Examination of Witnesses (Questions 100-119)
MR RICHARD BROADBENT AND MR MICHAEL HANSON MBE
WEDNESDAY 31 OCTOBER 2001
100. It is the real world I want to move on to as far as one or two of the answers. We do go over very much the same questions, the same ground, because we have got the same type of concerns. This business about letting loads run I found amazing. Would I be wrong in thinking that you are the enforcement officers for the collection of this duty and would I be wrong in saying if my local police chief said, to parry some of the answers you have given, "we have got 35,000 houses in your constituency and only 1,000 were broken into last year, I think that is pretty good", the 1,000 who got broken into would not and if they were told then "the police know who are doing it, they have a good idea, but they are letting it run until they collect sufficient evidence to put them away", would you feel there would be confidence among the public, especially these people who had been put at risk by the police by letting it run?
(Mr Broadbent) I think it is quite tough to explain but I think it can be explained because ultimately what the householder is interested in is not just whether he was burgled yesterday but are you reducing the chances of him being burgled tomorrow.
101. No. I think the householder would very, very quickly say "No, I think you should have caught them on the first or second one. As soon as you had sufficient evidence that person should have been taken off the street, you should not let things run".
(Mr Broadbent) The difficulty in these cases is if we had stopped the lorries in any individual case the lorry driver might not even have known it was illegal but if there was a lot of evidence that the principals behind it were going to reorganise very quickly, go to another warehouse and do the same thing again, to stop the activity we had to allow the loads to run to get the evidence against the principals. In several recent cases where this principle has been tested, legal cases, the judge has said "Letting a load run is a difficult judgement to make but is an acceptable judgement" and in one recent case the judge referred to it being a "laudable judgement" in order to protect the revenue. Although I recognise this is a criminal activity we are talking about, we also have duties to protect the revenue. If you believe that the revenue is less well protected by simply stopping the individual lorries you have to think of what other techniques can be used to safeguard revenue.
102. I am getting very short of time.
(Mr Broadbent) I am sorry, I will try and be shorter in my answers.
103. In 2.9 on page 21 it says there you would not issue assessments against 59 per cent of the total identified losses. Are these the total identified losses through letting loads run?
(Mr Broadbent) I am sorry, I missed the page reference.
104. Page 21, 2.9, at the top. You did not issue assessments against 59 per cent of the total identified losses. Were these total identified losses identified during this letting loads run procedure?
(Mr Broadbent) Would we have identified the losses, I am trying to get the question right?
105. If we have identified losses how do we know, was the information gained by letting loads run?
(Mr Broadbent) We gain the information by letting loads run. Assessments were not always issued. I think this was a fault in the process at the time, because a decision was taken that where an indemnity had been implied or given you would not issue an assessment. In practice that is a fault in the process.
106. Not only did you take the risk by indemnifying 53 per cent of the movements but not to proceed with 59 per cent of the identified load runs or the ones we followed was not a very good result for us all round. If I can move onto page 24, one of things I like is this diagram here, and I will tell you why I like it, it is because it is the receipt of duties, and it is going to fall due to falling consumption rather than fraud. What research did you undertake to justify this assumption?
(Mr Broadbent) There was some research done at the time. The trade sector was very largely of the opinion also that there was a switch of consumption away from spirits to wine. In practice the consumption switch was not as big. I tend in retrospect not to think that fraud might have been the case, particularly when your own investigatory branch was uncovering cases of fraud there were shortcomings.
107. It is not my everyday experience that this is justified. How many warehouse staff or Customs staff were investigated during these inquiries?
(Mr Broadbent) How many Customs employees were investigated?
108. That is right.
(Mr Broadbent) I am not aware of any individual staff being investigated, although I have to say I do not know for certain that none were investigated. What I was very pleased to see in the independent Roques Inquiry, and in the NAO Inquiry it was made clear there was no sign of corruption.
109. Would it be possible to give us a note on that?[3]
Geraint Davies
110. I am going to run through a lot of these questions quickly, if I may. You mentioned that you were responding to changes in the external environment and that takes time, would I be right to say that in 1993, when we had this new environment, we should have had a team of people predicting the minds of criminal fraudsters in terms of what economic opportunities they would see as new opportunities. I realise you have been in the job a relatively short amount of time but given your commercial background presumably the focus for this would be to say, this is a new environment, if I was trying the take advantage of new economic opportunities what I would do. How do we preempt that rather than waiting years for the problem to build up to massive proportions?
(Mr Broadbent) I think having the foresight to anticipate fraud is always going to be more effective. I think the controls we put in place after the Single Market, despite enormous changes, did to a very high degree anticipate most of those problems. So far as we know this is the major problem that arose out of the Single Market. Although everyone looking back would say, it would be nice to anticipate more I think the fact that we did not anticipate this one—
111. The thing is the changes in 1993 were predictable, we knew we were moving to a changing environment, we did not have to wait, to be there to watch what happened before we responded. What you have been saying is it took a long time to get used to that, then we did something about it. Surely you have teams now in the place waiting for the next change and trying to judge what the economic opportunities would be?
