Examination of Witnesses (Questions 140
WEDNESDAY 28 NOVEMBER 2001
PRIMAROLO, MP, MR
140. That is not £500 million; it is £500
million a year. That is correct, is it not?
(Ms Primarolo) No. Can I turn to the published figures
on fraud so that I do not mislead the Committee here unintentionally.
There were two publications yesterday: One was Tackling Indirect
Tax Fraud, and the other was Measuring Indirect Tax Fraud.
These have up-to-date estimates covering cross-Channel smuggling,
missing trader VAT fraud, hydrocarbon oil fraud and alcohol fraud.
If we look specifically at the question of alcohol fraud, I think
this is probably where the impression of £500 million occurs;
it is the diversion of duty suspended spirits for sale at full
price to the domestic retail market costing in the region of £450
million in 1999-2000. Mr Roques identified that he believed there
had been a shift in the fraud from diversion fraud, which triggered
the inquiry, and this is what is called inward diversion. It is
of a large nature but it is a different type of fraud. I am happy
to explain what the difference is, if that would be helpful to
141. I just wanted to be clear who is talking
about what. Mr Roques, when he appeared before this Committee,
said: "The actual losses were much larger. I estimate an
order of magnitude of £500 million a year."
(Mr Hanson) Mr Roques audited our estimates of fraud
losses for a particular kind of fraud back to 1994; that came
to £668 million. That was agreed. I suspect what he is talking
about is the continuing losses each year, and we agreed that broadly
speaking it is about £500 million a year.
142. That is a huge amount lost. Who is responsible
for the failures that allow losses on that kind of scale?
(Ms Primarolo) The inward diversion fraud is spirits
that are released from bonded warehouses outside the UK coming
to the UK, supposedly going to another warehouse which is bonded,
with no duty on it, and they do not reach the warehouse and enter
the domestic market. Clearly, in looking at the recommendation,
and indeed what the reports here identify, is the need to tackle
that and Mr Roques identified the need for agreements with our
European partners that this is an issue across the European Union.
We are responding on the basis of improved intelligence, increasing
checks on spirits entering the United Kingdom, which are supposedly
under duty suspension. Obviously we are trying to make sure that
we stop that inward diversion, but what we also need is better
co-operation with the warehouses the goods are released from,
which are outside of the UK.
143. I understand that. We are going to come
to some of the measures that have been announced. I just want
to be clear: who is responsible for failures that allow us to
lose £500 million a year? Is it Customs and Excise? Is it
Ministers who supervise Customs and Excise? Who is responsible?
(Ms Primarolo) Well, ultimately the entering of the
country is the responsibility of Customs and Excise in co-operation
with the authorities from which the goods are released, so there
is a dual responsibility for Customs to identify that entering
the country if it does not reach the bonded warehouse, but clearly
we need to ensure that we are given the movements of such goods
in a clear form, which requires us to get agreement with our European
partners on that basis, and we are now engaged in that. Mr Roques
also identifies in his report that the nature of the fraud is
that it shifts. It is about taking opportunities and, as we close
down, as Customs closes down, the original diversion of fraud,
which was occurring entirely here in the UK, which was the responsibility
of Customs and Excise as his report demonstrates, it appears to
have shifted now and we have quantified that on the basis of inward
fraud. Therefore it is a dual responsibility. Ultimately, we have
to collect the money in duties.
144. You have used the phrase there "we
close it down" or "we have to close it down". Are
you, as the Minister, or are Ministers responsible for supervising
Customs and Excise?
(Ms Primarolo) Yes, in the sense that we answer to
Parliament for them, of course, and that we expect to have the
information that enables us to ensure that the correct strategies
are being developed in order to tackle these issues. The problem
that Roques identified was that the way that Customs was structured,
even at Board level, the awareness of the problem and therefore
the ever-rising figures of exposure were not identified and therefore
in that sense Ministers, present and past, were not aware that
there was that exposure. Now that we have this, there is that
responsibility and that is what these documents lay out in saying,
"We have assessed what we believe the risks are following
from the advice that was given in Mr Roques's report, which was
supported by the NAO. This is how we are tackling it. This is
our methodology." It is showing how we came to those estimates
for Customs and Excise and they are open to scrutiny and comment
by others, which we hope they will be.
145. If the Board fails to focus on operational
matters, should not Ministers, plural, have been better informed
of that failure?
(Ms Primarolo) Ministers should have been informed
but Ministers were not informed. It is rather difficult for me
to answer a question about what previous Ministers may or may
not have known and how they might have acted. The evidence in
Mr Roques's Report indicated that, even at Board level, this was
not recognised, and that would be the link to Ministers to identify
146. I think you told us before that you yourself
were surprised that you were not told until I think June 2000.
