UK.

  17. I understand that. We are going to come to some of the measures that have been announced. I just want to be clear: who is responsible for failures that allow us to lose 500 million a year? Is it Customs and Excise? Is it Ministers who supervise Customs and Excise? Who is responsible?
  18. (Ms Primarolo) Well, ultimately the entering of the country is the responsibility of Customs and Excise in co-operation with the authorities from which the goods are released, so there is a dual responsibility for Customs to identify that entering of the country if it does not reach the bonded warehouse, but clearly we need to ensure that we are given the movements of such goods in a clear form, which requires us to get agreement with our European partners on that basis, and we are now engaged in that. Mr Roques also identifies in his report that the nature of the fraud is that it shifts. It is about taking opportunities and, as we close down, as Customs closes down, the original diversion of fraud, which was occurring entirely here in the UK, which was the responsibility of Customs and Excise as his report demonstrates, it appears to have shifted now and we have quantified that on the basis of inward fraud. Therefore it is a dual responsibility. Ultimately, we have to collect the money in duties.

  19. You have used the phrase there "we close it down" or "we have to close it down". Are you, as the Minister, or are Ministers responsible for supervising Customs and Excise?
  20. (Ms Primarolo) Yes, in the sense that we answer to Parliament for them, of course, and that we expect to have the information that enables us to ensure that the correct strategies are being developed in order to tackle these issues. The problem that Roques identified was that the way that Customs was structured, even at Board level, the awareness of the problem and therefore the ever-rising figures of exposure were not identified and therefore in that sense Ministers, present and past, were not aware that there was that exposure. Now that we have this, there is that responsibility and that is what these documents lay out in saying, "We have assessed what we believe the risks are following from the advice that was given in Mr Roques's report, which was supported by the NAO. This is how we are tackling it. This is our methodology." It is showing how we came to those estimates for Customs and Excise and they are open to scrutiny and comment by others, which we hope they will be.

  21. If the Board fails to focus on operational matters, should not Ministers, plural, have been better informed of that failure?
  22. (Ms Primarolo) Ministers should have been informed but Ministers were not informed. It is rather difficult for me to answer a question about what previous Ministers may or may not have known and how they might have acted. The evidence in Mr Roques's Report indicated that, even at Board level, this was not recognised, and that would be the link to Ministers to identify a problem.

  23. I think you told us before that you yourself are surprised that you were not told until I think June 2000, reading Roques. Are you still surprised?
  24. (Ms Primarolo) Yes, I am surprised that my predecessors were not aware because when we look at the PAC reports and at Treasury Select Committee reports, there is an acknowledgment across the board that there is exposure to risk here in these areas, and everybody was aware of that and that was not followed through to the connection between what was actually information in Customs though Customs, quantifying it and then the Board making an assessment and advising Ministers. That led Mr Roques and his inquiry then to make recommendations about how Customs is structured, how that information was gathered and how it was transmitted through the organisation and ultimately to Ministers. It is very difficult to see how Ministers can act on information that they do not have and if they do not know there is a problem there in the first place. Clearly, Members of Parliament were relying on that information being properly collected and then we are advised on what the problem is and then the strategies to deal with it. That seems to me to be the crucial missing link. As Roques shows, the first indication I had of the scale of the problem from 1994 onwards was in May 2000 when the new Chairman of Customs and Excise came to me and said, "This is an issue. Customs found this themselves" and that he would come back to me within a month, and he did, with an internal assessment and, as a result of that, I commissioned the Roquess inquiry to look at matters.

    David Laws

  25. Minister, the evidence that Mr Roques gave to us was fairly shocking in relation to his views on the weaknesses of the Board of Commissioners. You are probably aware of that already. He said he was surprised by the working of the Board and he went on to say: "As far as I could see, they did not discuss operational issues and performance issues. They did not look at data. They had hopeless management accounting information, and all of the things I would have expected a Board to do it did not". In questioning from our Chairman, Mr Roques suggested that the Board was more like the board of a charity than the board of a serious business. Would you agree with those criticisms?
  26. (Ms Primarolo) I do agree that about failure in Customs. Again, forgive me; it is rather difficult because I am commenting over a period in which the Ministers were of the previous Government. I do not see how anybody could look at the problem that arose and see Roques's Report and not be horrified that this problem actually occurred. Customs did discover it and acted on it and, as Roques shows, by 1998 it had been closed off but there was still the question of accounting for the loss and the big question, which was: why did it occur and what changes need to be made to ensure it does not happen again? As you will see, Customs has gone through a very substantial restructuring but we have followed the recommendations from Mr Roques and the NAO view is that, in following these strategies, that puts us in a position where there are satisfactory structures and mechanisms in place for the future.

