Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 80 - 99)



  80. Would it be fair to describe what you are trying to do with the management as trying to effect a culture change?
  (Mr Broadbent) Yes.

  81. How are you assessing the impact of the changes you are making in terms of the outcome you want in management?
  (Mr Broadbent) There are certain practical measures I can look at which are mostly to do with the flow of information. We are spending quite a lot of time investing money and time into management accounts and controls so that decisions get triggered, moved up the chain, discussed and you can see this happening. You can measure the number of times these things happen and you can see how often discussions get triggered. I can ask myself the question—I have the benefit of this report which others did not have—if this happened now, would I know? That is an interesting test to ask yourself. There is a second and much more difficult part of the answer, which I am afraid is really to do with the nature of change management. If you are seeking to change attitudes and behaviours you have to know very clearly where you are coming from and where you are getting to but make a rather subjective judgement about what point in the road you are at.

  82. Can I just turn to one specific recommendation from the report? Roques said that the Department has been reluctant to publish estimates of losses from fraud and other leakage in each tax segment. He has just stressed to us that he thought this was one of the most important areas on which he made recommendations. Are you now preparing to make such estimates in each of the tax segment areas?
  (Mr Broadbent) I said to the PAC the week before last that the Government will be publishing in the forthcoming PBR estimates for excise taxes. It will also be publishing an estimate for part of VAT, a particular set of frauds which we are confident we understand and can measure. It will not be publishing more estimates yet because we need to understand more about VAT before we can do that.

  83. Why are the responses partial?
  (Mr Broadbent) In the time available actually the response is quite full, but that is obviously my opinion. The partial response in relation to VAT stems from the fact that VAT is a significantly bigger and more complex tax than the excise duties. The issues with VAT go into understanding not just fraud in the sense of criminals attacking the system, of which there is an element and that is the element we understand best, but also error, law. The custom and practice relating to VAT is extremely complex and the way that is applied is very complex. Legitimate avoidance is quite large legal avoidance. Unpacking that as an analytical exercise is a very considerable undertaking which we have started but I cannot at this stage say when it will be completed.

  84. Do you accept in principle that full publication of estimated losses in all those areas is desirable?
  (Mr Broadbent) Provided one can get to estimates which are meaningful, yes. This is quite an important proviso.

  85. Do you think you can get there?
  (Mr Broadbent) I do not know yet. What we are going to do in a PBR is publish estimates in the area of VAT where we have got there, which I hope is indicative of our approach to the subject.

  86. Are estimates going to be done in terms of tobacco and alcohol as well?
  (Mr Broadbent) They will be for tobacco and alcohol and we shall also publish a technical paper showing how we have reached all our estimates so they are transparent.

Mr Ruffley

  87. Paragraphs 4.3 to 4.5 of Roques are really a depressing catalogue of what can only be called incompetence. How can your organisation explain the fact that although you had warnings in 1994 and 1995 from NIS and in 1996 from your own internal audit review, your organisation could not get to grips with outward diversion until 1998?
  (Mr Broadbent) Are you referring to sections 4.3 and 4.4?

  88. And 4.5.
  (Mr Broadbent) Sections 4.3 and 4.4 refer to bootlegging; 4.5 refers to drawback fraud.

  89. I am talking about September 1994.
  (Mr Broadbent) Outward diversion is the 1994-95 figure you gave me, which is section 4.6.

  90. I do beg your pardon, I am referring to pages 11 and 12, the executive summary. September 1994 there is a note from an investigating officer to a manager in policy which talks about "The fraud is extraordinarily easy . . . The risks . . . are considerable". Then on 7 December 1995 we go slightly higher up the food chain, do we not? A briefing paper to the head of NIS, reports, ". . . the last twelve months or so has seen a growing acceptance that the various transit systems for the movement of excise goods provide inadequate controls in the single market". In April 1996 an Internal Audit Division review of the Movement of Goods Liable to Excise Duty "highlighted significant control weaknesses in the Holding and Movements system". Those are three specific points in the story where the report concludes—and I use the words of Mr Roques—"I find it surprising that this audit, which can only be described as damning, was not acted on more quickly". So just to repeat the question: in 1994, 1995 and 1996 you are on notice that there is a major problem and in relation to outward diversion fraud jack-all happens until 1998 of any significance. Why?
  (Mr Broadbent) Two things are worth saying. The first thing, at the risk of repeating myself, is that the critical question here is at what point an organisation should know something is happening which is different from what was going on before. This is a big challenge for any organisation, including commercial organisations. In 1994 and 1995, the years you are talking about, the actual level of fraud was less than 0.1 per cent of alcohol revenue. Yes, there were the first signs at operational investigation level of the fraud beginning. But the interesting question we have to ask ourselves is at what point it is fair to say the organisation should have started piecing the bits together, an organisation should have known at the top that something was going on? My own judgement about that—and I do not think either the National Audit Office or in particular John Roques disagreed—is that that is probably some time around about the time of the IAD report to which you referred in 1996, at which point as a percentage of alcohol revenues the fraud was still quite small, but there was at that point a document at high level which said there was a control failure here. That leads me into my second point, that to me the most important issue is not in fact that this damning report was not acted on, it is that it was acted on. The report made 14 recommendations, they were all implemented and it did not deal with the problem. Why did it not deal with the problem? Because most of those recommendations are of a sort not untypical from an organisation which tends to deal in process, which said we have to promote this sort of practice, we have to remind people of that thing they have to do. It did not say there is a problem and you need to change the way you do things fundamentally to tackle it. That is very much to do with the point I was making earlier, that the challenge here is to bring an organisation to move more quickly to something which is happening in the external environment and take action. The IAD report was implemented; it did not actually deal with the problem. What dealt with the problem at the end of the day was a series of actions, quite practical actions, which were started to be taken in around about April 1997, which is about 12 months after the IAD report and that is what I regard as the real gap which this organisation should answer for.