(Mr Broadbent) In 1993 I think some effort was put in place that would cope with the new world, these were the risk based controls. We could no longer have fixed frontier checks so we had to put in place a new system. The new system was found wanting in that one particular way.
112. You mention risk based controls now as being the new regime, what confidence can this Committee have that you have any realistic judgment of risk when the track record for the department obviously when there are relatively low levels of fraud, 1993, 1994, 1995, when nothing was really happening, but the risk was still there and the criminal fraternity was building up their awareness and their sophistication and it suddenly blew up in our faces. Presumably this should have been somebody taking a view on that risk before it was in our face because otherwise there is no point in having the risk assessment if you have to wait for it to consume you.
(Mr Broadbent) I cannot sit here and say that it will never happen again, that is the nature of risk. I would like to sit here and say, not least because of this, and the work that goes into this and the external enquiries into this, because of these things we are significantly more conscious of and work harder at understanding these risks now.
113. Can I ask something on the Report, on page 23, 3.6 it is mentioned that alcohol fraud costs £800 million, 7 per cent of the total. In another one of tables it mentions that the loss from alcohol diversion, which peaked and then came down to 12.6 million in 1998-99, the £800 million obviously is a completely different type of fraud to the other sort, is this a switching of the focal point of fraud or what was the previous total under the £800 million in 1997-98? Do you see what I am trying to get at?
(Mr Broadbent) The equivalent figure for the previous frauds is actually about £500 million for spirits because the £800 million includes wine and beer as well. The £500 million matches the earlier one. That £500 million, which I think is a worrying figure, effectively is inward diversion and smuggling, mostly freight smuggling, clearly bootleging as well but mostly freight smuggling, inward diversion.
114. Seven per cent, do you think that is a reasonable amount of fraud to be suffering?
(Mr Broadbent) I think the acceptable level of fraud is a very challenging question. In the case of spirits it is much higher, it is 18 per cent in the NAO Report in table 7. I think that is manifestly far too high and that is a figure we need to reduce.
115. Okay. Can I refer you to page 24, table 6, I take the point you made about the access on the left-hand side, et cetera, certainly in 1997-98 and the like, the discrepancy between forecasts as you ran from 1995-96 onwards was enormous and divergent and I understand that the explanation within Customs was that this was some sort of shift in consumption patterns in the market place when, in fact, a very large amount of this was fraud. Can I ask you, is there not an independent quantification of market consumption you have at your disposal to check this, like diary based market research analysis that any multinational company producing drink or products would have? I am amazed that people in your department say people are drinking less beer, when really everyone in the trade knows that, in fact, there is an escalation of consumption and the missing link for the fraud that you are avoiding picking up?
(Mr Broadbent) The essential starting point is consumption data, we draw data from the National Expenditure Survey. I think one of the shortcomings of the earlier estimating techniques is they essentially started from the revenues in the previous year rather than estimating the consumption patterns. Some of the differences between the initial receipts and the adjusted receipts, which you see as lines going up and down, a lot of that difference is due to forestalling patterns, where movements of goods in and out of bond will tend to be very lumpy, depending on the anticipated tax and duty changes. It is the shape of the line which is not very different.
116. There was a similar 25 per cent reduction in the actual receipts and that would be explained by changing tax levels, clearly, the market has not dipped by that amount? In fact the Treasury is trying to hold tax rates constant.
(Mr Broadbent) In fact, real tax rates were falling over this period. I think you are absolutely right, an alternative explanation was available for why the receipts were going down.
117. In terms of your estimates of cigarette consumption, obviously you now base that on consumer diaries rather than how many fags have gone missing?
(Mr Broadbent) We do quite a lot of work now on expenditure surveys and also in collaboration with the industry.
118. You were very reluctant to give any estimate on drink forecasts in terms of fraud. We appreciate that the Treasury wants to do the Pre-Budget Report, etc, but this Committee is the arm of Parliament that brings the executive to account. Perhaps you could think again about what is your latest thought on the quantum size of fraud in alcohol in the next year? What is it or do you have no idea at all or will you not tell us?
(Mr Broadbent) Table 7 in the NAO Report gives estimates of fraud which are based on Customs and Excise working papers. I do not in any way want to anticipate the Pre-Budget Report but I do not think you would be misled if you took those estimates as being reasonably good estimates.
119. Thank you very much. You mentioned the issue in 1993 both having a situation where we had the Single Market introduced and at the same time when we faced this new uncertainty, which you appreciate was about risk and economic opportunity, at that very time we passed over operational control to the warehouses. Do you think that was a blatantly stupid thing to do?
(Mr Broadbent) Not in itself, no.
3 Ref footnote to Q179. Back
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