Examination of Witnesses (Questions 80-99)
MR RICHARD BROADBENT AND MR MICHAEL HANSON MBE
WEDNESDAY 31 OCTOBER 2001
80. In paragraph 1.17 on page 14 of this Report it is pointed out that in February 1994 the Committee of Public Accounts asked Customs whether there was any sign of increased fraud as a result of single market entrance. Is what you are saying that is what caused the opportunity for fraud. It goes on, Customs responded, they had from the outset recognised that the changes would give rise to new risks of fraud and that there would be people eager to exploit these opportunities. For that reason it seems to me strange, to say the least, if you had enough people on the ground you were not able to monitor carefully enough what was happening and pick it up in even when, as you say, in 1994-95 it was at comparatively low levels, £9.3 million, and certainly in 1995-96 it suddenly went up by nine times to 85 million. I would have expected, given that apparently Customs and Excise were specifically looking out for this, I would have expected them to respond earlier.
(Mr Broadbent) I think by late 1995, early 1996 it would be fair to say the organisation should have been aware of what was happening. Of course part of the organisation was aware of what was happening, as we touched on earlier the frauds were being investigated very vigorously. The difficulty was that while part of the organisation knew, that knowledge did not travel to other parts of the organisation and hence the corporate thinking about, "we have a problem here, that shapes what we are going to do about it," that bit of thinking got delayed by a few months.
81. I come back to letting loads run, how many on the occasions which a load was allowed to run, resulted in the prosecution of somebody higher up the tree?
(Mr Broadbent) It is quite difficult to pin each individual load to a prosecution. It is fair to say that in the majority of cases in which loads were run prosecutions were brought but I would hesitate to say that in every case a prosecution followed. It is very difficult because, as we were saying earlier, at the point in which a load left the warehouse it was not always clear whether you were allowing it to run or it was a perfectly legal load. There is no doubt that in many of the prosecutions brought the evidence gathered by allowing those to run has proved to be very important evidence.
82. Are you saying that where it was an illegal load, when you allowed it to run usually a prosecution resulted?
(Mr Broadbent) I am afraid I would be misleading you if I suggested that. There were a certain number of cases where loads were allowed to run and in some cases it did not. The difficulty is that many loads left the warehouse, some were illegal and some were not and in many of the cases we brought, letting loads run was very, very important evidence. It is quite difficult to identify every single load. One of the problems was, as the NAO Report says, our case management system at the time did not identify the activity down to the right level of detail. It is quite hard in each case to pin down the individual loads and relate them to individual prosecutions.
83. The reason I ask is partly Figure 5 on page 21. I have to say I am very surprised at the low level of recoveries, particularly as you seem to be saying you reckon that most of the loads that were allowed to run ended in prosecution. You would expect if they did end in prosecution you would then be able to get the duty on them and you might also have made some attempt to confiscate further from the people they were prosecuting?
(Mr Broadbent) This is a very particular difficulty which Customs and Excise faces. If you allow a load of alcohol to run within a matter of days the load has been sold and the money is gone, gone overseas, gone to the fraudsters. You only recover ultimately what is in the person's pocket when you arrest them. The nature of these taxes, they are real time taxes, the money goes, the load leaves the warehouse, it is sold in some cash and carry chain, the fraudster gets his take, cash probably, the cash & carry chain gets his bit, that vanishes, it is very hard after any period of time
84. When you say "let them run" I assume that you are following the load to see where it goes?
(Mr Broadbent) In some cases that is certainly the case. Some of the these loads were allowed to run in the sense that we knew the activity was taking place but we could not, for various reasons, move in an investigatory sense for a day, a week, a month in some cases, so even though you knew the activity was happening you were waiting for some other arranged event to happen and you would not necessarily follow the load.
Mr Rendel: That does stagger me.
85. Mr Broadbent, I just have one or two questions to ask on the Report itself, basically because some of the terminology I do not really fully understand, and I know you can help me here. On page 1 it says, "Customs adopted a risk-based approach", by risk-based I assume that this would be prior to the European market we would have been working in front of that, we would have been sitting down and we would be quantifying some of the components that make up this risk-based equation. What were the risks that you had actually taken into consideration and who bore the risks?
(Mr Broadbent) I think risk based approach in this context is really related to allocating resources and systems to where you perceive the risk of noncompliance to be the greatest. The old physical controls, for example, essentially had a physical presence at each point, and some points were huge and some were tiny. A risk based system would require a certain sort of return, a certain sort of information, it might trigger a certain number of visits, more, for example, in the case of a large trader or less in a small trader. Risk based is not aiming at a particular risk of this sort of fraud or that sort of fraud, it is saying, is a trader of this sort a risky trader or a less risky trader. There are various risk factors you can draw on.
86. The original equation was wrong or flawed in some respect because the thing went pear shaped.
(Mr Broadbent) I think the principle of risk based controls is essentially very effective and I think very appropriate for the modern world. I think the application of risk in these circumstances did not bed down as quickly and as accurately as it should have done. The fact we now have this sort of fraud under control with the same controls in principle shows it could be done. We did not get it quite right the first time round.
87. What we have is based on information we know how good you have been in the past and we have to take your word how good you will be in the future but there is nothing to stop you coming back in ten years' time and saying "Although we have given you information we have now eradicated all these problems, we forgot about this section over here which we were totally unaware of and it took us completely by surprise". We must judge you on your past record, yes?