  27. Is it your view that the weaknesses at the Board were the key problem that allowed this fraud to run unchecked for so long, or are you saying that the Board was not communicating and dealing with fraud that was occurring under it, and therefore the information was not passed on to the Treasury? Is the weakness of the Board what allowed this to go on for so long and rack up these fraud losses, or was it just stopping that information getting through more quickly to the Treasury so they could then have done something about it?
  28. (Ms Primarolo) No, I have to rely on the Roques Report for the explanations of what actually occurred in that period of time. It seems to me that he is saying that there is a systemic failure in recognising and tracking the cases; communicating the information, particularly about the loss of revenue; that oversight was not there; and, in a sense, there is a failure to commence inquiries internally in the organisation, which led to the Board not having the information that it, too, needed. My preoccupation was to follow very carefully the recommendations from Mr Roques, and indeed the National Audit Office, to ensure that the weaknesses that were identified were corrected. I am happy and satisfied that, in following Roques's recommendations, we have a structure now that is adequate for the task that Mr Roques has identified. Forgive me, it is very difficult and it would be very easy for me to sit here, with no responsibility for that period, and to pass judgment on actions of which I have no real knowledge, except the information that is in the report. Therefore, I have taken the Roques Report recommendations, as has the Chairman of Customs and Excise and the Board, and made sure that those weaknesses were corrected.

  29. Can we go back to the timing of all of this again. You have told the Chairman that you first became aware of this yourself in, was it May or June of 2000?
  30. (Ms Primarolo) May.

  31. How long before that was the Board aware of this scale of loss? How long did it take for them to report this to the Treasury?
  32. (Ms Primarolo) I cannot recollect, and ask for a prompt here on the Roques Report itself as to when it was reported to the Board. I think in truth, and I will be corrected if this is wrong, this particular issue came to light when the new Chairman, as a result of coming in and looking at the structure of Customs, was making the changes.

    (Mr Hanson) The Department had known about the losses and the systemic problems in the regime since about 1995 because investigations went on.

  33. You mean the Board of Customs?
  34. (Mr Hanson) Yes, they knew about that from about 1996/97 onwards because there were investigations taking place. In terms of the specific loss of the 668 million, that was only quantified in about April/May of 2000.

    (Ms Primarolo) Obviously the size of the loss is what triggers all the concerns.

  35. There seems a very big lag here between not just the information that the Board should have been getting its hands on, but also the time period when the Board became aware that there were problems and the time period when they notified Treasury Ministers . We have also got a Board that Mr Roques himself described as more like the board of a charity. These factors were obviously extremely difficult for you and our predecessors at the Treasury because it meant that the information that you needed to flag up this problem was not coming through to you. Could we ask why it was that the Treasury itself was not exercising more control and oversight in relation to this Board, if it was as third-rate as Mr Roques was suggesting, and he was pretty dismissive of its quality? Why was it not the case that the Treasury, which was, after all, the monitoring department, was not aware of this? Were Treasury officials not monitoring this Board in any way at all?
  36. (Ms Primarolo) The Treasury would not monitor a whole department in every function. The NAO go in every year and look at departments and in this period the NAO were going in as well, which I think reveals the scale of the lack of connecting.

  37. How does the Treasury monitor the activities for this period of time of the Board in respect of these matters? Does the Treasury have no monitoring at all?
  38. (Ms Primarolo) The Board runs Customs and Excise and they are responsible; they are commissioned and they are responsible for the operational delivery of that work.

  39. What monitoring does the Treasury have for the way in which the Board carries out its responsibilities?
  40. (Ms Primarolo) Only in monitoring targets that are set, which Roques makes clear in terms of collection of revenue, and whether the forecasts and the actual receipts are on target, and a number of others. The actual monitoring of whether it has a competent management structure, the very reason that there is a board, is actually to manage that and therein lies the problem that Roques reveals.

  41. Do you have any Treasury officials that would either ever sit in on Board meetings or do they ever send you the minutes of their meetings to the Treasury, so that there is some distant oversight?
  42. (Ms Primarolo) Actually, I do not have any idea, but the idea that I would read every Board set of minutes or any minutes -

  43. Perhaps one of your officials might do that?
  44. (Ms Primarolo) The point of having a Board and Commissioners and having operational responsibility is that they are held responsible; hence this report. It does not make comfortable reading for Customs and Excise. The NAO is the independent body that then monitors the department, and is independent, on a wider basis. On the idea that we have a team in the Treasury that tracks whether these are adequately managed , Treasury will rely on information coming from the Board.