  91. How is the organisation going to "answer for it", to use your words?
  (Mr Broadbent) The best thing you can do in answering is to understand what has happened, acknowledge your mistakes and learn from them, which personally is what I do.

  92. In responding to the earlier bits of evidence in September 1994 and 7 December 1995 that the report sees fit to draw attention to, your defence to this is that it was such a small percentage of the total it was not a developed problem, it was not something the report should have been drawing attention to. You are saying that it was early days, it was unreasonable to take action. But Mr Roques seems to take a contrary view, does he not?
  (Mr Broadbent) I do not think he takes a contrary view. The bit you are quoting sets out a chronology of events and he is quite right to point out that there were early signs, as early as 1994 and 1995, that there was a problem.

  93. That is 1994 and no serious or effective action kicks in until 1998. I could be getting this wrong, but four years is quite a long time for you to work out that there is a bit of a problem and provide solutions to cracking that problem. Twelve months, maybe. Eighteen months, fair enough. But four years? Surely the job of your organisation is to think strategically and think ahead. If there was an embryonic problem in 1994, are you seriously inviting us to believe that it should take four years to get it sorted?
  (Mr Broadbent) Where I disagree with you is in your assumption that the first warning sign is tantamount to full knowledge and full understanding of the problem. That is just not how organisations work. No organisation in the world, public sector or private sector, works that way.

  94. "The fraud is extraordinarily easy . . . The risks . . . are considerable". That is in the note in September 1994. I am not quite sure of your interpretation of the English language, but "The fraud is extraordinarily easy ... The risks ... are considerable". That is a problem.
  (Mr Broadbent) It is clear that within the organisation documents existed which at a working level identified the fraud. The question you are asking me, is: what is it sensible to expect the organisation to do? I have to go back to asking what the knowledge of the organisation was. The existence of a piece of paper deep down in the organisation is not the same as the organisation knowing. The challenge the organisation faced was drawing together quite a lot of disparate sources of information to a senior level where strategic action could be taken. That did take too long, but it did not take four years. The point at which it could be fairly said that the organisation should have known something was seriously astray here was not as early as I should have liked.

  95. I do not wish to be unhelpful or badger the witness but this really will not do. In September 1994, you say it is a piece of paper buried down in the depths of the organisation, "The fraud is extraordinarily easy . . . The risks . . . are considerable". Then on 7 December, in a briefing paper to the head of NIS, for heaven's sake, we have the quote, "... the last twelve months or so has seen a growing acceptance that the various transit systems for the movement of excise goods provide inadequate controls in the single market". This is the head of NIS and it is talking about what has been monitored in the preceding 12 months. I really must invite you to reconsider your answer. You are saying that the organisation did not know the problem. Those two pieces of paper to which Roques actually draws attention are there in September 1994, December 1995 and nothing is done effectively to tackle it until 1998.

  (Mr Broadbent) We just disagree what it means to say to "the organisation". I wish it were the case that the organisation —

  96. Hang on. This is to the head of NIS in December 1995. That presumably is suitably high enough up for you, is it?
  (Mr Broadbent) No, not necessarily. Not everything the head of NIS has will have crossed the Chairman's desk or the Board's desk or the director's desk.

  97. Absolutely extraordinary statements. So when the head of NIS is advised that for 12 months there has been a growing acceptance that there is a problem, inadequate controls, you do not think that is serious enough for anyone in your organisation to take seriously.
  (Mr Broadbent) I did not say that. What I said was that the question is: did the organisation know. The failure here was not —

  98. So what is the answer to that question.
  (Mr Broadbent) The failure here was not that people had information necessarily and did not act on it. What Roques goes on to say a bit later on is that the first the Chairman knew of this was an operation at the end of 1995. There was then the IAD report in 1996 and I do agree that at some point in this process it is fair to say the organisation, at the top, the senior people, should have known. What I do not accept is that the fact there was one reference by one person earlier than that is tantamount to saying the organisation knows. That is the complexity of a large organisation.

  99. It is not one reference, it is two references; I have given you the two references. Let me ask one question in relation to these findings of the Internal Audit Division in April 1996. When were they brought to the attention of the Board? First question. Secondly, when were they brought to the attention of Her Majesty's Ministers?
  (Mr Broadbent) They were not brought to the attention of Her Majesty's Ministers at all. This is an audit report within the organisation and I do not think many if any audit reports go to Ministers.

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