Examination of Witnesses (Questions 120-139)
MR RICHARD BROADBENT AND MR MICHAEL HANSON MBE
WEDNESDAY 31 OCTOBER 2001
120. At that time of enormous external change, therefore the economic opportunities you mentioned, therefore the risk, just give it over to the warehouses to look after. Do you not think that was a monumental blunder that led to nearly £1 billion of taxpayers' loss?
(Mr Broadbent) No, I do not think it was a monumental blunder. As I said, I think the most important change at the time was
121. Do you think it was a mistake in hindsight then?
(Mr Broadbent) No, I think it was the right thing to do in hindsight, to introduce risk based controls. What I think was not got right was getting those risk based controls honed down to deal with this particular fraud. The most important change that took place at the time was the change in our ability to check documents at the border. We could have had 100 people in each warehouse but once the load left the warehouse we had lost the ability to stop that lorry at the border, that was the key change. However many people we had in the warehouse that would not have been affected.
122. This business about letting loads run between 1995-98 where we ended up with the courts confiscating £23 million and losing £700 million. Do you not think you were letting loads run too long?
(Mr Broadbent) It is a very difficult judgment to make.
123. There is an enormous difference between those figures.
(Mr Broadbent) Yes. It was clear that we were not making sufficiently rigorous judgments in each individual case. The NAO looked at this and say in their report that even with hindsight it is not possible to say whether the revenue loss would have been higher or lower if fewer loads had been allowed to run. They have looked at all of those cases.
124. It strikes me that the number of warehouses, which you mentioned has gone from 532 to 986, is still a relatively low critical number to have very tight controls on. One of the reasons you let these loads run was because you could not track them going between different warehouses but, given so small a number, surely that is not true?
(Mr Broadbent) I think that the relatively small number hides an enormous number of transactions. It is actually the number of transactions which drives the control regime rather than the number of sites.
125. Do you think the Government should have prevented the number of warehouses increasing, or doubling, in this period, presumably partly in response to the fraud opportunities that were created?
(Mr Broadbent) I am not sure it is the Government's job. I think it is probably fair to say that Customs and Excise might have been tougher in issuing authorisations, and we are tougher now.
126. I note that you have got a new Finance Director who is a qualified accountant. When did that first happen? When did you first have a qualified accountant as Finance Director?
(Mr Broadbent) First of all, Mr Hanson, who is the Principal Finance Officer, and I suppose in commercial parlance Finance Director, is not a qualified accountant. He was appointed PFO last year.
(Mr Broadbent) However, we have thought very hard about accountancy skills which I think are particularly important in a revenue department.
128. They certainly seem to be, do they not?
(Mr Broadbent) We have had accountants within our finance branch for many years but what we did after the Roques Report was to recruit a very senior accountant who is now Mike Hanson's deputy and given her specific responsibility in the accounting and revenue area.
129. I thought we had a Finance Director who was a qualified accountant. We do, do we not?
(Mr Broadbent) No. Mike Hanson would be the Finance Director. We have recruited a qualified accountant to be Mike's deputy.
130. So how many actual qualified accountants have you got in Customs and Excise?
(Mr Hanson) Sixty and then 60 accounting technicians as well.
131. Do you feel that you have got enough?
(Mr Hanson) Yes.
Mr Davies: I think I have exhausted the questions I wanted to ask.
Chairman: Thank you, Mr Davies. Mr Ian Davidson.
132. Thank you. I wonder if I could follow on from the points that my colleague has made. Could you clarify for me whether or not at the time when all this happened you thought that, as a service, you were under-staffed, under-resourced or under-skilled in any way, or were you perfectly happy with the range of skills, abilities and numbers of staff that you had?
(Mr Broadbent) I was not there at the time, but I think in retrospect people would feel within a declining total number of staff excise controls had been depleted too far and we have taken some steps recently to reverse that and are adding staff back into that regime. Your question about skills I find a much more complicated one to answer. I am happier speaking about the organisation now. I would say that up-skilling the organisation is a major objective of ours and there are many skills we need to learn of which the two most important are management skills and IT skills.
133. Yes. Recently I was with Strathclyde Police, their fraud division, and it struck me that they were under-staffed and under-resourced and under-skilled. I wonder to what extent you now consider yourselves fully equipped for the whole range of difficulties and threats you might face?
(Mr Broadbent) I am much more concerned about skills at the moment than I am about the sheer volume of resources. I think even when I have the skills I am concerned about actually understanding these very complex fraud problems and working out how to tackle them. It is not immediately obvious how to tackle most of these problems.
134. There is a lot of fraud expertise in the City of London. Have you got access to their brains, their knowledge of these frauds?
(Mr Broadbent) I am sure I could access their brains and knowledge if I wished. Most fraud in our regimes is not actually financial fraud, it has a financial output. One of the things that we are doing at the moment is recognising that one of the most effective ways of tackling fraud is to tackle the financial asset side rather than to try to tackle the physical side but most of the frauds are physical frauds, they remain smuggling and matters like that.
135. I wonder if I can move on. I find it surprising that the scale of the frauds, which is about diversion, was not noticed. To what extent do you believe that the manufacturers ought to have been aware, or were aware, of the diversion? It must have distorted the whole market because it was a considerable amount of alcohol being diverted. It must have affected sales in particular areas. Surely they must have known that something was amiss?
(Mr Broadbent) I think the manufacturers in this case would have found it quite difficult because what they would have seen was a certain demand for their products and that demand being quite stable. The demand was going through a warehouse, going into retail outlets, it was only in some cases that duty was not being paid but the manufacturer does not see the duty, they would have seen a fairly stable level of sales.
136. But that presumes that they have no links on the ground. The going through the warehouse is the actual delivering of it but presumably there is the taking orders side of it and the manufacturers would experience a loss in demand if there was drink being transferred on to the market in particular areas in which they were normally selling and it was being met from other sources?
(Mr Broadbent) I think manufacturers are much more aware of inward diversion and smuggling than of outward diversion. The nature of an outward diversion is that the product would be acquired and paid for, probably in the UK, and it would then be distributed in the UK market. The fraud consisted essentially of the fraudster telling us that it was going to go abroad.
137. Why should it make any difference? If a bottle of scotch is in this country, it is meant to go abroad but is actually sold here, that is exactly the same as a bottle of scotch being smuggled in and appearing here. In terms of diversion or additional consumption or what have you it is exactly the same, is it not?
(Mr Broadbent) It is not quite the same because unless it is a counterfeit bottle of scotch it has got to be exported first, so the manufacturer should be able to see something in his export sales which may tell him that
138. That will tell him that it has been exported, it will not tell him that it has been smuggled back in again.
(Mr Broadbent) No, but if his exports go up rather sharply he might deduce that something strange is happening in the export market. He might conclude that he is winning market share overseas, but he might not.
139. Indeed. I find your answer there even more worrying. In terms of the carriers, presumably when it was being diverted it was being shifted to various places and somebody must have then been carrying it away. How was it physically moved away and put on to the home market? Were there no carriers at all who noticed anything amiss?
(Mr Broadbent) Again, without being able that give precise details of individuals it is likely that some hauliers, perhaps individual drivers rather than companies, were complicit in this. Loads would go and be off-loaded into warehouses and lock ups.