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Sir Robert Smith (West Aberdeenshire and Kincardine) (LD): Are there not procedures for tracking down whether the lorries take the right routes and cover the right distances for the delivery? If the paperwork says that it started in A and was delivered to B, the tachograph on the lorry is capable of confirming whether the mileage covered is consistent with making the requisite delivery.

John Healey: But if the hon. Gentleman thinks about it further, if the paperwork all appears to be in order and the receiving warehouse apparently confirms delivery—whether it be in Portugal, Portsmouth, some other part of the UK or somewhere else in the EU—how does he believe that anyone is going to be alerted to potential fraud, let alone carry out a detailed investigation? I remind him that the duty suspension system allows the sale and resale time and again of duty-unpaid goods and the movement of such goods time and again in and out of the UK without the duty ever being paid. If the accompanying documentation appears to demonstrate that all is in order, it is difficult to know where the evidence will come from to alert the enforcement authorities—or the honest traders who get hooked up unwittingly in these supply chains—that a problem may exist.

Mr. Duncan: A moment ago, the Economic Secretary mentioned complicit retailers. When retailers are found to be passing on to the public illicit alcohol on which duty has not been paid, as happened in London recently, why are the strongest possible sanctions not levied against them immediately? That would send the clear message that the distribution of illicit alcohol is not acceptable. For example, it would be very easy to ensure that such traders automatically lost their liquor licences for six months or a year.

John Healey: The hon. Gentleman refers to a recent organised operation undertaken by Customs, trading standards officers and the police. Some of the evidence gathered will contribute to the decision about awarding new licences to some of the traders involved.

Other hon. Members have said that prosecution is the toughest sanction available. They have asked why, in many cases in this exercise, the corner shops were not
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prosecuted. The problem is that that requires evidence that demonstrates guilty knowledge. Under the current system, that is very difficult to get. In this operation, we have levied sanctions and taken actions that, although they do not amount to prosecution, are nevertheless tough and deterrent. In many cases, the goods in question were confiscated and the vehicles and other means of transport seized. There is therefore a severe financial penalty for the businesses involved, and their continuing operation under licence is also threatened.

Angus Robertson (Moray) (SNP): The Economic Secretary is outlining the challenges that fraud poses. He is right to do so, and I am sure that hon. Members of all parties support a crackdown on fraud. However, I hope that he will have looked at the experience of other countries that use strip stamps. The grave danger is that fraud will move from what is in the bottle to what is on it. Will the Minister outline the Treasury assessment of the likely parameters of fraud on strip stamps, if they are to be introduced?

John Healey: The hon. Gentleman makes an important point. It is possible that the introduction of duty stamps, and their printing, distribution and retention, could cause additional security risks. We have recognised that implementing the system could be a cost to the industry, and we have undertaken to consider with it the operation of the duty stamp system that we plan to introduce. We shall also look at the scale of the risk, and at any appropriate measures to help meet the costs.

Angus Robertson: The Government do not know the scale of the risk.

John Healey: The hon. Gentleman says, from a sedentary position, that we do not know the scale of the risk. The honest response is to say that, at this stage, it is not possible to make a full and quantified assessment of the potential risk. As we develop the plans, the degree of risk will become clearer. As I said, we will also recognise the compliance costs for the industry that may be incurred.

Mr. Alex Salmond (Banff and Buchan) (SNP) rose—

Mr. Prisk rose—

John Healey: The hon. Member for Banff and Buchan (Mr. Salmond) has only just joined the debate. If he will forgive me, I shall give way to the hon. Member for Hertford and Stortford (Mr. Prisk) and then make progress with my speech. I propose to cover some of the points being raised, and I undertake to answer as fully as I can any matters raised by hon. Members in the subsequent debate.

Mr. Prisk: The Economic Secretary has been generous about giving way, and I am grateful. However, this is a very important matter. This morning, another fraud was identified: in St. Petersburg, 2 million strip stamps were lost to fraudsters. I am told that the value amounts to about £10 million. The industry has
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produced 17 schemes, and the Government have their own proposals, but is the Economic Secretary really saying that no assessment of this danger has been made?

John Healey: We are two years away from the introduction of a duty stamp system. Until we know how the scheme will work on implementation, it is not possible to make the quantified risk assessment that some hon. Members are urging. However, we have acknowledged that fraud could be a problem. We will discuss the matter with the industry and develop appropriate plans accordingly.

