Examination of Witnesses (Questions 80-99)
MONDAY 30 APRIL 2001
MR KEVIN
TEBBIT, CMG AND
MR IAN
ANDREWS, CBE
80. I said fraud prevention, not fraud detection?
(Mr Tebbit) It is increasing the awareness of the
issue generally which helps in prevention because the people we
are training are people who should also be applying the controls
in their work, ensuring that the five per cent checks happen,
ensuring that all of the procedures which we have talked about
work, applying the 16 Best Practice Guidelines that we are producing.
So it does work at the prevention end as well.
81. Can I take you now on to some of what I
regard almost as account payable problems that you seem to have
in chapter three of the report. Can we perhaps start with the
problem of invoices. In 3.56, let us start there, it tells of
the difficulty that you sometimes only see photocopies of invoices
which then could be presented themselves and invoices, even when
the originals are presented, are not always cancelled. As somebody
who, for my sins, a very long time ago used to be an AP manager,
that seems to be an incredibly simple check that ought to have
been in place a very long time ago.
(Mr Tebbit) And it has always been there as a rule.
Photocopies are unacceptable, they have always been unacceptable,
our rules have always said so, and people should not accept them.
82. So what you have done since this report
to make sure that problem which was raised by the NAO does not
occur?
(Mr Tebbit) As I say, a combination of training, reiterating
the rules and—
83. Are you confident that is no longer occurring?
(Mr Tebbit) I am trying to remember whether the Best
Practice Guidelines that have that in have been issued. We are
certainly confident in the establishments visited that it is no
longer happening because we have gone back to those three establishments.
These are the ones on the basis of which this whole report has
been written. We have gone back twice to make absolutely sure
that there is full compliance, which there now is. We are also,
as I say, including this sort of thing in the blue skies short
notice inspections. I do not know if Mr Andrews wants to say more
about this area.
(Mr Andrews) We are producing a Best Practice Guide
in that area as well, although that has not yet been published.
I would also mention that we have introduced a process of New
Works Reviews whereby we carry out formal, detailed examination
of the processes that lie behind individual transactions. That
is a new initiative which we started rolling out earlier this
year and we have something like 27 of those planned as we go through
this year. It is all about reinforcing the requirement, making
sure that proper processes are applied, making sure that where
we are bringing in our IT system, our PROM2 IT system, that that
provides the checks to ensure, for example, that invoices cannot
be submitted twice. In the same context that you were talking
about in that paragraph, rules in terms of the application of
discounts, it is reinforcing that IT is making sure that people
operating the processes understand it, and not just our people
but also those contractors who are involved in the process because
this is something which involves our Works Services Managers,
our Establishment Works Consultants, as well as our in-house staff
on the ground and my own property professionals who are seeking
to monitor the processes to make sure they are working properly.
It is a multi-faceted response that we have. We are not satisfied
with just doing one thing, we are tackling it in every possible
way that we can.
84. Can I move you on then to paragraphs 3.59
and 3.60 where there is a discussion on discounts not being properly
passed on. How has that been addressed?
(Mr Tebbit) Firstly, in contracts. We do now confirm
when we let contracts our ability to have sight of all the original
documents—by the way, that is another way of countering
the photocopy issue—and we are reviewing that process continually
to make sure that we do get everything by way of raw material,
and that includes the details of trade discounts. We have also
Best Practice Guidelines to Property Managers which reinforce
this point about discounts. We do not actually have any evidence
that people have failed to pass on discounts to us but it is a
classic area of concern, not just in the MoD but generally in
the industry, which we are trying to cover through the contractual
ability to have sight of all the prices that the contractor secures
the materials for.
(Mr Andrews) It is a contractual requirement today
for discounts to be passed back to the Department. As one of the
actions that we have put in place as part of our response plan
we are reviewing the instructions that are in place to see what
we can do to reinforce that message. It is covered in fraud awareness
training, it is a major feature, in fact, of fraud awareness training.
We are—
85. Can I just stop you there for a moment and
can I just come back to the point Mr Tebbit made a moment ago.
