Examination of Witnesses (Questions 80
- 99)
MONDAY 11 FEBRUARY 1998
SIR JOHN
KERR, KCMG and MR
MICHAEL ARTHUR,
CMG
80. So there are 222 posts where there could
be a strong risk of irregularity but you are telling us there
is a league table and it is the top half of the league table that
we should be most worried about?
(Sir John Kerr) I really do not think there is
a strong risk in 222 posts.
81. How many?
(Sir John Kerr) The wonderful objective and sub-
jective analysis of the mathematical model predicts at least ten.
I think it predicts many more than ten but the top ten are the
ones that I would be--
82. So how many more than ten are a strong
risk of irregularity?
(Sir John Kerr) It depends. It is like saying
is the weather warm or cold.
83. I understand, but you have given us
222. There is always going to be a top ten, there will be a bottom
ten. At what point do we say we are more confident at this level
that there is a strong risk or above this level that there is
a strong risk?
(Sir John Kerr) I would not wish to say that we
can relax about anyone, but I would also not wish to say there
is a strong risk of this sort of situation as described in this
ghastly paper emerging in 222 posts. I really do not believe that.
84. I am pleased you do not believe that.
C&AG, do you have an idea? You mentioned that there continues
to be a strong risk of irregularity at posts. Do you have a feeling
for how many of these 222 are in that strong risk category, given
that not all of them are?
(Sir John Bourn) I have not got a figure that
I could give you this afternoon, Mr Hope. Our analysis of the
risks is very much in line with the risks and a way of looking
at this as Sir John has described. You can look at the areas where
the surrounding culture is difficult; you can look at what the
embassy does and you can run down the list. Sir John mentioned
the top ten. You could say the top 50.
85. Could you say the top 50?
(Sir John Bourn) I could not say what they were
for you this afternoon but I am sure Sir John, if you wished him
to, would be able to provide a list.
(Sir John Kerr) I can do the top ten today. I
have not got any more in my head. But I would not wish you to
feel that because these are the warm end of the thermometer it
follows that there is, one would find, management staff at all
levels failing to comply with basic financial checks and controls.
I read the C&AG's sentence-one which I do not in any way dispute-that
where a post fails to comply with basic financial checks and controls,
there will continue to be a strong risk of irregularity.
86. I think there is a sense of tautology
in that. I am trying to get a grasp of the size of the problem.
Is this a renegade post, a renegade situation, that we can just
count as a one-off or is there a systemic problem within the service
that needs to be addressed? I would like you to give us a note,
if you are able to, of this league table and how many are in this
category where you feel there is a stronger risk, where the black
market scale of taxi movements and so on would give us cause for
concern, if we could have that figure, and I would like to know
how many spot checks you are now taking of the management and
finances within those posts[5]?
Given that this has obviously thrown it up, given that there is
a league table, given that there is a top ten, I would assume,
rightly or not, that you are now looking at invoices, translation
of documents, payments of notes and so on in those top ten or
top 50 or however many. Are you doing that now? Is that happening?
(Sir John Kerr) The answer to all these questions
is yes. Yes, I will be happy to provide a list of the top 50[6],
and yes, where the risk is highest there our internal audit unit
pays most attention to and goes most often, and yes, more of the
monthly accounts are called back for checking in London.
87. So Mr Williams' comment that he is looking
forward to seeing you again, if those spot checks happen and you
deal with it, then we will not see you again because you will
have sorted out this culture. You will have intervened actively
in those posts and stations to ensure that the kinds of fraud-cash
being paid over on delivery notes, false invoices-have been rooted
out and sorted out?
(Sir John Kerr) I shall be, but if I do see you
again I will not have accepted that the converse of your statement
is necessarily true.
88. By what period will you have completed
this "dipstick" assessment, this review of the top-I
am still not sure whether it is ten or 50? When will you have
completed that investigation?
(Sir John Kerr) This is constant. This is a rolling
programme.
89. So how many a year are you doing?
(Mr Arthur) If I could help, Mr Hope, we have
two different spot checking elements to this rolling programme.
There is, first of all, the Financial Compliance Unit about which
Sir John spoke earlier, who have visited all of the top ten, either
last year or have plans to do so this year. So it is a complete
coverage and, as Sir John said, there will be a rolling programme
in addition to other business they do. Then separately we have
internal audit regular systematic visits and they aim to cover
every post in the world once every six years. There is a regular
systematic travel programme for them as well.
90. The internal audits, I understand, clearly
from the previous internal audits do not work. The reason why
the additional spot checks, I think, are important is because
you have specific examples here that give you some big clues as
to where you might be looking when you do your spot checks. So
at ten a year-my maths defeats me-in 20 years they will have covered
all the 222 posts?
(Mr Arthur) I am sorry, I said they covered all
the top ten but there are others they are covering as well. I
can give you the full programme, if you like. I do not have it
with me today, but it is more than ten.
Mr Hope: More than ten a year? So
I would like a note on this league table and how many we are actually
investigating. Thank you.
Mr Love
91. Sir John, as I read through the report
and listened to the debate here this afternoon, like Mr Wardle
I was reminded of the famous quote from Lady Bracknell, and if
I could paraphrase here, "To lose one is unfortunate; to
lose both is careless." Have the Foreign Office and the embassy
in Amman been careless?
(Sir John Kerr) Yes, and we certainly recognise
the importance of being very earnest about it now.
92. We knew that was coming! Can I take
you to a comment you made earlier on about a lack of effective
control. You said your systems of control were inadequate and
inadequately applied. You then went on to say that you were considering
changes. Is that an appropriate response to what has happened
here, considering that these events date back to 1995?