(Mr Broadbent) As I say, I think we were aware of this fraud and we might have reacted more quickly but we did react and deal with it. I think more generally what I would say about fraud is this: I worry all the time about fraud. Out of all the regimes for which I am responsible I worry about fraud in all of them. I think the levels of fraud in some of them are certainly too high. I can describe some of the specific risks and some of the specific regimes. It is only when you get down to that level of detail and that level of analysis that you really begin to understand risk.
88. If I could take you to page three, I understand that if a lorry leaves the warehouse it can stop or stand overnight on the way to the docks but it says here there is a period of time limits for export. What are the time limits for export?
(Mr Broadbent) Four months is the answer to your question. The documentation has to be returned within four months.
89. If a lorry leaves the warehouse it can stop in this country for four months before it goes to the docks?
(Mr Broadbent) No, it can go to another warehouse, it can go to authorised premises, it can move around quite a lot. The goods do not ultimately have to be accounted for until the four month period is accounted for. You can follow it round a lot and perhaps it turns out to be a legal load, perhaps it goes to another warehouse, perhaps they feel they are being followed, it becomes a very complex pattern of activity.
90. Who gives the limit of four months?
(Mr Broadbent) That is laid down in regulations.
91. Do we give the limit or is it a European limit?
(Mr Broadbent) I am afraid I do not know offhand whether it is European or UK but I think it is probably European. Most of the law is European.
92. Do you think four months is an appropriate length of time?
(Mr Broadbent) I personally do not think that the documentation will be the key control. The control here, I think, has to be through the warehouse system, which we were discussing earlier was insufficiently tight, and through the hauliers and through the owners. At this time we are not controlling all of those other things.
93. I will come back to that. On page 7, paragraph 25, the first line down "Customs did not have a high level strategy for how they should combat alcohol diversion fraud". What are the key differences now?
(Mr Broadbent) I think the most important differences for me are, firstly, an awareness that it is only strategic action, not tactical action, that is relevant and, secondly, the management challenge of transforming an organisation to get it to focus on outcomes, not outputs. Tactical action leads to outputs which might be this big or this big but do they change the world, how do you know? Strategic action leads to outcomes and you should be able to say "the tobacco market is now X per cent rather than Y per cent because we had a strategy and we aimed for that target". I suppose the vision that we would have of this organisation, which is ultimately a risk management organisation, is to move it progressively from measuring outputs to measuring outcomes. The four points in paragraph 25, which I would accept are the four criticisms the NAO makes of us, I think are well taken and one is we did not have high level strategies then and if we had we might have asked ourselves different questions.
94. So you feel confident that this will never reoccur and you will not have to come before the Committee because you have now got a high level strategy in place?
(Mr Broadbent) No, I do not think I am confident. I think we have an awful lot of work still to do but we have a Tobacco Strategy in place, I think we will cover alcohol later this year, we are committed to publishing an Alcohol Strategy. I think there is a lot of work to be done on oils and I think that VAT is a big subject in itself. No, I think there is a lot of work yet to do. This is not going to happen overnight.
95. I am glad that you recognise the problem. A question I do not know the answer to. On page 17 at 1.30 we have got this last part, Recommendation 15, and it cannot be implemented because of the problem with warehousekeepers unable to recover guarantees from innocent people. Could we impose the duty on the carrier?
(Mr Broadbent) Yes.
96. Could we say that the carrier must pay the duty, albeit in the form of a guarantee, until that load reaches the destination and the paperwork comes back? Would that maybe cut down the length of time that this load is floating around?
(Mr Broadbent) I wish you were on my side. This is exactly what we have done, in fact. We cannot implement this Recommendation because it would effectively be unlawful but what we have done with the guarantee system is now make sure not just that we have a warehousekeeper guarantee but that no load moves without somebody giving a guarantee, whether it be the warehousekeeper, the owner, the haulier. We actually encourage the warehousekeepers now to get the others to give the guarantees where possible. We make it very clear that if the warehousekeeper chooses not to we will come against him. This is the most effective possible control because it gets them, if you like, where it is most painful.
97. So we collect the duty no matter where the load goes?
(Mr Broadbent) We collect the guarantees. I said earlier, guarantees cannot be a full answer but they are a very significant incentive towards compliance.
98. Why can we not make the guarantee for the level of duty the lorry carries?
(Mr Broadbent) In many cases for individual loads it is close to or related to the level of duty. The duty on a lorry load of spirits might be £100,000, so we should not be far off. The difficulty in this case was when we did not have the guarantees in place on the hauliers and there were successions of loads and of course the amounts built up very quickly. This system of guarantees now is quite an important deterrent to the same thing happening again for this particular fraud. Whilst I do not rest easy on this fraud, my much bigger concern on alcohol at the moment is inward smuggling which I think is still a big problem we have not yet fully tackled.
99. But we are moving in the right direction?
(Mr Broadbent) I hope we are moving in the right direction. We are thinking very hard and working very hard on these subjects and I think we realise it is no good kidding ourselves that what we do matters unless we can measure the real impact on the real world as a result.
2 Note by witness: The relevant EU Directive is 92/12/EEC. The implementing domestic legislation is contained in the Excise Duty Points (Duty Suspended Movement of Excise Goods) Regulations 2001. Back