  45. I understand, Minister, that what you are essentially saying - and this all predates your involvement, so I do not think this is particularly personal - is that if we have a situation where the Board is completely incompetent and acting like a charity, not managing itself and its business effectively, it can go on doing so until it realises that that is happening because there is no exercise of oversight by the Treasury in respect of these matters and they do no have time to read the minutes of the meetings. Is that really satisfactory?
  46. (Ms Primarolo) I really do not think that is a fair proposition and I really do not feel that I am in a position to comment on what happened pre-1997 in terms of the Treasury monitoring. The whole purpose of having Customs and Excise with a Board of Commissioners, with devolved responsibility, is that they are held responsible and so ultimately they are the ones who are providing the information. Customs do a vast array of other functions which they discharge then and discharge now in a perfectly reasonable and efficient fashion. The question you are asking is: where is the watchdog? The responsibility is for Customs. The Treasury monitors against their targets, and the NAO are the independent assessor in all government departments about whether those departments are responding to the challenges. So we have had, as you will see in the Roques Report, PAC reports, PAC inquires and the Treasury Select Committee itself in that period of time took evidence, made observations about what they believed was going on. I think there are quite a few checks. The question for all of us is: what happened here systemically and how can we make sure it does not happen again?

  47. My last question on this then, Minister is: I think it is the case that Mr Roques was not asked to look specifically outside Customs and Excise. He was not asked to draw conclusions about the way in which the Treasury had exercised its powers in respect of this, but are you really saying that you do not think that the Treasury as the overseeing department has any lessons at all to learn from this about the way in which it polices departments such as this where they can end up with very ineffective boards that are not doing their job and that the Treasury does not really have an ability to find out about that until it is told?
  48. (Ms Primarolo) Be clear, Mr Laws, Customs and Excise are not a sub-department of the Treasury. They are one of the Treasury departments. They have their own structure.

  49. You do not think there is anything to be learnt from this?
  50. (Ms Primarolo) I think that Roques tells us quite clearly what needed to be done and what we should do to respond to this. Short of making the Treasury run every single department in Whitehall, which would be truly ludicrous, we have to work -

    Mr Ruffley

  51. Some people think that is happening now!
  52. (Ms Primarolo) Really, Mr Ruffley, I wonder why!

    Mr Laws

  53. There are no lessons for the Treasury at all in its own oversight of departments that come out of this?
  54. (Ms Primarolo) They clearly do not engage in that. This is a rather, forgive me for saying so, bizarre point in that Customs and Excise is a department that has operational responsibility, that is managed through a board that is held to its targets and has to deliver within that. That includes the revenue it collects and the way it discharges its responsibly.

  55. So if the new Chairman had not come to you, this inefficiency and incompetence and fraud could have gone on for ever and the Treasury would never have been any the wiser?
  56. (Ms Primarolo) No, because, with respect, Mr Roques says that the department itself had discovered it, had actually made all the connections, was dealing with the problems and that by 1998 it had been completely closed down. Mr Roques then goes on to make further observations about the department, which have also been responded to.

    George Mudie

  57. I think you are in a very good position because the activities took place when we were not in government. Secondly, you are obviously no longer the Minister and so you take a detached view. I would urge you to take a detached view, Minister, because I find it hard to accept that you are so blasé about an agency - and that might not be the right legal word - that is responsible to the Treasury for collecting 100 billion a year in revenue but when it makes a major mistake it says it is arm's length, "It is nothing to do with us". It is your agency. It is not the Secretary of State for Education who here answering questions on it but the Treasury Minister because the link is to the Treasury. Do you not find it worrying that a board appointed by the Treasury mishandled that amount of money and is so incompetent, when you read what Mr Roques said, and yet says, "It has nothing to do with us"?
  58. (Ms Primarolo) I am very sorry if I have given you the impression that somehow I am blasé, I think you said.

  59. I said you appear to be blasé, but I am sure you are not.
  60. (Ms Primarolo) Of course not, and I commissioned an external inquiry because I felt it was so serious that we did that, and I did not give it to Customs to do an internal inquiry as they needed to have that external scrutiny. I do have the power, as the Minister responsible for reporting to Parliament for Customs, to do that. Customs as an organisation, in terms of its appointment and structures, is not an agency. It is a free-standing department that has to account for its work. Of course, the serousness of the shortcomings that were revealed to my mind made it clear that we needed that external scrutiny, which is what we have now. I think there are, of course, lessons to be drawn, but what I am finding a little difficult is the idea that somehow Treasury manage. We have three Treasury departments: the Treasury, Customs and Revenue. Customs failed in this particular area and Roques identifies what the failures were and has made recommendations. What triggered the report and the investigation was the fact that Customs itself finally managed to make all those connections. Now, it is regrettable it took so long and the issue is one I then cannot answer about what happened between 1995 and 1997. What I can say is that by 1998 it had been dealt with because Customs were already dealing with it.

  61. Did the Chairman go and did any of the Commissioners go? Are any of the Commissioners who were on the Board at that time still on the Board? Was any action taken by the Treasury?
  62. (Ms Primarolo) There was no action taken and again the Roques Report makes that clear, that there is no one individual or collection of individuals who can be pointed to as being responsible for what Mr Roques identified as a systemic failure to notify within Customs and pass information though, which is incredible, I agree; hence my rapid action. Within a month, I had commissioned this. In term of action against the Board, I must be perfectly honest and say that I cannot actually tell you exactly who is on the Board now and whether they were on the Board in 1995. I am told that it is a new board.