(Sir John Kerr) Mr Love, I am sorry, I misled
you. The experts are learning from this story and will be brushing
up what are already much better systems. I think what a permanent
secretary has to do, bearing in mind Mr Maclennan's point, is
to get across to the service that it really matters. That is what
I am going to do, but as somebody with an interest in this in
both senses, I have one or two ideas that I am now playing off
the experts. For example, I am struck by the fact that our procedures
retain invoices for only three years. As the C&AG's report
bears out, one of the reasons that we cannot tell who is right
as between Mr Wardle and me as to the scale of the fraud, why
it might be 200 [7]-I
do not think it could be £300,000 but it certainly could
be well above £109,000-is because the invoices get destroyed
after three years. That cannot be right and I have asked-and I
think this will now happen-I have instructed that in posts in
the top 40 the invoices will be retained and that will be very
very visibly done. The local staff will see that the invoices
are being retained and carefully kept until the internal audit
department has paid its next visit on a regular cycle. So on average
they will be retained for six years. They were there for the NAO
to see if they come through and they will be there for the internal
audit to see, so we shall not be destroying the evidence. That
seems to me to be the kind of deterrent which we ought to be introducing.
I also feel, having been to the post, that it is absurd that so
much cash transaction was allowed. It does not make sense. Some
of these cash sums are, as Mr Williams said, really quite large
sums and very lumpy down the years and his system was to have
one cheque and then a couple of months later come back for a second
lump in cash. Now, people should ask questions as to why he was
going to pay a large bill in cash and I am sure we can tighten
up our rules on that.
93. But let me ask you a question on that
because you said earlier on that in effect the accountant presented
the cash to himself. In the previous fraud, as I understand it,
and I have not read it very carefully, the accountant in those
instances was both giving the names of the people who were receiving
the pensions and also when the yearly certificate had to be signed,
they were signed by him, so you had in effect a mirror image presented
to himself. Have you learnt anything from the two?
(Sir John Kerr) Yes, I think we have learnt a
lot. You are absolutely right, that in the previous fraud the
signatures he was required to match were his own fraudulent signatures
and he had invented a wonderful machine for making money.
94. And in this case he was presenting the
cash to himself?
(Sir John Kerr) That is right. It seems to me
that one thing we need to do is insist that what the rule book
says is applied, that each transaction is entered in a book, that
there is a number, that the number from the line in the ledger
is put on each transaction. In that way, it would be much more
difficult to present for authorisation to a superior the same
transaction twice. That seems to me to be completely obvious and
that is laid down in the book of rules, but clearly it was not
being adequately applied in Amman. It is now, because I have seen
the ledger. I have seen how the chequebooks are now controlled,
but I do think that a general admonition to the Service about
cash, and there are still some little cash amounts in the Embassy
in Amman, but they are very small, a 200 dinar one, a 100 dinar
one and a 40 dinar one, so I am not worried about that, but I
think this man had far too ready access, unquestioned access,
to large sums of cash.
95. Can I ask whether he was ever investigated
at any time? I note from the previous report that in fact the
previous accountant was sacked, although that occurred long before
the fraud was ever discovered. Was this accountant ever investigated
during that period?
(Sir John Kerr) Not to my knowledge, no.
96. There was in fact a four-year overlap
period where the previous accountant was the accountant and he
was the deputy accountant.
(Sir John Kerr) Correct.
97. Surely that must have raised at least
some alarm bells that there may have been collusion? Surely there
must have been some consideration that, if nothing else, he may
have learnt from his superior and although they may not have been
working together, they could have been working scams separately,
as indeed turned out to be the case?
(Sir John Kerr) I agree.
98. Can I move on because Mr Hope raised
earlier the question about those that are most at risk, those
embassies that are considered most at risk and in this case you
have given us a table here that starts in 1993, yet you told us
right at the beginning that the Foreign Office carried out an
investigation in November 1993, the National Audit Office sent
out a team in 1994, your Financial Compliance Unit was sent out
in August 1995, all of this during the period when he was at the
height of his activities, yet nothing was discovered. What confidence
can you give us that these new regimes that you have introduced
will actually do anything?
(Sir John Kerr) Firstly, he clearly was frightened
of the Financial Compliance Unit in summer 1995 because it all
stopped and no frauds occurred while they were there. He started
again when they had gone. Like Sir John Coles in the last answer
to Mr Wardle last time, I cannot give you an absolute guarantee
of 100 per cent confidence. I can give you an absolute guarantee
of 100 per cent effort to try to make sure that it does not happen
again. I do agree with Mr Maclennan's point and Mr Hope's point,
that partly it is the attitude of the people who are doing the
checks on the ground and that is what really matters so we need
to get across to them and there clearly are some, although they
were not required, who do not take this seriously, so that is
what we have to do. I really hope that it is not a general thing
in the Diplomatic Service, and I do not believe it is.
99. Can I then go on because my own view
is that it is the proper monitoring to ensure compliance actually
in the embassies themselves that is the solution to this problem,
yet I do not have confidence from what you have said earlier on
that you have as yet got that right. A comment was made in the
report about there only being pockets, yet no evidence is given
as to why it cannot be much more widespread. From some of the
things here said this afternoon, there would be concerns that
it is perhaps more widespread. What I really want to hear from
you is what sanctions are available to you in the situation where
these proper prescribed checks and controls are not being carried
out.
(Sir John Kerr) The sanctions are if there is
no crime. If the offence is simply that we detect that the control
task is not being taken seriously, then the sanctions are reprimands,
admonitions, they are clear reductions in promotion prospects,
they are management sanctions. In part, it depends on the tone
set by people like me.
5 Note: See Evidence, Appendix 1, page 21 (PAC 208). Back
6 Note:
See Evidence, Appendix 1, page 21 (PAC 208). Back
7 Note
by Witness: The figure should, in fact, be £200,000. Back
|
