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Home Affairs Committee - Minutes of EvidenceHC 614-ii
House of commons
TAKEN BEFORE THE
Home Affairs Committee
Tuesday 11 March 2014
Sir Charles Montgomery and Jim Harra
Evidence heard in Public Questions 61 - 138
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Taken before the Home Affairs Committee
on Tuesday 11 March 2014
Keith Vaz (Chair)
Dr Julian Huppert
Mr David Winnick
Examination of Witnesses
Witnesses: Sir Charles Montgomery, Director General, Border Force, and Jim Harra, Director General, Business Tax, HM Revenue and Customs, gave evidence.
Q61 Chair: Could I call the Committee to order? We have the possibility of further votes during this session, so I say to the witnesses that we will adjourn and return if we haven’t completed our questioning. My apologies for keeping you waiting outside. I ask all those present to indicate if they have any matters that need noting before the Committee, other than what is in the Register of Members’ Interests.
We are starting today’s session with a look at tobacco smuggling and we welcome back Sir Charles Montgomery, the Director General of the Border Force, who is celebrating his year in office, 374 days by my calculation-I don’t know whether you count your tenure by days, Sir Charles, but there you have the figure-and Mr Harra who has been there slightly longer as Director General of Business Tax at HMRC. Thank you for coming.
Before we get on to tobacco smuggling, I want to ask you, Sir Charles, a question about border checks, especially in view of what has happened in respect of the Malaysian airline that has ended up in the South China sea. There was a report in the Telegraph this morning that suggested that up to 20 million people’s passports are not checked when they leave the United Kingdom. Do you recognise that figure and, if you do, it is a very large figure, is it not?
Sir Charles Montgomery: Can I first of all say that is not the case? It is not the case that 20 million people’s passports are not checked when they depart the United Kingdom. Indeed, Chair, I perhaps would take this opportunity, without referring to the two individuals concerned, to just make the point more generally that our borders, since the introduction of the 100% checks on arrival at our immigration controls, are the most secure in Europe and one of the most secure in the world. I would also say that by dint of our advance passenger information regime, where we are achieving well over 90% now-you will remember last time I was before you it was rather less than that-we are making some significant progress. We are achieving well over 90% of the advance passenger information-
Q62 Chair: Can I stop you there because I just want to get the facts right so nobody is under any confusion as to the numbers we are talking about? You do not recognise the figure of 20 million?
Sir Charles Montgomery: I do not.
Q63 Chair: So what figure is it?
Sir Charles Montgomery: All passengers who are departing the United Kingdom, of course, have to go through checks that are conducted by the airline operators.
Chair: Yes, we know that.
Sir Charles Montgomery: Of course that includes passport checks in almost all cases other than those travelling within the European Union where some other form of identity may be acceptable.
Q64 Chair: Sure, so what is the figure? We understand that. The Committee has been sitting for a number of years and we have been to Heathrow Airport. If the figure of 20 million is wrong, what is the figure? What is the estimate-you must have these estimates as the head of the Border Force-of those you are going to check? You also have concerns no doubt about those we can’t check because we can’t check 100% on departure-you have said so yourself. What is the figure?
Sir Charles Montgomery: The figure, Chair, as I have indicated, is always passengers going out of the United Kingdom will have their passports checked, other than the European Union passengers who will have some other form of valid identity checked. So their identities are being properly checked.
Q65 Chair: That does not take us much further. You are saying we are above 90%-I think you said "well above". We would like a bit of precision before this Committee and at the moment you have not given us any precise figures. You have talked about "well above" and you have distanced yourselves from the figures in the Telegraph, but you have not given us any figures. I can give you another figure from Interpol. It said on Sunday that more than 1 billion air journeys take place worldwide without passenger details being checked against its stolen passport database. Do you recognise the Interpol figure?
Sir Charles Montgomery: I don’t I am afraid. I am not an expert on Interpol but I am an expert on-
Q66 Chair: But have you seen that figure?
Sir Charles Montgomery: I am an expert on Border Force.
Q67 Chair: No, we understand that. We don’t expect you to be an expert in Interpol, I don’t think anyone would claim to be, but I would have thought the head of the Border Force would have picked up an alarming figure put out by the international police organisation-we know it is not part of the Border Force and is a quite separate organisation.
Sir Charles Montgomery: It is. It is an alarming figure.
Q68 Chair: Right, are you hearing it for the first time today?
Sir Charles Montgomery: What I picked up from the Interpol announcement was that the United Kingdom is second only to the United States in terms of the amount of information we provide to Interpol and the amount of information we extract from Interpol. I think that is the most significant detail.