    Mr Beard

  63. On this same topic, looking forward and weighing things, here you have a management which, according to Roques, virtually collapsed; it was dreadful, and it was only discovered to be dreadful when you have this extravagant mistake that cost so many millions of pounds. The question really is: what is the means now of supervising the present Board? I think it is admirable that it has been replaced so promptly but that Board is there. It is a small organisation that could suffer the same sort of problems that the last one did. What is to stop it? Who is supervising it? If it is the board of a company, then the shareholders supervise it and the income supervises it in a way. If it is a ministry, then Parliament supervises the Minister. Who is supervising this Board and who, in the future, is going to catch up on some of these mistakes before they get to these extravagant proportions that the last lot got to?
  64. (Ms Primarolo) Mr Roques deals with that in two specific steps of recommendations: one is about the reorganisation of the department, and the checking, reporting and restructuring of the department. That has been done. The second is the recommendation on estimates of fraud - therefore, how great that is and the development of strategies. That is now within the two publications that accompanied the BPR yesterday, which shows the level of fraud and suspected fraud in the various areas and the strategies necessary to tackle it, in a sense. That means that Customs are now held to account on those estimates and their strategies are monitored against their delivery. To give the example of the tobacco strategy in dealing with tobacco fraud, you can see the targets we set and the department is very closely monitored now to ensure that those targets are met, which they have been, and the problem is being dealt with. So there is the second series, if you like: what is above the Board is the fact that the fraud figures are there. I think that is the key in many recommendations that Mr Roques made.

  65. I understand that and that is one element of being accountable. We go into the targets in later questions. On this question of accountability of the Board, that did not prove adequate for them to be caught up with last time because they had targets before and Treasury were measuring them against targets before. These failures that are itemised in the Roques Report are not just failures on the targets, because targets are so loose that anybody could have met them by the sound of it; it was a deep seated failure in the management. For instance, they did not have any management information to discuss between themselves; they did not have any analytical background to it. Somebody looking at this from the outside as Roque did saw this straight away. So anybody who envisaged that organisation with a critical mind anywhere in the last six years would have seen the same thing. Are we not making some preparations to spot things not in a nit-picking sort of way or down into the detail, but in a structured way that is not necessary reflected in the targets?
  66. (Ms Primarolo) I think it is important to have it reflected in the targets that the department is charged not only with collecting the revenue, and so was doing forecasts of possible revenue receipts which were then measured against actual receipts, but that it now has, through the collection of information, through its risk strategies, identified, and is charged with doing that, the weaknesses that may exist, or potentially could occur, and therefore what strategies they will take to deal with that. I think when you have an organisation charged with working that way round, and that is being monitored closely, then that provides the checks that you are seeking. I am prompted on the point that the BSX Committee, in monitoring the performance, obviously now has this as a focus in terms of what departments need to do. I suppose that takes us back in a sense then to Mr Laws's question about whether the Treasury were checking that it is actually delivering what it is charged to do. I think that the Roques Report and the NAO report provide a rigorous framework in which to have a much more reasonable way of seeing how the department is operating and judging its performance and identifying the possible problems that can occur with exposure to fraud and where that might occur. They are charged with not just telling us that it is there, but what they are doing about it and what their targets are within that.

  67. Coming specifically to the targets now, could you clarify the point about the minutes? Is it still the case that the Board minutes are not copied to Treasury officials?
  68. (Ms Primarolo) I will have to check that.

  69. Could somebody come back to us on that?
  70. (Ms Primarolo) Of course. Of all the things I thought you might ask me, whether the minutes of the Board were sent to me, I am afraid -

  71. Mr Roques is critical because, first of all, he could not find minutes before 1997 and he was critical of the way the Board operated. We would like to know whether Board minutes are copied to those officials in the Treasury who look after this particular area. We would be grateful if you could find that out for us.
  72. (Ms Primarolo) Yes.

    Mr Ruffley

  73. Paymaster, on page 167 of the Roques Report, Mr Roques says that the Board, was, and I quote "lulled into complacency by its focus on the targets it had agreed with the Treasury to deliver and which in general were being met". Could you describe - and for the record I absolutely know it was not on your watch - to the Committee what role Treasury officials and Treasury Ministers had in setting those targets?
  74. (Ms Primarolo) The discussions on the targets are discussions with Customs and the Treasury and then monitored, and they would be checked regularly. I think part of what Roques is saying is that the measurements pre-1997 perhaps were not the best ones to have - I think he puts it slightly stronger than that - and that they needed to be revisited. As to why those were the targets set at that time, I rely on Roques to provide that information. In the absence of any other information, it was difficult to see how that could be questioned on the change of government in 1997. There was not a perceived problem and the information was not being passed through up to Minister. I am afraid I am in some difficult exactly how that was done when he refers to these specific issues. How it is done now is as Mr Roques suggested it should be done, which is by providing estimates, because we are particularly talking here about the exposure to fraud, and strategies of how to deal with that fraud and then being measured against that.

