Examination of Witnesses (Questions 1-19)
MR RICHARD BROADBENT AND MR DAVID SPENCER
WEDNESDAY 26 JUNE 2002
1. Mr Broadbent, could you identify yourself and your colleague for the shorthand writer.
(Mr Broadbent) Richard Broadbent, Chairman, HM Customs and Excise. This is Mr David Spencer, Non-Executive Director of the Board of HM Customs and Excise.
2. Thank you very much. When you appeared here some six months ago, I asked you whether the Board was actually operating as you would understand a Board to operate from the commercial sector. I think you were honest enough to hedge a little. You said, "It is operating as a strategic overseer." You said, "I am still trying to build the Board." You said, "I think we are getting there, but we are not there yet." Are you there yet?
(Mr Broadbent) I think that we have made useful further progress, and I think now I would try to remove some of the hedges and say that we are probably as close to the best practice in the private sector as it is possible to get to in the public sector. There are some differences, I think, between the public and private sectors in this respect. But since we last met, we have managed to satisfactorily increase the number of non-executive directors, which is important. We have improved the quality and completeness of information going to the Board, and also, something which I believe I touched upon last time we met, and I attach particular importance to, we have been pushing forward and have fully implemented the restructuring of the organisation underneath the Board, which I have always found is a critical part of actually allowing the Board to do its job. So in those respects, yes, I believe we have now made better progress and I think we are now in a position where the Board can do its job as well as it is able to in the public sector, where there are one or two differences between the public/private sector Board.
3. I just want to be clear about that. I think you also said to me that it was only over a period of time that the concept of a Board developed in the true governing sense. Is it now a Board?
(Mr Broadbent) It is a Board now. It meets regularly. It has a balance of executive and non-executive directors. The executive directors are largely the operational business heads, and it receives full and complete reports from the Management Committee, which is actually the executive body which runs the organisation. I do not want to digress, I would just say that I think there were two really quite serious issues previously, one was that the Board itself was not perhaps of the right composition and structure, and Mr Roques pointed to some of those issues: the balance between executives and non-executives, and the need for the executives to be the people who ran the business. The other area which Mr Roques pointed to was that even if the Board had been of the right composition, it would have struggled to have done its job because for the Board to do its job of overseeing the organisation, there has to be good executive decision making in the organisation to oversee. I would attach as much importance to, for example, the creation of a Management Committee which runs the organisation which the Board can oversee, as I would to the actual steps we have taken to strengthen the Board itself.
4. Fine. Let me ask Mr Spencer. Do you think the non-executive directors now have access to all the information they need to discharge their duties?
(Mr Spencer) I think they do. I think since the year 2000 there have been some significant differences in the way that the Board has been structured, the way that it interacts with the Committees beneath it, and the way that it discharges its duties. I think much of that is down to having a new Chairman, Richard Broadbent. The executive team is now very clear, whereas those accountabilities were not clear before, and I think the more streamlined committee structure allows the Board to more sensibly question and interrogate those committees as they report to the Board. In addition to that, the strength of the Audit Committee within the organisation, one of the sub-committees of the Board, which now has non-executive involvement and it has teeth, I think that has also been a significant step forward as well.
5. You have actually been on the Board for six years, I think?
(Mr Spencer) That is correct.
6. How did you operate previously?
(Mr Spencer) My role with regard to the Board has somewhat changed over that period. Initially, and before I arrived, Customs had no non-executive directors, so myself and another colleague, Graham Pecan were the first, and I think there was a period of time when neither party quite knew what the expectation of non-executives was. But Customs have taken a significant step forward. They had embraced external contribution to their meetings, but, significantly in those days, myself and my colleague were excluded from Customs and Tax policy issues and discussionsquite specifically and explicitly excluded from those issues, so we were never really contributing to the overall government of the organisation as a private sector non-executive would. That has changed: my own personal role has changed in that I now sit on the Audit Committee, whereas I had not done so previously, and secondly, there are no longer any no-go areas or exclusion zones from my own contribution.
7. I understand how it has changed, I am just puzzled as to how you were exercising your functions properly during your first four years if you were excluded from these areas. How could you say to yourself you were properly performing the function of a non-executive director?
(Mr Spencer) I think it was a somewhat unique situation. It was not the private sector. The statutory duties rested with the Commissioners of Customs and Excise and not with the Board, and the Board at that time was a very loose term. It is not one that either myself or my colleague, at that time, would have regarded as a correct and fully functioning private sector Board. It was far from that. It has changed substantially in recent times, and I am much more comfortable with where we are now today than we were 4, 5, 6 years ago.
8. And were you trying to put right these failings in your first four years?
(Mr Spencer) Failings is perhaps a strong word. I think at that time, of course, the failings were not obvious. They were items for discussion. The structure of a Board of Customs and Excise with non-executive involvement was a new concept. It was very difficult at that point to say where the successes and failures lay. I think, with the benefit of hindsight, those have become clearer. At the time, as I say, it was very much a first step for Customs and Excise to take on board outside directors, with never having a history of that kind of intervention before.
9. Mr Roques, in his report, said it was impossible to obtain a full set of Board Committee documents such as Board minutes before 1997. You were there then: did you get Board minutes properly?
(Mr Spencer) I had a number of comments to make to Customs over that period about the Board minutes and about the committee structure. I would receive vast amounts of paperworkand I was fairly well known in the organisation for having been critical of thisand, therefore, the administration which surrounds Board meetings has sharpened up and changed significantly. We now get meaningful Board papers, manageable Board papers, and they are quite focussed. So, at that time, change was required; that change has happened. Some of that change happened back then as well. It is not all just in the last two years.
