Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 140 - 159)



  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 the Committee.

  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 a problem.

  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.

Mr Laws

  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 were corrected.

  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 all?
  (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 that?
  (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 saying—and this all predates your involvement, so I do not think this is particularly personal—is 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 happen again?

  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 —

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 29 January 2002