Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 20 - 39)



  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 be helpful?
  (Mr Roques) They were aware that he was not seeing me.

  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 inquiry.
  (Mr Roques) It was the way I interpreted my terms of reference.

Mr Plaskitt

  28. What did you find Customs and Excise had done to prepare for the effects of the introduction of the single market?
  (Mr Roques) My impression—and I would say this was more an impression than something I spent a lot of time on—was 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.

Mr Ruffley

  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 leakage?
  (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 later.
  (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.

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