  75. What Roques exposes I think is well summed up in what he said when he gave evidence to this Committee within the last month, and it is a transcript which I will read out for the record. He says, and I quote: "Most of those targets were in the area of how much fraud they discovered and, as at the beginning of the period there was not much fraud, the reason they kept doing better than that was in my judgment not because they were very good but because the amount of fraud was so much larger than they had understood." I am agreeing with you here; it was the fault of the targets. But what Mr Roques is saying is that the targets were loose, they were easily met, they were useless. What I wondered was how rigorous now are Treasury officials and Ministers, who have a clear responsibility for setting the targets, which I think we would all accept, in saying, "We are not going to set soft targets that can easily be met." How are we going to set fairly high hurdles so that these are targets that really mean something?
  76. (Ms Primarolo) The difference is in how the targets were set, whether they were outputs and measured on outputs or outcomes, and looking at that. The rigour, it seems to me, and this is one of the points that Mr Roques made, was in being required to assess the exposure to fraud and to make those figures available publicly and the strategies to go with dealing with the fraud. That of itself sets very tight observations by Minister, Treasury and the Department itself, in terms of achieving those targets. Again I return to the examples of the cigarette frauds that were going on and the huge amount of revenue the Government does not collect. Very clearly there the Government Minister put before Parliament the extent of the problem, why it was happening and why we understood it was happening, and what we were going to do in order to tackle that, and that we would report on that to Parliament. So there is a much tighter pressure now on those areas than before the Roques Report. It is not a very pleasant experience to be told as a Minister, even if it is, as you kindly put it, not on my watch.

  77. That is a helpful answer. What I am tyring to get at here is that the Treasury have a role in setting targets. In the past, in the period under question, the targets were soft, for reasons we understand. What I do not understand, and perhaps you could enlighten us here, is how do your officials with Ministers at the Treasury come to a target? Who gives you the information as to what is a reasonable target and what is a tough target? What kind of disciplines are you imposing on Customs and Excise? How do you arrive at a target. What is the process?
  78. (Ms Primarolo) The targets for achieving the reduction in fraud are revealed for everyone to see and comment on. Firstly, in the explanations in the document that was produced it explains the methodology of how the Department arrived at those figures. Secondly, the strategies agreed with the Minister to deal with that, put forward by the Department and to deal with those frauds, over a period of time are then obviously very closely followed, and indeed followed by BSX as well. The focus is shifted into ensuring that there is pressure on the points where the likelihood or possibilities of fraud exist and therefore there is a loss of revenue. So it is the combination of those activities, and I am sure that you and all other Members of Parliament will be reading these documents closely, and it is not just whether Ministers keep the Department under review; it is actually that Parliament, hence the Roques Report, would want to know exactly what is going on here.

  79. It is the responsibility of us all to find it here?
  80. (Ms Primarolo) No, I was not saying that, Mr Ruffley, please; I do not see this as at all combative, so forgive me if I gave that impression. What I accept is that the Roques Report reveals an unhappy and very serious sort of problem within a Government Department that had to be put right. They have been scrutinised externally in order to do that and changes have now been made. Given that I gave Mr Roques that brief, that he made all his recommendations and that he said that if we did all of that, that would put us in a better position to monitor and the Department respond, and we have implemented those recommendations, I feel that what is now necessary is to ensure that, for instance, targets on fraud are closely followed and monitored and the Department kept under pressure to deliver in that area.

  81. Finally, the PSA targets for the period 2001 through to 2004 for the Department include a target for reducing tobacco smuggling, but apparently no specific targets for alcohol or for VAT. Could you explain why there are no targets for such rather large revenue streams?
  82. (Ms Primarolo) I am sorry to keep referring to these figures, but the figures that are in the report give the estimates in the areas of missing trade from fraud, oil fraud and alcohol fraud. The question of tobacco, which had already been published, and the results of the first year's activity health target, have been achieved. That was published yesterday as well. So those targets are now in place and the strategy is how we expect the Department to deal with those issues.

  83. Could you quickly give us a summary of the new targets for alcohol and VAT in the PSA targets?
  84. (Ms Primarolo) This is where fraudsters set up frauds and buy goods that are VAT-free from another European Member State and then sell the goods but with VAT on them, and then disappear without paying the VAT over to the authorities. The figures show that the estimate of loss in 2000/2001 is in the region of 1.7 billion to 2.6 billion. The strategy is the targeted investigation, increased checks on new registrations, which have to half the fraud by 2003, saving 750 million. Between September 2000 and August 2001, there were 1000 suspected registrations rejected and 350 registrations cancelled. Customs have also been charged with developing new techniques to disrupt the fraudsters, tightening on the VAT registraton procedure and increasing the numbers of post-registration visits. That is in these documents.