I think you said you had no evidence that any discounts had failed
to be passed on. On page 58 of the NAO's Report the example says:
"There have been a number of examples where subcontractors
have purchased materials in bulk and have received a substantial
discount on the list price. Although a requirement of the contract,
these discounts were not passed on to the Department...."
That is not theoretical, it sounds as if they have found some
evidence.
(Mr Tebbit) I am reading it too. I am not aware of
the evidence. We have no evidence ourselves that we are not getting
the discounts passed on, that is all I was saying.
86. Are you saying that when the NAO did this
report they did not tell you what the evidence was they had found?
(Mr Tebbit) That is correct.
Mr Rendel: Is that usual practice?
Mr Williams
87. That is for Sir John to answer, I think.
(Mr Clarke) As far as I understood it we shared any
evidence that we had and gave details of cases, so I am not quite
sure looking back at these particular ones.
88. Could you perhaps check. Are you sure that
is absolutely accurate?
(Mr Tebbit) My information from my staff when I asked
about these details was that we had no evidence ourselves and
did not get this from the NAO. I hate to end on, as it were, a
note of discord but that is the position as I am aware.
Mr Rendel: If that really is the position may
I suggest that this evidence be passed across very quickly because
there may still be time to take some action to recover them if
there are discounts missing.
Mr Williams
89. Thank you for that suggestion. Perhaps Sir
John could consider it and perhaps towards the end if there is
any clarification you could indicate we will call you in at that
stage.
(Sir John Bourn) Yes, I will be glad to do that, Mr
Williams.
(Mr Tebbit) I should just mention in this area that
we do actually have a large case pending which does involve this
area. When I said we have no evidence that we have not detected
and followed up, there is one that we have detected and are following
up and we do have a case pending in this particular area, but
it is not linked to anything in the NAO Report as far as we are
aware.
(Mr Andrews) It was under investigation before the
NAO Report.
Mr Rendel: I am glad to have that clarification
from what Mr Tebbit first said when he said that there was no
evidence he knew of.
Mr Leigh
90. We know from the very first paragraph of
the Executive Summary, and indeed this point has been made to
you several times today, that the Department made broad estimates
suggesting that property management expenditure of up to £180
million a year may be at risk of fraud. My back of the envelope
calculations tell me that since 1995 we are looking at very considerable
sums which may have been subject to fraud, and yet we see on page
12 in paragraph 1.9 that "Despite the number of cases under
investigation, the Department have not taken any cases of suspected
property management fraud to the criminal or civil courts since
1995." The truth is that this is a risible record, is it
not? If you were a BBC scriptwriter basing a comedy programme
on the advice given by a Permanent Secretary to a Minister this
would be a suitable item for a sketch, would it not?
(Mr Tebbit) That is not entirely accurate actually.
We have taken at least three cases to court since 1995.
91. It is not accurate?
(Mr Tebbit) That is my understanding, yes.
Mr Leigh: If it is not accurate, what is it
doing here then?
Mr Williams: It is an agreed report.
Mr Leigh
92. In any event, I do not think three cases
since 1995—
(Mr Tebbit) I think the general point is true that
we have not taken a large number of cases to court, that certainly
is true. I am sorry, the three cases, I am told, have been since
the report was issued.
93. So the report is right?
(Mr Tebbit) Since the report was issued. It is difficult
because it was 18 months ago when the report was being done, I
do apologise.
94. Either this figure of £180 million
a year bears no relation to reality, which I suppose is possible
but, again, it has been signed off by the Comptroller and by yourself,
or this is a woeful record. Until very recently not a single case
was brought to the criminal or civil courts.
(Mr Tebbit) It is a technical proposition. This is
a figure which is based on the extrapolation from visits to three
establishments using a risk model which we believe actually to
be well based. It is then extrapolating across the whole of the
area in the MoD saying "This is the amount of activity which
we believe to be at risk and which we have to manage". It
is certainly not a figure which we believe to be a loss. It is
an area, therefore, where we need to strengthen our controls which
is what we have been doing. What I have been trying to do is explain
broadly what we are doing to strengthen those controls.
95. Yes.
(Mr Tebbit) It consists of two different things really.