Reading Roques, are you still surprised?
(Ms Primarolo) Yes, I am surprised that my predecessors
were not aware because when we look at the PAC reports and at
Treasury Select Committee reports, there is an acknowledgment
across the board that there is exposure to risk here in these
areas, and everybody was aware of that and that was not followed
through to the connection between what was actually information
in Customs, through to Customs, quantifying it, and then the Board
making an assessment and advising Ministers. That led Mr Roques
and his inquiry then to make recommendations about how Customs
is structured, how that information was gathered and how it was
transmitted through the organisation and ultimately to Ministers.
It is very difficult to see how Ministers can act on information
that they do not have and if they do not know there is a problem
there in the first place. Clearly, Members of Parliament were
relying on that information being properly collected and then
we are advised on what the problem is and then the strategies
to deal with it. That seems to me to be the crucial missing link.
As Roques shows, the first indication I had of the scale of the
problem from 1994 onwards was in May 2000 when the new Chairman
of Customs and Excise came to me and said, "This is an issue.
Customs found this themselves" and that he would come back
to me within a month, and he did, with an internal assessment
and, as a result of that, I commissioned the Roquess inquiry to
look at matters.
147. Minister, the evidence that Mr Roques gave
to us was fairly shocking in relation to his views on the weaknesses
of the Board of Commissioners. You are probably aware of that
already. He said he was surprised by the working of the Board
and he went on to say: "As far as I could see, they did not
discuss operational issues and performance issues. They did not
look at data. They had hopeless management accounting information,
and all of the things I would have expected a Board to do it did
not". In questioning from our Chairman, Mr Roques suggested
that the Board was more like the board of a charity than the board
of a serious business. Would you agree with those criticisms?
(Ms Primarolo) I do agree about that failure in Customs.
Again, forgive me; it is rather difficult because I am commenting
over a period in which the Ministers were of the previous Government.
I do not see how anybody could look at the problem that arose
and see Roques's Report and not be horrified that this problem
actually occurred. Customs did discover it and acted on it and,
as Roques shows, by 1998 it had been closed off but there was
still the question of accounting for the loss and the big question,
which was: why did it occur and what changes need to be made to
ensure it does not happen again? As you will see, Customs has
gone through a very substantial restructuring but we have followed
the recommendations from Mr Roques and the NAO view is that, in
following these strategies, that puts us in a position where there
are satisfactory structures and mechanisms in place for the future.
148. Is it your view that the weaknesses at
the Board were the key problem that allowed this fraud to run
unchecked for so long, or are you saying that the Board was not
communicating and dealing with fraud that was occurring under
it, and therefore the information was not passed on to the Treasury?
Is the weakness of the Board what allowed this to go on for so
long and rack up these fraud losses, or was it just stopping that
information getting through more quickly to the Treasury so they
could then have done something about it?
(Ms Primarolo) No, I have to rely on the Roques Report
for the explanations of what actually occurred in that period
of time. It seems to me that he is saying that there is a systemic
failure in recognising and tracking the cases; communicating the
information, particularly about the loss of revenue; that oversight
was not there; and, in a sense, there is a failure to commence
inquiries internally in the organisation, which led to the Board
not having the information that it, too, needed. My preoccupation
was to follow very carefully the recommendations from Mr Roques,
and indeed the National Audit Office, to ensure that the weaknesses
that were identified were corrected. I am happy and satisfied
that, in following Roques's recommendations, we have a structure
now that is adequate for the task that Mr Roques has identified.
Forgive me, it is very difficult and it would be very easy for
me to sit here, with no responsibility for that period, and to
pass judgment on actions of which I have no real knowledge, except
the information that is in the report. Therefore, I have taken
the Roques Report recommendations, as has the Chairman of Customs
and Excise and the Board, and made sure that those weaknesses
149. Can we go back to the timing of all of
this again. You have told the Chairman that you first became aware
of this yourself in, was it May or June of 2000?
(Ms Primarolo) May.
150. How long before that was the Board aware
of this scale of loss? How long did it take for them to report
this to the Treasury?
(Ms Primarolo) I cannot recollect, and ask for a prompt
here on the Roques Report itself as to when it was reported to
the Board. I think in truth, and I will be corrected if this is
wrong, this particular issue came to light when the new Chairman,
as a result of coming in and looking at the structure of Customs,
was making the changes.
(Mr Hanson) The Department had known about the losses
and the systemic problems in the regime since about 1995 because
investigations went on.