Q69 Chair: We are not just interested in good news, we would like the facts. We know the United Kingdom is doing splendidly and we know you are a splendid head of the Border Force because you have been in office for a year, which is longer than your predecessor. You still have not told this Committee and it worries me, it means that you as head of the Border Force have no estimates and no knowledge of how many people leave the country without their passports being checked. That makes me more worried than when the session began.
Sir Charles Montgomery: There are two issues, Chair, if I may, and I tried to address but clearly I didn’t do it clearly enough. The over 90% figure, of course, refers to the advance passenger information that my organisation harnesses, analyses carefully and uses that as the basis of doing intelligence based targeting for both inbound and outbound passengers. Now, it is right to say that just over 100 million leave the United Kingdom every year, so it is right to say, therefore, that well over 90% of that 100 million-
Q70 Chair: Which is what then? We are at the situation where we nearly have a figure from you. What does the 10% represent in terms of numbers?
Sir Charles Montgomery: About 5 million.
Chair: Right, brilliant.
Sir Charles Montgomery: But that is advance passenger information, Chair, not the question you asked, which was passport checks.
Q71 Chair: So the answer to the question on the number of people who leave the United Kingdom who do not provide us with API is about 5 million?
Sir Charles Montgomery: It is about 5 million.
Q72 Chair: Right, thank you. So what is your estimate as to the number of people who leave the country who do not have their passports checked at the border?
Sir Charles Montgomery: I can provide you with a very exact figure of that but I do not have it with me.
Q73 Chair: That is fine. We are very happy to accept that you have to go away and come back. I would be grateful if you could do that by Friday of this week.
Sir Charles Montgomery: I would be delighted to.
Q74 Chair: The Committee has just returned from Nairobi where we have been looking at counter-terrorism. When we arrived at Jomo Kenyatta Airport, our bags were checked and put through security. We are not suggesting this should happen at Heathrow because we have many more passengers than Jomo Kenyatta Airport, but when we got to the check out, through immigration, and when we were waiting to board the plane, we then went through another security check where our hand luggage was put through security and they tested some of the passengers, including my own baggage, as to whether or not they had been contact with any equipment that could relate to terrorism. Are you satisfied, leaving aside the issue of passports and those checks, that we have our security system right to prevent those who may be terrorists from boarding our flights?
Sir Charles Montgomery: I am content.
Q75 Chair: You are content.
Sir Charles Montgomery: I am content. I am content that we have a perfectly proportionate response to all those who are passing both inbound and outbound of the United Kingdom to check them, whether they be in the business of terrorism, crime or immigration crime, or whether they are just travelling legally.
Q76 Chair: The Home Office Minister, Mr Baker, said that the Liberal Democrats are firmly committed to exit checks at the earliest opportunity. You came before this Committee and you said that by the time we got to the end of the Parliament e-borders would be in place. That is 422 days to go. Are you still happy with that timetable?
Sir Charles Montgomery: To be clear, what I said was that I was confident that we would have an exit check regime in place and I am still confident we will do so.
Q77 Chair: So you are not confident-the Permanent Secretary who gave evidence to us is-that e-borders would be in place by the time of the general election, which is 7 May 2015?
Sir Charles Montgomery: Chair, I do not recognise the Permanent Secretary’s comment. The Permanent Secretary is aware that the e-borders programme has been terminated. We are in the business now of replacing warnings index and Semaphore. I am confident that we will be well on track to deliver that but not the full e-borders capability, as it originally was, by the general election.
Q78 Chair: That is new information you are giving us because that is certainly different to what the Permanent Secretary has said.
In respect of the arbitration, when you appeared before us you did say that you hoped that it would be completed within months. That was October. What has happened to this arbitration?
Sir Charles Montgomery: The arbitration is out of my court, Chair, as you will know. This is being scrutinised independently. I can tell you that the Home Office is as anxious for the outcome of that as anybody else but it is not within the Home Office’s gift to determine timelines, and it certainly is not mine as Director General, Border Force.
Q79 Chair: Can you reassure the Committee, especially after this terrible catastrophe in the South China sea, that everyone’s passport-everyone who leaves the country-is checked against the lost and stolen passport list that is held by Interpol?
Sir Charles Montgomery: No, I can’t do that and I didn’t say that. Your question was-
Q80 Chair: Well, this is a new question.
Sir Charles Montgomery: The link with Interpol is a new question.
Q81 Chair: So we can’t be sure that every stolen or lost passport is checked against the Interpol database?
Sir Charles Montgomery: Every lost and stolen passport, whether it be UK or other, is checked on the way into the United Kingdom against the Interpol list. On outbound, every UK false or stolen passport, but not other than the UK outbound, would trigger an alert at the border and therefore an intervention potentially. What we do on outbound-it goes back to my original point-is have a system of advance passenger information, which of course is watched against a warnings index and other data, including the police national computer. If there are people who trigger an alert on that, of course we may well intervene.