10. I just want to be clear: do you have a set of minutes for all the meetings you have attended?
(Mr Spencer) Yes, that is correct.
11. Mr Broadbent, in the Spring Report, you say you will measure success by your ability to meet outcome based targets by satisfaction surveys, and by the extent to which the Government see you as a first choice organisation for new tasks. Based on that, do you think you have had a successful year?
(Mr Broadbent) That statement was as a result of about 12-15 months' work with a management team which I think needed a great deal of work to develop into a management team, and it is a very recent statement, which is why it appears in our Spring Report and has not appeared earlier. Have we had a successful year? I think we have had a mixture. On the one hand, I think that there has been a great deal of change in the organisation. We have not just been making changes at the Corporate Government's level, we have introduced a restructuring of the organisation, which, I think I will use the word "radical". It has moved, essentially, from a wholly regional to a wholly functional structure, one from where there were 11 directors with many overlapping responsibilities, into half a dozen very clearly definedI do not want to go on about the level of operational change which perhaps has had some impact on the activities of the organisation, and, at the same time, we have undertaken a very major programme of asking most of the people in the organisation, certainly most people at management level, to behave differently and to do different things. We are trying to encourage different attitudes and values and behaviours, and, in particular, to attach an importance to the impact of what people do rather than just doing it and completing a process. Those things have had some impact . Change has a cost. On the other side of the coin, I believe that we are doing some things we have not done before, and we are adopting a different approach in most of our areas, including collecting tax and in law enforcement. I do believe that there are some signs thatour stakeholders recognise thisso, for example, when we developed a new approach in law enforcement which identified pursuing money rather than pursuing the commodity of drugs, the Treasury has given us the responsibility of regulating money transmission services, which is a wholly new activity, and they gave us that responsibility and the money and the legislation to put it into place.
12. Mr Broadbent, last time you were here, at the end of the session, you said you would go away and think about the way in which your organisation avoided having members of the criminal fraternity in your bonded warehouses, and after that, we received a communication which set out various checks that were done. Were those checks done on people who were involved in the fraud previously?
(Mr Broadbent) Sorry, which people?
13. The people who were involved in the case which led to a loss of £640 million whilst the malfeasors were being supervised.
(Mr Broadbent) The way we approached that was to essentially do a risk assessment of all the warehouses and start with the ones we assessed at being highest risk, then working down through them. I would need to check whether our risk assessment matched the past, but my expectation would be that insofar as those people are still in the business, they would have been incorporated in our checks, yes.
14. But the question I am raising is whether the people who were involved in that fraud had gone through this process?
(Mr Broadbent) I do not believe we conducted these checks prior to the time we are talking about, the time of my last hearing.
15. So these are new?
(Mr Broadbent) These are new checks, yes.
16. Right. Mr Roques also said at the time that he was surprised that the Management Committee never had any estimates of what were the likely figures for smuggling against which you could compare your achievements. Do you now do those estimates?
(Mr Broadbent) Yes. I think this has been one of the major changes, and has been a big change for the organisation, that we do now, for the first time, develop estimates of the total available tax take, if you like, for our major regimes, and we are trying to move towards a situation, which I personally welcome, where our targets are phrased in terms of the percentage of the tax we collect rather than the cash amount we collect, and that is certainly the way, as managers, we think about the organisation. Those figures were published for all the major Excise regimes, in some parts, for VAT in the pre-budget report last November, and the Government said they wanted a completed analysis on VAT, which is a significantly complex area, it will be bringing those numbers forward as well.
17. You mentioned before that Customs and Excise were in cooperation with the security services: how well is this cooperation with M15 and M16 working?
(Mr Broadbent) The cooperation, in my view, is excellent, and I would say three things about it. I just need to tread slightly carefully. One is that there is a significant interchange of personnel between the organisations now, which is new in the last two years. I personally welcome that a great deal. I made it very clear when I arrived and went to see the agency heads that I thought there were areas where we would benefit from a skills transfer, and they have been very good indeed. For example, I will not talk about individuals, but there are people in our intelligence and investigation branches who were seconded from that organisation, and, equally, we have met certain requirements, particularly recently, which those organisations have had for skilled personnel. The second thing I would point to is that as we have moved progressively from trying to see our business as trying to do practical things at a particular point in a transaction, so trying to collect drugs at the border, for example, we are trying to move much more to seeing it as a chain of activities. We do not have the skill sets or people to act at all levels in the chain. For example, if you go upstream in the heroin chain, or upstream in the cocaine chain, we are working very closely with the relevant UK agencies, and, indeed, overseas Governments to take action in those areas. Yes, indeed, we are downstream with the police, for example.
18. Do you have contact with them at Board level, just to supervise how well this arrangement is working?
(Mr Broadbent) I meet regularly with the heads of both agencies, and I was delighted recently to be able to announce that the retiring head of M15 is actually one of the non«executive directors joining our Board. I think he will bring a particularly valuable eye to our problems.
19. Also, last time we were talking, there was a review of whether Customs and Excise should retain its prosecution powers because of the case that went wrong, and now it has been agreed that you should keep them. What have you done to improve your performance over that which caused them to be reviewed?
(Mr Broadbent) It is not quite the case. We kept our prosecution powers. The conclusion the Government came to was that we would, if you like, retain the "housekeeping" of actually housing and looking after the solicitors and paying them. But the care of those cases have actually moved to the Attorney General, so if Customs wishes to bring a prosecution, it is now the Attorney General who takes the decision that it should be taken, and he has the care of the case. That is the key, safeguard, I think. I think the problem before was that we were both, if you like, judge and jury in deciding whether to bring a case. This separation of that power is important.