1.15 pm

Angus Robertson: It is important that the House clearly understands what the Minister is saying. Is he confirming that the Government are introducing an expensive scheme without having made an assessment of the potential for fraud in connection with strip stamps?

John Healey: This afternoon, we are introducing legislation to prepare for the scheme. We shall introduce the scheme in two years' time. As part of the work on planning with the industry, we shall deal with the important concerns being raised this afternoon.

I turn now to the scale of the spirits fraud problem, a matter at the heart of the concerns expressed by the Treasury Committee and by some hon. Members this afternoon. To tackle any fraud effectively, we need to assess its scale. Since 2001, the Government have published annual estimates of the scale of spirits fraud losses. Our most recent estimate appeared in December's pre-Budget report, and it showed that around £600 million in revenue was lost through spirits fraud in 2001–02. That equates to a fraud level of around 16 per cent., up from an estimated 14 per cent. the previous year.It was against that background that my right hon. Friend the Chancellor decided that duty stamps were now necessary, unless a similarly effective alternative could be found.

In January, the Scotch Whisky Association put forward an alternative estimate, showing fraud at a level of £100 million and £150 million a year. The National Audit Office's examination of the differences between those estimates recognised the inherent difficulty of measuring illegal activity. It confirmed that the estimate by Customs was reasonable, but suggested that it should be expressed as a range between £330 million and £l,080 million. The report also concluded that the estimate put forward by the SWA should be expressed as a range between £10 million and £260 million, and that it was also reasonable. I make no bones about the fact that the report stated that

We accept that, where there is fraud, there will always be uncertainty about its scale, but we do not accept that that uncertainty is an argument for inaction. Everyone accepts that there is significant fraud, and we must take tough action to combat it, even if in some quarters that is unpopular.

I turn now to the alternative measures put forward by the industry. The hon. Member for Hertford and Stortford called it a package of 17 proposals. Our published regulatory impact assessment gives our detailed view of the trade's package, so I will be brief.
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I welcome and appreciate the work done over the past year and more by the industry, through the joint alcohol and tobacco consultation group, to develop its package of alternative proposals. The package contained a few potentially useful new ideas, with some limited scope for additional impact on fraud. It proposed variations on ideas already being pursued by Customs, although we have already established that those ideas do not amount to "the answer" on fraud.

However, most of the measures in the industry package are either simply a restatement of established policy, or new suggestions that would have low or no apparent impact on fraud. Those suggestions would take significant time to develop, and some could be illegal under current EU legislation.

As a whole, the package contains a number of inherent weaknesses: First, it would leave the door open to displacement to other types of fraud, most notably inward diversion. Secondly, it could be undermined at any point by a complicit party, in the shape of an unscrupulous trader. Thirdly, and most importantly, the package does not address the issue of identification—the ability for consumers, retailers and Customs officers to distinguish readily between licit and illicit product. As a consequence, the estimated anti-fraud impact of the package fell significantly short of that estimated for duty stamps. Customs cautiously estimates that duty stamps will produce a minimum of additional revenue of £160 million in 2006–07. On a similar basis, as set out in the regulatory impact assessment, Customs confirms that the industry's package of alternatives would be unlikely to have an impact of more than £70 million a year once they were fully operational, and the figure would probably be lower.

It may help the Committee if I draw a more direct comparison between the approach to tackling the fraud problem with the trade's package and the duty stamps. In essence, the trade's measures seek to tackle fraud by tightening weak points in the supply chain, increasing the vigilance of the legitimate trade and Customs, and thereby stemming the supply of fraudulent product to retail shelves. Consumers' and traders' ability to tell whether duty has been paid does not come into play.

By contrast, duty stamps straitjacket the fraudsters on both the demand and supply sides. On the demand side, they ensure that consumers and traders have a clear and immediate visual means of identifying whether a bottle is licit or illicit. Even if some people are none the less prepared knowingly to buy dodgy goods, most will not be. The rules of the game will fundamentally change: people certainly will not be prepared knowingly to pay the full prices they unknowingly pay now for many fraudulent, illicit bottles on which duty has not been paid.

On the supply side, it will be impossible for a would-be fraudster to convince an honest alcohol trader that he is dealing in duty-paid goods if there is no stamp on them. It will be much easier for Customs to finger those caught in the act of diversion fraud. The difference, bluntly put, is between tightening the boundaries of the playing field for fraudsters and closing the ground. It
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would be misleading to suggest that the decision to proceed with duty stamps rather than the trade's alternative package was a marginal one.

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