Q82 Chair: Of course. We understand. But as far as you are concerned there are 5 million people at the moment. You want to see it brought down-we know you do, and it is the wish of this Committee that it be brought down-but there is still risk from 5 million people. Are they able to leave the country without being checked out?
Sir Charles Montgomery: No, they are not subject to advance passenger information, Chair. That is the point. None the less they are still, of course, checked by the airline operator on the way out, including either their passport or, if they are European Union citizens, some other valid form of identity.
Q83 Chair: The point the Committee has made to yourself and other Ministers, and to your predecessor, is that it is checked not by you, but by the airline.
Sir Charles Montgomery: That is correct.
Q84 Chair: It depends on the airline being able to co-operate with you if they want to give you that information?
Sir Charles Montgomery: Yes, it does. I would emphasise, however, that the Home Office forward analysis and detection unit does provide training to those airlines, and that that unit itself is recognised worldwide as being a source of international training as well.
Q85 Chair: Of course, but we remain concerned about the fact that still there are so many passengers in this position, and we urge you to redouble your efforts to try and make sure it is 100%, which I know is what you want.
Sir Charles Montgomery: Indeed, I can assure you there will be no stone left unturned to close that gap down to 100%.
Chair: Excellent. Mr Winnick has a supplementary on this.
Q86 Mr Winnick: As regards the passport issue that the Chair has raised, and airport security-he made the comparison with Kenya-would it not be the position that to a very large extent countries, certainly our own, would decide security on the obvious question of how acute is the terrorist threat?
Sir Charles Montgomery: That would be correct.
Q87 Mr Winnick: Therefore Kenya, like Israel, which comes readily to mind, would have far stricter controls simply because the threat of terrorism is so acute, where in Britain-which no one for one moment underestimates after 7/7-the position is less so.
Sir Charles Montgomery: I wouldn’t like to compare Kenya to the United Kingdom because, of course, different terrorist groups which would target the two different countries. I would like to satisfy this Committee that my organisation, and indeed the Home Office more widely, takes the terrorist threat to the United Kingdom extremely seriously and therefore we regard the terrorist threat to be a major driver of our activity at the United Kingdom border.
Q88 Mr Winnick: This is my final question on this. When passengers, including myself, leave Heathrow, say, on holiday, the procedures that are adopted seem-even the taking off of shoes for very obvious reasons-to be adequate to deal with the terrorist threat. Obviously none of us are complacent-the terrorists will remain for many years to come a danger to our people. What I am really asking you, Sir Charles, is whether there is any danger at the moment arising from the fact that all is not what the Chair has indicated.
Sir Charles Montgomery: I would just like to be clear about the question.
Mr Winnick: What I am saying is that, given the points the Chair has rightly made, do you in anyway believe at this stage that the absence of what is occurring presents a day-to-day terrorist threat to our country?
Sir Charles Montgomery: The answer to that is no. I believe our response is being utterly proportionate and is being very closely allied to the intelligence and the risk that the United Kingdom faces. If the question is whether I believe our posture at the border reflects the real risk to the United Kingdom, the answer is yes.
Q89 Chair: Thank you, that is very helpful. Let us move to tobacco smuggling and the report that was written by John Vine last year. He was highly critical of the relationship between the UK Border Force and HMRC. I think he said that there was a breakdown in communication at an operational level between your two organisations. Mr Harra, has this now been cemented? Are you getting on better?
Jim Harra: In terms of the relationship between the organisations, certainly at a strategic level, we have been working effectively together.
Q90 Chair: Since the Vine report?
Jim Harra: Sir John Vine made findings in relation to operational co-operation and we have taken steps both before that report and since to strengthen how we work together operationally. We will continue to do so. For example, we have recently launched a joint debriefing unit at Dover, which is a vital part of our protection against tobacco smuggling. The pattern of the smuggling is changing, for example, more to roll-on, roll-off, so Dover is critically important. We have also agreed a protocol on the referrals from Border Force to HMRC for criminal investigation, what we will do with those referrals and what feedback we give to Border Force.
Q91 Chair: He was very clear. He felt that because of this operational breakdown, large seizures of cigarettes were not being investigated and prosecuted. Are you confident, Sir Charles, that this has now been put right and you are both singing from the same songsheet?
Sir Charles Montgomery: I would just like to echo what Mr Harra has just said. One of the measures that was taken as a result of the Vine report, which I absolutely welcomed, is a much more rigorous and structured process of feedback between HMRC and my officers at the front line. So not only, as Mr Harra said, is there now a protocol in place that affects the referrals and adoptions by HMRC-I welcome that because it provides clarity to my people in the front line-but there is also a feedback loop now from HMRC to the front line that did not exist before. You can understand that it was the issue of communication rather than policy that undermined that level of confidence and to which John Vine referred. I would agree with him.
