Examination of Witness (Questions 20 -
WEDNESDAY 14 NOVEMBER 2001
20. For our sake, we who are not experts in
this particular area of operational responsibility, tell us how
senior this individual would be within the fraud management department.
(Mr Roques) He was very senior in the National Investigation
Service and his role was potentially very important. As you might
get from the flavour of my report, I found it quite difficult
to know his approach to management, and still therefore do not
really know, but I got two pictures. Sometimes it was asserted
to me that he was very involved in the detail of things; very
tough on signing expense vouchers or something of that sort would
be given as an example. Yet at other stages he did not seem to
respond to letters from colleagues which seemed to me extremely
important and which therefore did not seem like close supervision.
21. Did you involve his line managers in your
efforts to get him to give evidence to you?
(Mr Roques) No.
22. You did not. Did you not think that would
(Mr Roques) They were aware that he was not seeing
23. But they did not instruct him to see you.
(Mr Roques) He no longer works at Customs & Excise.
I do not think they have the ability to instruct him.
24. Were your investigations restricted to Customs
and Excise officials and papers or did you desire to talk to Treasury
officials, Government Ministers and so forth?
(Mr Roques) I saw no papers whatsoever from Government
officials. I had one meeting with the Paymaster General.
25. Were you restricted specifically to that
Customs and Excise area in your mandate to prepare this report?
(Mr Roques) My mandate did not require me or expect
me to understand the involvement of the Treasury or Government.
I did in my report in the background section two, talk about the
various projects which governments had had over the years of modernising
the Civil Service in different ways which I thought broadly were
less helpful than they might have been. If you interfere from
the outside of most organisations every couple of years you do
not do them much good.
26. Were you asked not to talk to Government
Ministers and Treasury officials?
(Mr Roques) No.
27. That was the way you chose to pursue the
(Mr Roques) It was the way I interpreted my terms
28. What did you find Customs and Excise had
done to prepare for the effects of the introduction of the single
(Mr Roques) My impressionand I would say this
was more an impression than something I spent a lot of time onwas
that in 1993 at the beginning they were utterly focused on trade
facilitation, on free movement of goods, almost to an extent that
if they ever stopped anybody at Dover they might get hauled up
before some court in Brussels. Therefore it seemed to me that
there was very little thought given to the implications of the
controls which might be required in the new regime. At the same
time, or a little before, they had drastically reduced the number
of people working in the Excise activity in terms of spirits.
As a result of reducing the numbers, most of the people had left,
the old stagers who knew something about the business. Therefore
you had many fewer people, much less experience and a new regime.
As a package that is not a very good package. I would say those
were factors in their slow response to the problem.
29. It sounds as though they were pretty unprepared.
(Mr Roques) They were not prepared in the way they
should have been prepared.
30. Was that just because they had been focused
on something else, or had they not been instructed to get ready
for this, or where does the fault lie?
(Mr Roques) To me the history of Excise was that it
used to be an extremely well controlled activity with probably
very little fraud. If you think back to when they had people in
the warehouses, where nothing moved without a Customs van moving,
where in fact most people running a distillery were delighted
because it was quite difficult for the staff to steal because
the Customs man would find out, apart from the odd breakages which
were no doubt shared between two or three people that was all
that happened. It was a very secure safe business. Because it
was safe it was an easy place to attack the numbers of people
when there was pressure from government to reduce the number of
people working for them and to take their cost base down. Then
they did not recognise in my judgement that when 1993 came in
and the new market arrangements came in, there was a huge opportunity
for fraud, which they were unprepared for.
31. Do you think they have caught up with the
deficient preparation by now?
(Mr Roques) As I say in my report, all the indications
are that the sort of fraud I was investigating, with diversion
of goods from the warehouse, those goods going abroad, was substantially
eliminated by the end of 1998 and almost certainly it was replaced
by inward diversion and smuggling. What happens is that the market
has been established, distribution systems are there and at the
moment it is easier to smuggle than it is to do outward diversion
from warehouses. If smuggling were stopped, the groups of criminals
who run this activity would seek another way to supply the market
they have established. Whether that would be a re-run of a more
sophisticated outward diversion or whether it would be smuggling
in freight, is unpredictable.
32. If I understand you correctly, you are saying
it took about five years to close the gaps which could have been
closed if they had done full preparation prior to 1993.