  85. Those qualify as PSA targets?
  86. (Ms Primarolo) They will become so but we are moving forward. You would not expect us to wait until the PSA targets. The Department has to act on them immediately.

  87. As PSA targets, they are operative from which date?
  88. (Mr Hanson) We have to finish the strategies between now and next April and, if they are approved, there will be new targets set for next April.

    Mr Laws

  89. Minister, just before we leave this issue about the Treasury's oversight responsibilities, in a nutshell you are basically saying that the new Chair came to you and highlighted these problems. You then acted, in all fairness extremely speedily, to do something about them and you have taken up the recommendations that were made, but you are maintaining that there is no Treasury responsibility for allowing the Board to continue in operation, even though it is a total shambles and acting like a charity board rather than a board of a major entity. Is that not something that you could look at again because it seems to me that there is a lesson to be learnt here, which the Treasury have not managed to learn.
  90. (Ms Primarolo) I commissioned an investigation.

  91. It is not yours, it is the Treasury's.
  92. (Ms Primarolo) With respect, Mr Roques went wider than his original remit because he saw that as relevant. He covered a number of things, which are very helpful.

  93. He said he considered that outside his terms of reference.
  94. (Ms Primarolo) What he has recommended, and he is a well-respected authority in these areas, is what Customs has to do to bring itself to where he believes it should be with proper checks and balances and the combination now of the broad targets, the monitoring through their PSA targets and the clear responsibility -

  95. Do you not think it is a Treasury monitoring responsibility?
  96. (Ms Primarolo) With respect, what is the point of commissioning an independent investigation, getting them to make recommendations, and then -

  97. Because that was not in his terms of reference.
  98. (Ms Primarolo) Because it was not relevant. What is relevant is what is happening in Customs, and that is what he has identified. Surely it would be much more serious if I had come here and said, "It was very interesting, but I am not going to act on the recommendations". We commissioned an independent investigation; it was very thorough and he made his recommendations. That has all been acted on. There are new checks and balances in place. The Department is being monitored and is monitoring itself in a way that Mr Roques believes will therefore ensure that it does not happen again. To instigate independent advice and then not take it, is just -

    Mr Laws: That is not what I was suggesting.

    Chairman: We want to move on to the estimates of revenues.

    Mr Mudie

  99. The first one you might not be able to talk about because you were not there. We are asking why, under the Roques Report at page 192, he points out that the Department preferred not to publicise the specific estimates which were available on lost revenues on the grounds of the lack of robustness. Why did the Treasury accept that decision not to publish, or were Ministers even aware that estimates existed? You might not be able to answer that because it was not on your watch.
  100. (Ms Primarolo) I understand that Ministers were not aware. I think that is what Roques says, that this remained internal with Customs.

    Chairman

  101. Were officials aware?
  102. (Ms Primarolo) In Customs, yes, but not beyond, hence the methodology now.

    Mr Mudie

  103. In terms of revenue and estimates (and I have read the documents albeit briefly, discovering their existence at lunch time) are you happy with the robustness, for example, of the tobacco revenue estimate and the basis of arriving at that estimate?
  104. (Ms Primarolo) Yes. The tobacco estimate was provided when I was Minister and the strategy was again implemented by the present Government and it is working very well. Part of the reason, and I appreciate that you would not have had time to look in detail at this, now for giving the methodology - and if people have comments, they are going to comment - is to expose that to a wider assessment but certainly, in terms of the Treasury and Customs, the tobacco strategy was subjected to considerable scrutiny in terms of its correctness and its achievable targets. I would say that when we introduced this strategy, we were told that the targets would not be achieved, and they have been. For instance, the 21 per cent -

  105. I am not so much worried about the target as the information that the target is based on, the revenue estimates. Can you assure me that the basis of it, which is 1992/93, and having chosen that as a base, is that Customs and Excise tell us that smuggling was minimal in that year.
  106. (Ms Primarolo) In the sense that those figures have been now scrutinised on a wider basis - and we get into quite technical discussion about how these estimates are delivered - I am assured that the rigour with which those estimates are now made is very tight.

  107. There is a question that can be asked about the estimates because there are two ways of getting that: there is a household survey and the report points out that they have not published one since 1998. Having said that, the calculations all relate back to 1992/93 when Customs and Excise, with this appalling record over the last ten years, tell us that there was minimal smuggling that year. Is that a good basis for thinking these are robust?
  108. (Mr Hodgson) Certainly with regard to the estimates being up to date, you say that the data is based on 1998; yes, we accept that. We have had to do a certain amount of extrapolation. We will be looking at new data when it comes in. As regards the assumption that there was not so much smuggling before the Single Market -

  109. It says it was minimal.
  110. (Mr Hodgson) There is certainly operational evidence from that time suggesting it was very limited. That is what we have had to go on.