Q92 Chair: Looking at the prosecutions and convictions for 2012-13, there were 265 prosecutions for tobacco smuggling but only 159 convictions. That is quite a big gap, is it not, between the numbers you prosecute and those who are eventually sent to jail or get fined? Why is that?
Jim Harra: There is no direct correlation in time between the prosecutions in a particular year and convictions because obviously convictions can take some time to come through. What we have been doing is increasing both the number of prosecutions and achieving an increase in the number of convictions year on year. So 2012 to 2013, for example, exceeded the previous year and we are on track this year to exceed 2012 to 2013.
Q93 Chair: In 2011 to 2012 you convicted 156 people, and in 2012 to 2013 you convicted 159 people, which is an increase of three. That is not a huge increase, is it?
Sir Charles Montgomery: No, it is not. I think-
Chair: Three extra people in what is one of the biggest criminal activities in the world does not fill us with confidence.
Jim Harra: Obviously prosecutions are one element of the strategy for disrupting tobacco smuggling, together with seizures and civil action we can take, such as assessing for duty and recovering civil penalties. We have a sort of twin track approach to criminal investigation. We investigate organised crime groups and we also investigate volume crime as well. So, for example, where we see repeat-
Q94 Chair: Sure, but organised crime prosecutions have gone down from 62 to 51.
Jim Harra: Yes, that is correct. When it comes to organised crime our key performance indicator is the extent to which we prevent revenue loss. We do that through a combination of prosecutions and convictions and seizures and other actions we take.
Q95 Chair: We will come on to that later. Just tell the Committee the loss to the revenue, to the taxpayer, of smuggling? First of all in terms of tax not paid and, secondly, those that are hand-rolled tobacco.
Jim Harra: For 2012, 2013 we estimate that the revenue loss was about £2 billion.
Q96 Chair: £2 billion?
Jim Harra: Yes, that is correct. Hand-rolling tobacco-I have the figures, I think-is £900 million and cigarettes is about £1.1 million.
Q97 Chair: That is an enormous amount of money, is it not, almost £3 billion?
Jim Harra: Sorry, it is £2 billion.
Q98 Chair: Together it is £2 billion, plus £900,000.
Jim Harra: No, together it is £2 billion.
Q99 Chair: Together it is £2 billion. That is a huge amount of money, is it not?
Jim Harra: Yes, it is. My aim is to continue reducing that. It was £3.4 billion when we started our tobacco strategy back in 2000 and in the intervening period obviously duty rates have gone up, so like for like we have reduced that from £4.9 billion to £2 billion. I am obviously not satisfied with £2 billion and I would like to see it lower.
Q100 Chair: So you are doing that. Sir Charles, finally from me, on the issue of plain packaging, is plain packaging going to make your life more difficult and those of the extra staff that I know you have put in? You have put in an extra 120 staff at the borders to deal specifically with tobacco smuggling, which we warmly welcome. Is plain packaging going to make it more difficult for you?
Sir Charles Montgomery: It makes it more challenging but it is not the only thing that makes it more challenging.
Q101 Chair: Just focus on plain packaging-we will come to the other challenges in a minute with colleagues. Why is that going to make it more difficult for you?
Sir Charles Montgomery: For Border Force as a whole it probably does not make it more challenging. I think it makes it more challenging right across the piece from up country or across the border and back into in-country. It makes it more challenging in that sense. At the border, in terms of the searching regimes and of the intelligence flow, it does not make it more challenging in itself for Border Force, but it does make it more challenging in terms of the end to end.
Q102 Chair: Mr Harra, is it going to be more difficult for you if we have plain packaging?
Jim Harra: First of all, there is a real dearth of data that enable you to predict what the impact of standardised packaging will be on smuggling. Only one major country has introduced it-Australia. We are collaborating very closely with them to learn the lessons, even though there may not be direct parallels with the UK. Our assessment is that it is not going to create any new risks for us but it could well change the profile of the illicit market, and we would have to respond to any changes in that market in that way, but we do not think any new risk is created.
Q103 Michael Ellis: Sir Charles, let us have a look at this illicit trade and the risk of an increase by plain packaging. I think I am right in saying that the tobacco industry have argued that plain packaging will increase illicit trade, but ASH, a lobby group that opposes smoking-I think I am right in saying that-feels that illicit trade would not be increased by plain packaging. Where do you come down on this? I note what you said in answer to a question put by the Chair a few moments ago about the decrease-or I think it was you, Mr Harra-in loss to the Revenue. So in the year 2000 the loss was £3 billion in lost taxes, is that right?
Jim Harra: Yes.
