Examination of Witnesses (Questions 40-59)
MR RICHARD BROADBENT AND MR MICHAEL HANSON MBE
WEDNESDAY 31 OCTOBER 2001
40. How much?
(Mr Broadbent) £100 million for beer, £200 million for wine and £500 million for spirits.
41. Perhaps the Treasury would like to tell me why when I ask a Parliamentary Question like this you could not answer it. Perhaps you will tell me after the meeting. As soon as you start to read the report I am afraid that I just think that the answers you have given have been very complacent as were the action of Customs and Excise during this period. It is very easy to argue in hindsight, I accept that, but if you look at paragraph 3 on page 1, right at the very start of the Report, "Customs adopted a risk-based approach, removing many of their physical checks of goods and largely passing operational control over the system to the traders themselves". If ever there was a recipe for asking for trouble that has to be it, self-regulation?
(Mr Broadbent) It is not self-regulation, it is audit based regulation. The audit used to be conducted by a physical presence at the warehouse. That physical presence was exchanged for a paper based control and audited. That took place at the same time a Single Market was introduced. My own personal view is that the bigger impact was the introduction of the Single Market. However many people we had at warehouses, those loads that left the warehouses were legal and it was the loss of our ability to stop and check documentation that allowed the fraud.
42. I accept that but you made it worse by taking this risk-based approach by handing the operational control over to the warehouse owner's themselves, you seemed to negate responsibility. If ever that was asking for trouble, it seems incredible to me. Did you not think that was a recipe for disaster right from the very start?
(Mr Broadbent) No, I do not think it was. I think it was an innovative change. It is a change that is introduced in most of our regimes now and it can be very, very effective in reducing the cost for traders, which is very important, reducing our own costs and it is also
43. Reducing your own costs.
(Mr Broadbent)compatible with controlling fraud. The problem was that we did not get the controls put in place in the right form quickly enough.
44. Do you have a plan, an overall plan?
(Mr Broadbent) For risk-based control, yes, there was a plan of change from physical controls to risk-based controls, quite a deliberate change, yes.
45. As far as I can see you allowed the fraudsters to move in. As Mr Osborne said, way back in 1994 this Committeenot some of the members on this Committeeactually warned you what was going to happen and you seem to have taken no notice at all. If you look at the next page you were basically warned that there would be risks of fraud, people would be eager to exploit these new opportunities and Customs reaction was, "we are watching this very carefully", that is just complacency as far as I can see.
(Mr Broadbent) I do not agree it was complacent. I do think there were some areas where things could have been done differently.
46. Would you have adopted a different attitude?
(Mr Broadbent) I would love to be able to say that I would have but I have no confidence in saying that. Let me go back and say three things. First of all, it is often difficult for an organisation, more difficult than it might seem from the outside, to understand exactly what is going on in a fast changing outside world. The NAO Report says as early as 1995 that Customs acted effectively through enforcement to tackle this, and I think that is quite an impressive response. The next stage was to translate that enforcement activity into control activity. Enforcement activity is not an end in itself. That probably did take a bit longer than it should have done. I would love to say if I had been there that I would have done it more quickly. It is very hard to know if that is the case, because to understand what is going on and then to take the necessary measures to do that is not a small undertaking.
47. I am not being rude but we only have a very small amount of time and it goes very quickly, to come back to that, it is okay saying that but the more I read the Report the more I thought the attitude became very, very lax, because if you were watching very carefully in 1993-1994 explain to me why it took until 1996 to actually realise there was some fraud going on. That is what the Report says, that it took you three years to realise the fraud was taking place, that does not seem very quick to me, then it took you another two years
(Mr Broadbent) In 1996 the level of fraud was quite low, in 1995 it was only a couple of
48. It was beginning to rise, if you nipped it in the bud then we would not have had the huge amounts that we had later on.
(Mr Broadbent) When something is as small as that it is sometimes harder to spot it going on. The nature of this fraud was that 80 per cent of it took place in a 20 month period. I think you are right, and I think there is a big learning experience to be taken from this, if we acted more quickly, every month of that 20 months would have saved money. This is the big lesson for the organisation, it is to look at what is happening outside, do not rely all of the time on your controls, look at what is happening outside and respond very, very quickly. That is the lesson for the organisation.
49. You did not do that originally, did you? Let us move on.
(Mr Broadbent) It was innovative and there was a risk, that is another matter.
50. You did not. You would have done it differently, I am pleased to say. You talked about the method of letting loads run, all this was pretty reasonably successful in getting a number of prosecutions, it did cost the revenue a lot of money. That is the problem.
(Mr Broadbent) Yes and I think in retrospect it cost the revenue too much money. The point is made in the NAO Report very fairly that Customs did not properly assess each individual case. It should have asked, "if I let this load run does the additional evidence I get to prosecute outweigh the revenue costs". As the NAO Report very fairly goes on to say, even with hindsight you cannot say if we let fewer loads run revenue losses would have been lower. In every case it is recognised that if you do not let loads run, you knock the load but the principal gets away.
51. You only recouped something like £23 million. How much was lost?
(Mr Broadbent) £668 million in revenue, but I doubt the fraudsters would have taken that full margin.