  111. Three years later it was 1 billion.
  112. (Mr Hodgson) It grew very rapidly.

  113. Two years after that it was 2.5 billion but it says it was minimal then. On what basis are you telling the Committee it was minimal in 1993?
  114. (Ms Primarolo) But Roques identifies the issues that occurred then, the emergence of the Single Market, the removal of all the internal arrangements that were possible before the Single Market. He then identifies a number of other issues that Customs were required to do that withdrew them further from that direct operational contact and relying on risk assessments. As Roques points out, there are better ways to do an assessment of your likely exposure to fraud, hence the change now. So this is also to do with how operationally Customs could operate before the Single Market.

  115. My next question is about indirect tax. In the document you acknowledge that smuggling and fraud have a debilitating effect on respect for the law and provide a source of funding for those organised through networks. When considering raising indirect taxes, how does the Government assess the risk that this will encourage the public to seek illicit sources of supply?
  116. (Ms Primarolo) I think, firstly, we have to be clear - and the Government would assess that - that in these areas it is systematic and organised criminal activity, that the arrangements and the activity around, for instance, the alcohol diversion of fraud was not as a result of anything other than extensive criminal activity that then shifts to find opportunity elsewhere. The NAO and Roques point out that as you close one area down, people try and seek out another area. If we look, for instance, specifically at the cross-Channel smuggling, you will see that in the report it clearly identifies huge success in breaking down that smuggling to the point of reducing it massively. So the issue for Customs and for the Government has to be to understand the opportunities for that organised activity, which leads to the massive loss. The missing trader VAT fraud is a huge operation engaged in by criminal networks, and not somebody just taking the opportunity not to pay some tax. Many of these goods do not have any tax on them at all.

  117. Missing trader VAT fraud cost you 2.6 million in 2001. Is that the only type of VAT fraud that is significant and, if not, what other types of VAT fraud are costing you significant sums?
  118. (Ms Primarolo) Naturally, as a result of the Roques Report, we are asking Customs to look across the areas and to report to us. At the present time, their report is on missing trader fraud and they will have to report to the Minister on other areas of potential fraud or actual fraud across the whole area. That is being worked on now, as I understand it.

    Mr Beard

  119. The Roques Report on page 69 at paragraph 3.20.5 states that in 1980 there were some 2,600 staff employed on Excise control work. Successive cost-cutting exercises and business re-engineering have reduced this number dramatically. The current level of less than 400 staff is surprisingly low, having been further depleted this year by the diversion of a 100 staff to service the tobacco destruction strategy. Do you think this is a situation that has contributed substantially to the increased smuggling of alcohol and tobacco?
  120. (Ms Primarolo) Again, forgive me, the Roques Report accounts for what happened before this Government. I can tell the Committee what we have done since 1997. For instance, on election, we retained 300 anti-smuggling staff programmed to not be required any more. By the end of 1997, we had put in 130 extra staff on the IMPEX system. In July 1998, following the alcohol, tobacco and fraud review, we put in a further 145 staff. In July 1999 we commissioned the Taylor Report. In March 2000, in publishing that strategy, we put in place 955 staff. If we look over that period, mainly new staff and some redeployed staff account for some 2000 redeployed and recruited into these areas, which is some 10 per cent of the total of the Department's staffing levels. Whilst Roques comments on what happened before 1997, since 1997, where it has identified a weakness, the Government has a systematic, consistent and thorough record of addressing this issue and keeping pressure on the Department to do that. I think you can see that in the way that the Government was moving through this area in looking at the number of anti-smuggling staff that we needed and commissioning reports, tyring to get to the bottom of the problems that exist,

  121. Yesterday's publication, along with the Pre-Budget Review, dealt with tackling indirect fraud and refers to Customs as having deployed 340 staff to tackle VAT fraud and having commenced the redeployment of an additional 146 officers to tackle spirits fraud. It says that specifically. Are these resources extra or are they redeployed from somewhere else?
  122. (Ms Primarolo) These are redeployed from within the Department as a result of the fraud estimates, particularly in those areas, and a reassessment of best use of the Department's resources in terms of where the pressure points are. Clearly, as the Department moves into discussion on an expended amount, the question of resource will need to be addressed.

  123. The Roques Report brings out the threat of increased oil smuggling, tobacco smuggling and also the prevailing increase in drugs smuggling. Why does this report specifically mention spirits fraud? Is there a problem through all these areas?
  124. (Ms Primarolo) Which report are you talking about?

  125. I am talking about the one that came out yesterday, entitled Tackling Indirect Tax Fraud.
  126. (Ms Primarolo) In section 4, which starts on page 15, it states "tackling other forms of fraud" and it goes through: missing trader fraud, oil fraud, and for Northern Ireland and all frauds in the rest of the United Kingdom. It then goes on to alcohol and spirits. It is covering those areas.

  127. So those numbers are not just related to spirits fraud?
  128. (Ms Primarolo) No. The 146 is just for spirits and the warehousing issue.