Q104 Michael Ellis: Now it is closer to £2 billion. It is still a lot of money but there has been a reduction. Where do you come down effectively as law enforcement officials on the question of plain packaging? Can you be more specific?
Jim Harra: First of all the purpose of standardised packaging would be a health measure, so it would not be directly related to revenues. As I said, there is very little data to enable you to predict with any accuracy what the impact would be on smuggling. We do not believe it will create any new risks. There has been, for example, some suggestion that it might give rise to an increased risk of counterfeiting, but obviously that would displace some element of the illicit and would make no difference to revenues. It is something that we would have to monitor very carefully and respond to very quickly.
Q105 Michael Ellis: I am not talking about feasibility studies and consultancy documents and the like. What do your people on the ground who deal with these sorts of issues think about whether it is going to make their job more difficult? Have you had any feedback? Have you had any input from those people on whether plain packaging would make it more difficult for them to intercept?
Jim Harra: We certainly do gather intelligence from our front line when making our assessment of the threat. The assessment that I have given you includes that. The fact is that because there is no experience of it, it is guesswork at the front line as to what the result would be. What we have done is some futures analysis that identifies different scenarios that might come about as a result of standardised packaging to figure out whether there are new risks in there or whether we need to make changes in anticipation of it. As I have said, the outcome of that assessment is that we do not identify any new risks.
Michael Ellis: Very well, thank you.
Q106 Dr Huppert: I am tempted ask further about standardised packaging but I think you are quite clear that there are not risks. Can I just ask about your targets? If anything, you have missed quite a lot of the targets. I have a constituent who is a heavy smoker who had some tobacco confiscated from him when he was coming from Europe. Having seen the colour of his fingers and the state of his teeth and so forth, I can well believe that he would smoke that amount. How do you make sure you do not inappropriately target people?
Sir Charles Montgomery: Our targeting at the border comes by and large in two forms. One of them is the intelligence-led targeting. There is a number of means by which we can draw on intelligence to target specific traders or individuals coming across the border. I can’t comment about your constituent but he may or may not have fallen into that category.
The other, of course, is the straightforward intuition and judgment of my officers on the front line. I can honestly say, Dr Huppert, that when I have been down to see my people in the front line I am immensely impressed by the degree to which their intuition and judgment delivers real results. They do so through their experience, through very subtle questioning, which of course to the experienced officer reveals a lot about the individual. My people ask where people have come from, where they are going to and how often they have been travelling, so they can use that judgment as well. Their success rate on that basis, to my mind, is very satisfactory.
Q107 Dr Huppert: What recourse does somebody have? That person and his partner smoke about a pouch of tobacco a day, which is a large amount-I am certainly not recommending it-and he had about two months’ supply. What recourse do they have after this material has been confiscated, when they have been taken off the coach they were on and missed the last trip back? How do you make sure you have a proportional response, because I don’t think this would have been an intelligence-led pick-it was a tobacco cruise or whatever the equivalent is called?
Sir Charles Montgomery: If the individual wishes to appeal, of course he can do-the appeal is heard by a completely independent officer from the individual who affected the seizure in the first place. Of course, there is then a process of further escalation as well. Indeed, I occasionally receive letters from the public, not just on tobacco, but on other seizures as well. In the end, I am satisfied that there is a very fair and proportionate response to enabling those who are legally bringing materials into the country to do so and to stop those who should not be from doing so.
Q108 Dr Huppert: To move on, I think both of you have not managed to hit your internal targets last year, in the separate organisations. How come? What more will you do beyond what you have already addressed?
Sir Charles Montgomery: Perhaps I can start from a Border Force perspective. I could start at the micro and then perhaps we could touch on the macro issue. I am not satisfied that Border Force has failed to hit its tobacco target and I am disappointed. I am disappointed not least because tobacco is the only top or high-priority target that I failed to meet last year. It sticks out as a failure to meet one target in many. I am wanting to close that gap. If I could lead into the macro and then perhaps Mr Harra could take it on.
It is important to understand that the target setting between upstream, the border and in-country is not a precise measure. You will understand immediately that there are interrelationships between the three-upstream, border and in country. There are interrelationships at play. It is our policy as part of the strategy to intervene as much as possible upstream as we can. Over half last year was taken upstream as well. That naturally impacts on the volumes crossing the border, so I think there is an end-to-end piece here, and it is quite hard to understand the dynamic. I just want to reassure you that we have responded operationally in Border Force to the changes in the modus operandi the criminals have adopted. We are seeing them bringing less volume but more frequently. We have responded to that by intensification operations and by building up our joint intelligence capability. Certainly in the last two months we have had some notable and multi-million stick seizures as a result of that. But it has been a challenge-I would be the first to admit it.