151. You mean the Board of Customs?
(Mr Hanson) Yes, they knew about that from about 1996-97
onwards because there were investigations taking place. In terms
of the specific loss of the £668 million, that was only quantified
in about April-May of 2000.
(Ms Primarolo) Obviously the size of the loss is what
triggers all the concerns.
152. There seems a very big lag here between
not just the information that the Board should have been getting
its hands on, but also the time period when the Board became aware
that there were problems and the time period when they notified
Treasury Ministers . We have also got a Board that Mr Roques himself
described as more like the board of a charity. These factors were
obviously extremely difficult for you and your predecessors at
the Treasury because it meant that the information that you needed
to flag up this problem was not coming through to you. Could we
ask why it was that the Treasury itself was not exercising more
control and oversight in relation to this Board, if it was as
third-rate as Mr Roques was suggesting, and he was pretty dismissive
of its quality? Why was it not the case that the Treasury, which
was, after all, the monitoring department, was not aware of this?
Were Treasury officials not monitoring this Board in any way at
(Ms Primarolo) The Treasury would not monitor a whole
department in every function. The NAO go in every year and look
at departments and in this period the NAO were going in as well,
which I think reveals the scale of the lack of connecting.
153. How does the Treasury monitor the activities
for this period of time of the Board in respect of these matters?
Does the Treasury have no monitoring at all?
(Ms Primarolo) The Board runs Customs and Excise and
they are responsible; they are commissioned and they are responsible
for the operational delivery of that work.
154. What monitoring does the Treasury have
for the way in which the Board carries out its responsibilities?
(Ms Primarolo) Only in monitoring targets that are
set, which Roques makes clear in terms of collection of revenue,
and whether the forecasts and the actual receipts are on target,
and a number of others. The actual monitoring of whether it has
a competent management structure, the very reason that there is
a board, is actually to manage that and therein lies the problem
that Roques reveals.
155. Do you have any Treasury officials that
would either ever sit in on Board meetings or do they ever send
you the minutes of their meetings to the Treasury, so that there
is some distant oversight?
(Ms Primarolo) Actually, I do not have any idea, but
the idea that I would read every Board set of minutes or any minutes
156. Perhaps one of your officials might do
(Ms Primarolo) The point of having a Board and Commissioners
and having operational responsibility is that they are held responsible;
hence this report. It does not make comfortable reading for Customs
and Excise. The NAO is the independent body that then monitors
the department, and is independent, on a wider basis. On the idea
that we have a team in the Treasury that tracks whether these
are adequately managed, Treasury will rely on information coming
from the Board.
157. I understand, Minister, that what you are
essentially sayingand this all predates your involvement,
so I do not think this is particularly personalis that
if we have a situation where the Board is completely incompetent
and acting like a charity, not managing itself and its business
effectively, it can go on doing so until it realises that that
is happening because there is no exercise of oversight by the
Treasury in respect of these matters and they do not have time
to read the minutes of the meetings. Is that really satisfactory?
(Ms Primarolo) I really do not think that is a fair
proposition and I really do not feel that I am in a position to
comment on what happened pre-1997 in terms of the Treasury monitoring.
The whole purpose of having Customs and Excise with a Board of
Commissioners, with devolved responsibility, is that they are
held responsible and so ultimately they are the ones who are providing
the information. Customs do a vast array of other functions which
they discharged then and discharge now in a perfectly reasonable
and efficient fashion. The question you are asking is: where is
the watchdog? The responsibility is for Customs. The Treasury
monitors against their targets, and the NAO are the independent
assessor in all government departments about whether those departments
are responding to the challenges. So we have had, as you will
see in the Roques Report, PAC reports, PAC inquiries and the Treasury
Select Committee itself in that period of time took evidence,
made observations about what they believed was going on. I think
there are quite a few checks. The question for all of us is: what
happened here systemically and how can we make sure it does not
158. My last question on this then, Minister
is: I think it is the case that Mr Roques was not asked to look
specifically outside Customs and Excise. He was not asked to draw
conclusions about the way in which the Treasury had exercised
its powers in respect of this, but are you really saying that
you do not think that the Treasury as the overseeing department
has any lessons at all to learn from this about the way in which
it polices departments such as this where they can end up with
very ineffective boards that are not doing their job and that
the Treasury does not really have an ability to find out about
that until it is told?
(Ms Primarolo) To be clear, Mr Laws, Customs and Excise
are not a sub-department of the Treasury. They are one of the
Treasury departments. They have their own structure.
159. You do not think there is anything to be
learnt from this?
(Ms Primarolo) I think that Roques tells us quite
clearly what needed to be done and what we should do to respond
to this. Short of making the Treasury run every single department
in Whitehall, which would be truly ludicrous, we have to work