Select Committee on Public Accounts Third Report

Conclusions and recommendations

Improving the effectiveness of farm inspections

1.  It is of major concern that the level of discrepancies noted by the Department's inspectors, when accompanied on farm visits by the Audit Office, was many times higher than when they were not accompanied. It appears to us that, by turning a blind eye to irregularities during on-farm visits, some inspectors were complicit with farmers in claiming more money than they were properly due. The Department must ensure that all irregularities are reported by inspectors.

2.  We were surprised to find that payments were being made for sheep that had apparently died, but which had not been reported or replaced. Decisions by inspectors to ignore well-established rules cannot be justified. It also sends out the wrong message to farmers, making it harder to enforce the rules on future occasions. This practice must stop immediately.

3.  There is compelling evidence that the vast majority of sheep losses have not been reported, despite the requirement to do so. It is likely, therefore, that many payments of premium which were not properly due have been made. Given the large numbers of sheep involved, the overall level of overpayment is probably substantial. The Department must take action to ensure that all sheep deaths are reported, where premium has been claimed. Where farmers fail to comply, penalties should be rigorously applied.

4.  We find the circumstances surrounding the Department's 1998 decision to allow payments for sheep at unnotified locations quite extraordinary. Not only was this contrary to EU rules, but the Department has no record of its decision, despite a senior official apparently travelling to Brussels to discuss the matter. This is astonishing. Unauthorised changes to EU rules are wholly unacceptable, not least because they carry the risk of disallowance. We take a very dim view of any breach of well-established rules, but especially where it is compounded by such shabby administration. We also want to make clear that this Committee will only accept explanations from Accounting Officers where these are adequately supported by documentary evidence.

5.  Despite all farmers signing an undertaking to provide reasonable assistance during inspections, there were a number of cases where farmers had refused to help inspectors. Allowing farmers to get away with this is indicative of the slack control regime the Department has been operating. We welcome the Accounting Officer's undertaking that, from now on, any farmer who refuses to co-operate will not be paid.

Raising the standard of flock records and markings

6.  We find it disturbing that, some seven years after the European Court of Auditors reported that flock records were in a lamentable state, there appears to have been little improvement. It is utterly pointless to instruct farmers to maintain proper flock records and threaten to penalise them for non-compliance, but then fail to check and enforce the requirement. The Department needs to get a grip on flock records and demonstrate to farmers that any failure to comply with the regulations will no longer be tolerated.

7.  The Department's failure to properly address the weaknesses in control, highlighted by the European Court of Auditors in 1994, was a serious error in judgement. Given the risk of disallowance for failing to enforce EU controls, the Department's disregard for the auditors' recommendations, especially on flock records and markings, was irresponsible. The Department has to understand that ignoring EU requirements is not an option as it creates a liability which the taxpayer may have to repay.

8.  We regard flock records as an extremely important control, with benefits over and above sheep annual premium—for example, they are a key source of information during disease outbreaks, as was demonstrated during Foot and Mouth in 2001. Because of these wider benefits, checks on flock records should not be confined solely to the retention period, but should take place throughout the year.

9.  It seems to us that the Department's system of checking flock records is rendered completely useless by allowing a delay of up to 10 days to complete the check. In our view, the Department should make clear that it is up to farmers to ensure that their flock records are held on the farm and are available at all times for inspection. Failure to comply should result in some form of sanction.

10.  Flock markings is another control measure where the Department appears to have paid scant regard to the findings of the EU auditors in 1994. We recognise that flock marking is not foolproof, but it can provide added assurance at inspection, as a counter to the fraudulent 'borrowing' of sheep. As with flock records, the Department needs to send a clear message to farmers that flock marking is obligatory and failure to comply with the regulations will no longer be tolerated.

11.  While we welcome the Department's decision to introduce the individual tagging of sheep, we are concerned that the timetable for implementation appears open-ended. Although there could be some advantage in waiting for EU guidance, the resulting delay means that it may be some time before a system of tagging is fully developed and operational. We expect the Department to progress this issue at an early juncture.