Jim Harra: Yes, just to pick up right across the strategy, Sir Charles is right. From my point of view, so long as we disrupt the smuggling and seize the product, it is not so important whether that happens at the border or further upstream. In 2012-13 we did, for example, seize more cigarettes than the previous year-about 7% more-but you are right that we fell short of the targets we had set ourselves. Like Sir Charles, I am not satisfied with that. It is right that we have stretching targets and it is right that we are driven by them to perform even better.
I think we are seeing changes in the profile of the smuggling, which is making it increasingly challenging for us to make seizures. In particular, in the past, we have seen a lot of use of the postal channel and a lot of use of large consignments through containers, which has driven large seizures. Increasingly, we are now finding the postal channel has been virtually abandoned by the smugglers and we are seeing some behaviour where they are fragmenting consignments and bringing them over the border in smaller values, increasingly through roll-on, roll-off. That is why you are seeing an increase in the number of seizures but not an increase in the actual volume of sticks seized. We are finding that our European partners in Ireland and Germany, for example, are also experiencing that pattern. I think we have to be driven to try and get one step ahead and change our intelligence and change our targeting to match.
Q109 Yasmin Qureshi: Sir Charles, may I just ask you a question in relation to the number of cases referred from the Border Force Agency to Her Majesty’s Revenue and Customs? From the year 2012-13 11,839 seizures were made by the Force, but only 2,971 cases referred out to HMRC for financial penalty. Are you able to enlighten us as to why there is this discrepancy, which is quite high, and as to what can be done to improve it?
Sir Charles Montgomery: Thank you very much indeed. There is, of course, a discrepancy but I will try and explain it. We now have a clear protocol between HMRC and Border Force on when referrals will be made from Border Force to HMRC. We have a protocol which sets out when they will be adopted for further action. I would just like to make clear, therefore, two things on why there are significantly fewer referrals as opposed to the seizures. First of all, of course, that is against the requirements of that protocol and, secondly, those people who we do stop at the border do not get away scot-free-their contraband is seized by Border Force. We do interview and we do get a lot of intelligence from those interviews, so the criminal does not get away scot-free. They lose quite a lot and we get a lot of intelligence.
To go back to our point earlier about the degree to which we have been able to achieve between us so much upstream seizure in the last few years-as I said, 50% of the seizures are now out of country-that has largely been as a result of the intelligence that we have gleaned at the border. Much of it is from seizures that do not in the end get referred or become adopted by HMRC.
Q110 Yasmin Qureshi: Can I then ask the next question? I want to ask this very carefully because I am not going to try to imply anything. From what you have just said, effectively you are saying that from low-level seizures-little criminals-you often get the information to get the big people, and therefore in return, the little person is allowed to go away?
Sir Charles Montgomery: No. It is about a proportionate response. Yes, you are absolutely right that that intelligence allows us to form a bigger picture and enables us at times to target the bigger people rather than the smaller people. It is also the case that some of those smaller seizures may be from repeat offenders and, of course, the little people do in the end get prosecuted.
Q111 Paul Flynn: What new sanctions do you think we should apply for the big criminals-the major tobacco companies who quite significantly overproduce and send to countries where there is no demand for certain brands of cigarettes and certainly no demand for the amount they send out? They are possibly produced here-produced legitimately with no tax being paid-and those companies know when they send them abroad they will not be consumed in the country of their destination but will be smuggled back here. What can we do to deal with those?
Jim Harra: Oversupply of brand cigarettes overseas with the intention of it being smuggled back into UK has historically been a problem and it remains a problem. We do have sanctions with a fine of up to £5 million available to us.
Q112 Chair: Sorry, a fine of what?
Jim Harra: There is a fine of up to £5 million for any tobacco manufacturer that does not take adequate steps to manage their supply chain. In addition, there are enforceable agreements with the EU where, if their product is seized, they have to pay a duty fine. For example, last year HMRC received £8 million from those manufacturers in response to seizure across the EU that were related to that.
The aim of the £5 million fine, obviously from my point of view, is to enforce compliance with supply chain management, so success for me is not that I gather in £5 million fines but that those manufacturers toe the line and manage that chain effectively. We have seen them respond to that. For example, exports by those manufacturers to what we regard as high-risk countries have fallen by 20% since we introduced that. We have one manufacturer at the moment who is in receipt of a statutory warning letter. Under the statute, I have to give them six months’ warning to improve before I can impose the fine and one of the four main-
Q113 Chair: Who is that?
Jim Harra: I am afraid I am not able to disclose who that is.
Q114 Paul Flynn: You can tell us. You are among friends.
Jim Harra: I am under a statutory obligation not to do so.
Q115 Paul Flynn: Do you think they might have been the sort of people who come here with some fairy story about how we must not have plain packaging and other self-interested types? It would be useful to know if they are the same people that are feeding the illicit market.