One is to make the existing system work better by improving the
procedures, guidelines, training, awareness and all of that. The
other is to introduce a completely new system of prime contracting
which is the way to go, I am quite convinced, where, as I say,
we will be able to transfer a great deal of the risk currently
borne by the Department on to contractors in an open book accounting
method.
96. Okay, perhaps I will come back to prime
contracting first. We take it that the departmental staff, no
doubt because of the fact it is written on pens and everywhere
else and you have given speeches, are aware of the policy towards
the MoD as no tolerance, prosecutions where evidence permits,
but has this been conveyed to the Department's contractors? Indeed,
we appear to be advised that it has not been. Surely part of the
reason for having such a policy is to deter would be defrauders
before they defraud the MoD? How is this going to work if they
do not even know about the strict policies?
(Mr Tebbit) I think you are absolutely right about
the past. We tended to bother more about our own staff and not
enough about our contractors. We have now informed our contractors
and they are fully aware of our conditions. In June last year
we sent a note to all of our contractors, 21 of them, as I say,
requesting, requiring them to give details of their own fraud
awareness strategies, reminding them of our own. More recently
the Chief Executive has sent a letter to all of our contractors
with a clear policy statement on fraud and theft for construction
industry suppliers making absolutely clear what we require of
them, what our own policy is and, therefore, what we require of
them which is the same, as it were, as we require of ourselves.
So, we have taken steps over the last couple of years to be very
explicit with contractors about their obligations to us and we
say that they must have a statement of ethical behaviour built
into their own activities. They must have their own fraud policy
statement throughout their organisation and they must have their
own fraud response plan about the actions they will take to root
out any evidence of this if there is suspicion.
97. Okay. Now figure two on page 22, the operation
to combat fraud did become very complex and desperate. There seems
to be a plethora of different fraud units, hotlines, organisations
engaged in this struggle. What has been done to simplify this
so that property management can easily determine who they should
contact in the case of fraud? Why is there not one individual
in charge of the fight against fraud in property management?
(Mr Tebbit) There is now one focal point, as I said.
There are now only three boxes rather than four because we have
integrated the procurement fraud element into the main fraud activity,
the Defence Fraud Analysis Unit. We have also promulgated our
policy and response plan, I did this, throughout the Department,
to all the Top Level Budget holders requiring them to cascade
it down throughout their organisations. Basically it says all
staff should report suspicion of fraud to the Defence Fraud Analysis
Unit. They can do it through their line manager if they choose
but that unit holds the central records, that is the unit with
the database. That is the unit which decides whether to hand material
over to the police or to deal with it as an internal investigation.
We do have one central focal point now, 12 people.
98. Is there one individual in overall control?
(Mr Tebbit) There is a head of that unit. Can I ask
Mr Andrews to comment further?
(Mr Andrews) I would also say that as Chairman of
the Fraud Prevention Steering Group, which was an initiative that
we took some two or more years ago now, that was in recognition
of the fact that property management was an area in which we were
potentially at risk. It was picking up the recognition that was
articulated in the Strategic Defence Review in 1998 that there
were weaknesses in our procurement model that we needed to improve.
We have brought together this Steering Group which drew on not
only all of the principal budget holders in the Department but
also all of those agencies who had something to contribute to
the fight against the threat of fraud in property management.
If you are asking who is the focus for that, it is me as the Chairman
of that Group.
99. Right.
(Mr Andrews) We have done a great deal both to raise
awareness, to improve processes, to take action to convey our
policies both within the Department and to industry and I can
say with confidence that we are seeing a response from industry
to the raising of that awareness. We talked earlier about evidence
of increased awareness amongst our own staff. We are seeing clear
evidence of raised awareness and a recognition of the need to
take action in industry. We have made it clear to industry that
only suppliers who are able to demonstrate that they have embraced
wholeheartedly the Department's policy on fraud are going to be
considered for future business. That is reinforced by the model
that we are developing for prime contracting within which contractors
will simply not qualify unless they can satisfy us not only over
their policy and commitment to root out fraud but also that they
have effective processes to make sure that they succeed.
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