  129. Are you saying there are increases for tackling the other frauds?
  130. (Ms Primarolo) What I am saying is that in section 4 of this report it identifies the issues and explains what the strategy is to deal with that fraud. That is in the document that you are reading from, Tackling Indirect Tax Fraud. The second publication is entitled Measuring Indirect Tax Fraud, and that covers the methodology of how the figures were compiled for scrutiny by others outside the Department.

  131. I am sorry to labour the point but if they were redeployed they must have been redeployed from one of these other areas, must they not?
  132. (Ms Primarolo) No,

    (Mr Hanson) The 146 are what we have already put into the system. That is what we have already done or we are in the process of putting them in. These strategies here are describing what we want to do next. The 146 were primarily redeployed from support functions in the Department.

    (Ms Primarolo) So we moved staff to the front line because that is where the risk was.

  133. Could I go back to the alcohol and tobacco fraud review, which started in 1997 and was published in 1998, where it was recommended that an additional 359 officers to combat fraud in the Excise duties were needed. That was the original recommendation in the draft report, but then it had been taken out by the time the report was finalised and published in July 1998. Was that an opportunity missed?
  134. (Ms Primarolo) The Department was in negotiation on its spending round and that is part of negotiation on that spending round as we went into the CSR in terms of what the bid from the Department would be to cover that area. So the report was published but clearly the future spending of the Department needed to be considered in the round with other priorities, both within the Department and across Government. That is what happened.

  135. There were increases at that time then, even though the recommendation was taken out?
  136. (Ms Primarolo) Yes, because we were acting to redeploy and looking at where our staff would be better used. You would expect the Department to be doing that constantly in its risk assessments about where it should best use its staff, and there was additional money at that time that was given immediately to deliver that.

  137. You reported yesterday in this paper that you have cut the revenue loss from cross-Channel smuggling by 76 per cent in one year compared with a target of 10 per cent. How is it that the target has been achieve with such a very wide margin?
  138. (Ms Primarolo) By the effective and efficient use of staff and procedures working correctly in developing the strategy.

  139. Could it have been that the targets were too low to begin with?
  140. (Ms Primarolo) Possibly, and that is exactly the point, and so when we look at targets, we look at what happened last year, what happened this year and therefore what should happen next year.

  141. There has been a record of this for the last five years of straw men being put up.
  142. (Ms Primarolo) I do not believe that the information that is now in these two documents in terms of the fraud estimates is anything but very rigorous. I accept, hence commissioning the report, that the practice of the Department over an earlier period needed more rigour than apparently was in place and had been in place since the emergence of the Single Market where the risks in this area were considerably increased.

  143. It is just that this appearing so recently rings bells that the practices have not changed very much from the ones that Roques commented on.
  144. (Ms Primarolo) In the sense that Roques would then be asking the questions that exactly you are asking, which of course the Department and the Minister would be too, that now is on the record to be scrutinised in a much clearer way, which previously it had not been. It seems to me you come back to the main point that Roques sought to make about putting in the checks and balances.

  145. Some press reports have suggested that the European Commission is not satisfied with the interpretation of personal use adopted by Customs and Excise for alcohol and tobacco purchases in the European Union. Have you received formal communications or complaints from the Commission on this?
  146. (Ms Primarolo) I understand that inquiries are being made and the Commissioner has said so publicly. This revolves around the issue of what are called the indicative levels which are set by the European Union and agreed at the time of the Single Market by our predecessors, which is the basis for the quantities that are roughly accepted as being for personal use. Customs go slightly wider than just using actual quantities carried. There could be reasons why, and there are many, people are bringing in more. Therefore, in helping to deal with what used to be called the white van trade, this has been a very important tool. Whilst the Commission is making inquiries, our view is that we are acting within the agreed levels back in 1993 and will say so.

  147. If we did need to come forward to the Commission, would that mean a relaxation of what is being applied at present?

(Ms Primarolo) It is difficult to know exactly what the Commission might want because the indicative levels are agreed across Europe. We are operating within those. I am not fully conversant with the details of the inquiry. I admit that it is difficult to see how that can progress in terms of the activities, particularly in our ports and airports, to stop people from bringing back quantities that are clearly for sale, as opposed to for personal use. I am sure you have seen reported in many places the exceedingly large amounts that some individuals carry claiming that it is for personal consumption when they are within a certain time period and, quite frankly, stretching credulity to believe that that would actually happen. The issue is one of activity within those levels. We are clearly within the agreement. We have to wait and see what the Commission has to say in the future.

Chairman: Minister, we are going to leave it there today. We are obviously, like you, waiting for the Public Accounts Committee report, which will then reflect further on how we will report. It might be useful for you to know that we are minded to focus on the relationship between the Treasury and Customs and Excise. You are kindly replying to us on the point about Board minutes. There is an opportunity there, if you wish, to say anything further to us in your letter about that relationship. We will return to that particular aspect. Thank you very much for coming today.