Jim Harra: There are only four major tobacco manufacturers and I dare say at one time or another you have met them all.
Q116 Paul Flynn: How many have been fined? Presumably nobody has been fined £5 million, and you say that 80% of the trade remains untouched.
Jim Harra: No, sorry, there have been no fines under the legislation as yet.
Paul Flynn: Why?
Jim Harra: Because, as I said, the purpose of the legislation is to incentivise them to improve their supply chain management and we are seeing them do that. There is the potential for-
Q117 Chair: Sorry, you are telling us that the purpose of legislation passed through this House is just to encourage people to improve their supply chain, as opposed to ensuring that those who break the law go before the courts and are fined. That is the point Mr Flynn is making. You have this legislation but it seems to be just there to kind of provide you with a good climate.
Jim Harra: I will not hesitate to seek a fine-
Q118 Chair: When was this legislation brought in, Mr Harra?
Jim Harra: I am sorry. I do not have that information to hand but I will get it to you if you just bear with me one moment.
Chair: Roughly, which year? It is a key bit of legislation, is that not right?
Jim Harra: It was 2006.
Q119 Chair: So it came in in 2006 and in the last eight years no company has been fined, even though you have said to Mr Flynn in answer to his very pertinent question that you believe there is oversupply?
Jim Harra: You are right. There has been no fine to date. Our aim is to use the threat of a fine to force those companies to improve their supply chain management. We have seen them respond positively to that. In one case where we had not been satisfied, we have issued them with a statutory warning letter, which is a pre-cursor to a fine.
Q120 Paul Flynn: We are talking about companies who come and give evidence to us as respectable members of society, whereas their business is to sell a killer addictive drug at a very low price to young people. We have had a law for eight years that has been ineffective in at least 80% of the cases, and the nonsense goes on. We are producing the goods here, avoiding tax and sending them overseas knowing that they are coming back to our markets.
Jim Harra: I don’t believe it has been ineffective. There are high-risk countries that we regard as being oversupplied and we have seen the supply to these countries reduce-
Q121 Chair: Which ones?
Jim Harra: Countries like Andorra, for example.
Chair: Andorra. What is the population of Andorra, Mr Harra?
Jim Harra: I don’t know the population of Andorra but in effect the high-risk countries are EU countries with very low duty rates because-
Q122 Paul Flynn: Can you compare the tobacco retail industry in Andorra with the Ukraine or Bulgaria?
Jim Harra: Sorry, can you repeat the question?
Paul Flynn: What would you say it was? Has Andorra more than a 0.1% of the tobacco retail industry that the Ukraine has or Bulgaria has?
Jim Harra: I do not think it is valid to do a comparison on the size of population because one of the key legitimate reasons for exporting branded cigarettes is to supply legitimate cross-border shopping. If British tourists visit there to buy cigarettes to bring home, which they are entitled to do, then that is entirely legitimate, but we do believe that that industry has been oversupplied and we continue to work to get that oversupply down.
Q123 Paul Flynn: But we are making no progress. This is the main source of the illicit tobacco coming in, the main reason why we lose £2 billion, and the main reason why our children are exposed to very cheap addictive drugs.
Jim Harra: First of all, I think we are making progress, but it is also important to say it is not, we believe, the main source of the illicit tobacco that is smuggled into the UK. The main source of illicit cigarettes, for example, is foreign brands, which we call illicit whites, rather than the UK market.
Chair: It would be very helpful in answer to Mr Flynn’s questions, which were very pertinent, if you could let us have the percentage breakdown of how much you regard as being oversupplied as opposed to foreign brands entering the country, and let us know what that £2 billion figure you gave us represents. Just for your record, the population of Andorra is 78,000, which I think is about the same as Northampton North, Mr Ellis, or even Rochester and Strood, where we will now go for the next question.
Q124 Mark Reckless: Are you on course to meet your target of reducing the amount of revenue lost from fraud by 30% by 2015? Do you expect to hit that?
Jim Harra: Yes, I very much hope we will. We have obviously got a year and a bit to go on that, but the revenue losses prevented are so far are running ahead of target up to the end of 2012-13. We are on track to exceed 2013-14 as well.
Q125 Mark Reckless: Ultimately, can you deal with the issue that taxes on tobacco are so much higher in this country than in many of the other countries exploited for this trade. Is there not something inevitable about the losses in this trade?
Jim Harra: UK duty rates on tobacco are among the highest in the world and they are the highest in the EU. That does mean that the price of legitimate product in the UK is very high compared with other countries in the EU, so that does contribute to UK being a target for smuggling. I think what the evidence shows, however, is that year on year we have been able to increase the amount of revenues we collect from tobacco duties. Over the period of the tobacco strategy, we have been able to reduce the size of the illicit market both in absolute terms and as a proportion of the overall tobacco market, so it definitely contributes to the scale of the challenge. That is a challenge I face but it is one we have been able to count.