(Mr Roques) If they had analysed the weakness of the
control system and they had analysed their changed audit regime
in terms of taking the people out of the warehouses and seen the
juxtaposition of those two events as extremely serious, then they
could have reacted much more quickly. It actually took up to three
years before they began to see the seriousness of the problem.
33. What was the cost of that failure?
(Mr Roques) My judgement is that order of magnitude
the fraud in Excise of spirits is running at circa £500 million
a year, although 1998-99 the numbers are very peculiar. It looks
as though fraud suddenly stopped, unless you believe people drank
a lot more because of the millennium. I am unable to tell you
which is the more probable answer; I have my suspicions. Ignoring
that, it is £500 million a year and in my judgement the market
has been established, the distribution system exists and the criminals
will seek to satisfy that market one way or another. I believe
that is likely to be continuing.
34. You say in your report, "The Department
has been reluctant to publish estimates of losses from fraud and
other leakage in each tax segment". Do you think there is
any justification for them not publishing these estimates?
(Mr Roques) No and I would go much further than just
publishing. I believe if I were allowed to make a single recommendation
and only one, it is that one, namely that the Department should
be required to understand what its total tax take should be, understand
what proportion of that they are getting, understand therefore
the leakage and understand the trends of leakage. There has been
no culture in Customs that that was the way you should manage
that Department. It is almost impossible to imagine in my judgment
how you can manage that activity without knowing that information.
They have slowly begun to acquire that information, but there
was in 1997-98 particularly a reluctance to publish the data because
they thought it would bring them under pressure because there
would be criticism of their performance. They were quite comfortable
not to publish. It is very important that they do publish. Frankly
it is a terribly difficult task to estimate these figures and
my expectation is that by having to publish them, by having themselves
monitored against that information, they will improve their performance
and improve the quality of the data.
35. If they did publish them, do you think they
would publish reasonable figures or would there be a tendency
to set out estimates which they thought were attainable in order
to avoid embarrassments in due course?
(Mr Roques) No, because we are not talking about targets
here, we are supposed to be talking about an "estimate"
of the truth. I think they will make their best efforts and I
am sure the numbers will prove at the beginning not to be as sound
as one would like. What will happen is that something will occur
which is different from their expectations and that will slowly
improve the investment in the process of estimation. It is quite
a new art in their business and in my judgement it is an area
where they should invest heavily in quality analysts, quality
people, quality information systems, quality databases and really
understand. In most other businesses people can estimate what
is going on in their industry and I see that as absolutely key.
36. I find that a very helpful and illuminating
answer. You think that this is the single most important recommendation
which needs to be seen through.
(Mr Roques) Yes.
37. What sense do you have from those in Customs
at the moment about this being done? Do you still sense resistance
from them, a very transparent sectoral approach to fraud and tax
(Mr Roques) Those who have been in the Department
for a long time are challenged by the fact that the data is difficult
to get and therefore there is an inclination to say that as the
data is difficult/impossible to get, they will not try all that
hard. Because it is most easily acquired in tobacco they are now
persuaded that they will publish and are publishing data in tobacco.
They will move on to alcohol. People like you will have to keep
the pressure on in the area of VAT which is the most complicated
area and almost certainly is the area where the largest amounts
of fraud take place.
38. Is your sense that there has not been a
culture change such that in all the sectors they are going to
embrace the recommendations you have put forward willingly? You
seem to imply that it is going to be a softly, softly approach,
they will do what they can, tobacco, they will worry about that
(Mr Roques) The Chairman would say to me that there
has been a culture change. I believe him. How hard it is driven
through the whole Department I do not know. How effective the
Department is going to be in producing this information I do not
know. I recommended quite a major restructuring of the finance
activity, the analysis activity, the intelligence activity, which
is almost the only major issue in my report where the Department
has taken a different view and effectively kept them separate
although all reporting to the same individual now, Mr Hanson.
One of the challenges will be whether they can deliver the sort
of improvements in this area of estimation and analysis which
I think are essential within their structure, or whether they
should have taken my recommendation in this area. It is clearly
possible to do it their way, but that is their challenge.
39. Did they in discussing your recommendation
and proposals plead poverty, that is to say, did they say this
is going to be extremely expensive to implement fully, to have
properly robust numbers which they would want to publish on a
sectoral basis? Or were they saying they may not have the money
and resources to do that? Was that an argument you came across?
(Mr Roques) No.