52. One of the things the Report saysI must admit reading the Report I did not have a great deal of confidence in Customs at this particular stage, it is obviously a lot better nowis that the reason why they did not interrupt an investigation because, if I remember correctly, all the fraudsters would do is move the goods from one warehouse to another warehouse, it would stop the investigation and allow another fraud to start. Surely to goodness there must have been somebody with some method to stop that. I find it incredible that the defeatist attitude seems to prevail.
(Mr Broadbent) I think you have put your finger on what are one or two or three of the important lessons here. I characterised Customs response to this as being a law enforcement response, and the NAO has commented on how rapid that law enforcement was. More importantly, it is a very particular skill. You look at particular cases, you pursue them and you try and convict people. Perhaps the organisation should have been quicker to recognise that while there was a law enforcement response leading to a criminal investigation when pursuing these cases to say, what should have been learned from that? What should have been learned was there was a control failure and quick action needed to be taken to deal with the control failure. I think it is quite a lot to expect people who are trained specialists to think more widely but the organisation should have thought more widely. That is a lesson to be learned.
53. The Ministers commissioned a review in 1997 to look at the whole issue about fraud and there were 90 recommendations. In effect, the way I read the report, only 12 were initiated. Then, because there were still weaknesses, the chairman commissioned a review, initiated a review in the year 2000, so that is three years later, because of the losses between 1995 and 1998. Why were the recommendations in 1997 not taken up, why were only 12 taken up and not all of them accepted in the first place, which might have meant they would not have needed another review in 2000, three years later?
(Mr Broadbent) The Alcohol and Tobacco Fraud Review made 90 recommendations, 31 related to excise duties, and of those only 18 have been implemented. The primary reason that they could not be implemented is that usually they require the cooperation of the EU and that sometimes takes a lot of time, it can sometimes take years. I would also make a couple of other observations, which are more personal observations. There were far too many recommendations. Anything which has 90 recommendations I do not think has got quite to the core of the matter or if it has there is a danger you are going to lose the core of the matter in other things. Secondly, because the Review was done with the trade as well as within government, to cover a vast range of issues, it did not really know which direction it was driving at. I think, therefore, although more than 12 of the recommendations have been implemented, a lot of the recommendations that came out of it were perhaps not driving towards one or two given objectives.
54. Okay. So we had a situation where there was a review commissioned by Ministers in 1997, then three years later the chairman reacted quickly and had another review and that still was not good enough because then the Paymaster General instigated an investigation by John Roques. I looked at the recommendations that Mr Roques had made and when I read them I was quite staggered because the key measures were to include a more rigorous approach to the approval of warehouses, tightening the registration procedures for warehousekeepers and the owners of goods. These are obvious. Why the devil were they not doing them in the first place? I could have give you these recommendations. They are so obvious. Why were you not doing them in the first place?
(Mr Broadbent) You are referring to tightening procedures, to tightening up measures. John Roques, I think, provided a very timely introduction of rigour into some of the measures we have. Many of the things were pre-existing, we had registration procedures for warehouses, but Roques pointed out that they should be tightened up and he was right and we have now tightened them.
55. The point I am making is that they seemed to me to be quite obvious.
(Mr Broadbent) I think they are less obvious from this side of the fence because one of the problems you face as a tax collector is you are constantly balancing this question of how much cost do I impose on the person paying the tax. The Roques recommendations are not cheap, they are imposing quite heavy costs in some cases on the trade. During the whole of the 1990s when all of this was going on there was a very, very live debate about
56. If the trade is abusing the situation then I am afraid it is a bit tough on the trade, is it not?
(Mr Broadbent) It is not always the trade who are abusing it. Fraudsters are abusing it, sometimes in collusion with the trade but sometimes not. I think it is a perfectly fair question to ask, which is what is the burden I impose on the taxpayer versus my security of revenue? I think in retrospect the balance went slightly the wrong way. Through the 1990s perhaps it moved too much towards facilitation and what John Roques said was "look, you have gone a bit too far, tighten up" and he was right and we have.
57. Unfortunately, because of your very lengthy answers, I cannot go to the next document, but you are back again on Monday, are you not?
(Mr Broadbent) I am back again on Monday and I would be very happy to answer your questions then.
58. Thank you, Mr Steinberg. The problem is your predecessor took too many Customs bodies away from the warehouses, is that a fair criticism?
(Mr Broadbent) No, I do not think I quite accept that. I do think that the risk based controls that were put in place were combined with perhaps too much trade facilitation as we introduced a new system. It is a very effective system both in terms of collecting revenue and compliance costs. It means fewer bodies but it still works. I do not think we quite got the right balance between risk and compliance at the time and it was those two things combined that caused the problem.
Chairman: Thank you.
59. Mr Broadbent, you said just now that fraud is the exercise of an economic opportunity. Fraud is a crime in my view and I think probably in the view of most of the public. I am slightly concerned that you see it merely as the exercise of an economic opportunity, which to my mind is what you do when you go out to work.
(Mr Broadbent) I should instantly dispel any misunderstanding. I would not be doing this job if I did not believe that the exploitation of this particular opportunity is not only a crime but it is a crime which I think has some very, very debilitating effects on the body politic and the body economic. The point I was trying to make was that in tackling fraud I think it is very important to see it as an economic activity. I think that exposing the idea that fixed controls and fixed points can meet what is a very dynamic and very commercial activity, an illegal one but driven very commercially, is one of the important lessons we have to learn.