Q126 Mark Reckless: If the Chancellor were to make your task more challenging by, say, increasing tobacco tax by a further 10%, what impact do you think that would make on smuggling? How much of the expected revenue would be lost to greater smuggling than would otherwise be the case?
Jim Harra: I can’t quantify what a 10% increase would do, but certainly since 2011 we have had an escalator on tobacco duty where it increases at above the rate of RPI. During the same period, we have managed to reduce the duty losses and reduce the illicit market share, so I think most assessments would say that we have not reached an optimal point in terms of maximising the revenues that you could get from tobacco.
Q127 Mark Reckless: So are you saying the current tax rate is sub-optimal?
Jim Harra: No, I am saying that I will rise to whatever challenge Ministers want to give me, but my assessment would be that it is still possible for tobacco duties to rise, as indeed they will under the escalator, and to continue to bear down on the illicit market and get more revenues.
Q128 Chair: Can we just check what happens to all this stuff that is seized-all the cigarettes and other illegal items? Where does it all go? Is there a ritual burning of these cigarettes or are they kept in some warehouse?
Sir Charles Montgomery: The answer is both. It is taken to a Queen’s warehouse where it is preserved in secure accommodation unless or until there is a decision for a prosecution, but in the end every bit of it gets burnt.
Q129 Chair: Is that under your control?
Sir Charles Montgomery: It is under my control.
Q130 Chair: How much of these items do you have under your control, for example, today?
Sir Charles Montgomery: I am very happy to give you a reply by return.
Chair: By tomorrow? That is fine.
Sir Charles Montgomery: Whenever you would wish it.
Q131 Chair: Tomorrow would be fine because they are figures you could get to. So you have all these items, you do not destroy them until you decide on a prosecution, and then there is a mass bonfire?
Sir Charles Montgomery: Yes.
Q132 Chair: Where is that bonfire held?
Sir Charles Montgomery: Again, I am sorry, Chair, I do not know, but of course there are a number of Queen’s warehouses around the United Kingdom.
Chair: On days other than 5 November cigarettes are just burnt.
Sir Charles Montgomery: Contraband more widely is destroyed. Yes.
Mr Winnick: The Chair wants to witness it for himself.
Chair: I was going to say Mr Flynn.
Paul Flynn: I think the Chair wants to volunteer for the champagne that comes in that has to be disposed of.
Q133 Chair: Anyway, the Chair has not said any of those things. Can I place on record our appreciation to you, Sir Charles, and your organisation-in particular your chief of staff, Dan O’Mahoney-for the way in which we are treated when we ask to visit any of your facilities? It is quite unlike any part of the Home Office. You say yes immediately and you facilitate our visit-as you did recently, when we were most grateful. That helps the Committee understand effectively how things are going. We are most grateful for that.
On the issue of dogs being used, has there been any reduction? We were very impressed with the way in which dogs are deployed to find illegal activity on the very big lorries that come over from the Continent.
Sir Charles Montgomery: There has been no reduction on my watch.
Q134 Chair: Mr Harra, we are very worried. We would not say it is complacent yet, but we are worried by the fact that nobody has yet been prosecuted under legislation that has been on the statute book for eight years, and that it is used more as a threat than as something that brings people to justice. At the end of the day, we would be very keen to have further information from you as to how there has been an improvement in the supply chain for those companies that you have had communications and discussions with. You presumably engage with foreign countries to try and stop them sending this contraband into our country. There is engagement with foreign countries, is there?
Jim Harra: Yes. Quite apart from engagement from the UK, we have a network of foreign crime liaison officers who are embedded in the highest-risk countries around the world. They work with local law enforcement agencies and local policy agencies to get those countries to help us with the upstream procedures.
Q135 Chair: With respect to the only country you mentioned to us today, Andorra, who do you engage with there?
Jim Harra: Our foreign crime liaison officers will often be embedded in one country but cover a region. So, for example, we have one in Madrid who will cover that country.
Q136 Chair: It covers Andorra?
Jim Harra: Yes.
Q137 Chair: Right, because we understand that Andorra is run by the President of France and Bishop of Urgell and we wonder how you engage with those two.
Jim Harra: I don’t know how we engage with those people personally. Our FCLOs will usually engage with custom authorities, tax authorities and law enforcement agencies. They are key to making sure that intelligence flows both back to the border and from the border to the agency.
Q138 Chair: Of course, but could we have a note on your foreign engagement, because obviously stopping things coming in is better than seizing them when they are at the border?
Jim Harra: Absolutely, and that is where the majority of cigarettes-
Chair: We are most grateful. Thank you both very much for coming in today.