Improving payment controls

12.  We find it worrying that the weaknesses in the Department's land identification systems leave it vulnerable to fraud. While the Department thinks it highly unlikely that there are major fraud problems in the database, we are not persuaded. Bogus land declarations have already been discovered and, with some 375,000 records still to be validated, the potential for other irregularities exists. With validation of the remainder of the database scheduled to take more than 10 years, the Department needs to consider how this exercise can be speeded up.

13.  We welcome the Department's decision to introduce an automated 'Geographical Information System' to record and validate land holdings. We expect the Department to ensure, however, that the range of concerns, identified within its existing land identification systems, are not repeated when the new system is implemented.

Applying penalties for irregularities

14.  We were surprised at the extent to which the level of penalties actually applied for claims irregularities in Northern Ireland has been lower than anywhere else in the British Isles. Penalties, properly applied, can provide a strong deterrent effect to farmers who might otherwise fail to observe the rules of the scheme. We welcome recent improvements and expect the Department to rigorously enforce the EU rules at every opportunity.

15.  We regard the Department's decision not to introduce penalties for poor flock records and markings as very poorly judged. Given the high level of non-compliance with these key controls, the Department needs to toughen-up enforcement right away. When this Committee looked at the Sheep Annual Premium Scheme in England, we recommended a separate system of graduated penalties for shortcomings in flock records. We are in no doubt that the introduction of a similar system in Northern Ireland, to include flock marking, would go a long way to raising the overall standards.

16.  We are keen that recommendations which we make for England are translated across to Northern Ireland. However, this has not been happening as effectively as it should have been. While we expect the Department of Finance and Personnel to play a pivotal role, we would also encourage Northern Ireland departments to liaise closely with their GB counterparts on all Public Accounts Committee reports.

Combating fraud

17.  Prior to the Audit Office examination, the Department's record in combating fraud was pretty abysmal. We welcome the Accounting officer's assurances that procedures are now much improved and we expect that, in future, every case of suspected fraud will be properly investigated; that decisions on all cases will be fully documented; that every realistic opportunity to prosecute will be vigorously pursued; and that successful prosecutions will be widely publicised as a deterrent to other would-be fraudsters.

18.  It is worrying that one of the cases where no sheep were found at inspection involved an employee of the Department. We are disappointed that prosecution was not recommended, due to concerns about the standard of evidence. In a case where a civil servant deliberately seeks to exploit the rules within his own Department, we are of the firm opinion that the Department must make a particular effort and be seen to take strong action. This should always include disciplinary proceedings and, wherever possible, prosecution.

19.  With some 230 of the Department's 3,750 staff currently claiming agricultural subsidies, the requirement for all staff to make a conflict of interest declaration is a useful procedure. We expect the Department to carefully consider each situation where a potential conflict of interest exists and ensure that the risks are fully addressed.

20.  Even though the Department has rotated 20% of inspectors each year, we are not convinced that collusion between farmers and Departmental staff has not been an issue. There were far too many situations where non-compliance with the rules was ignored by the Department. We expect the Department to ensure, through close supervision and monitoring, that any pattern of possible collusion is picked up at the earliest opportunity. Other measures, such as a programme of selected re-inspections should also be considered.

21.  The degree of fraud discovered in the wake of Foot and Mouth was a quite staggering state of affairs, particularly in one of the affected areas where at least 58% of claimants had been attempting to cheat the system. We are not at all persuaded that this was a one-off situation. In our view, the Department's risk analysis is fundamentally flawed and needs to be re-examined as a matter of urgency.

22.  While the Department estimates fraud in the scheme at £0.5 million each year, we think this figure is almost certainly understated. We saw plenty evidence of irregularities, including shortfalls of sheep, that went unreported. In our view, the actual fraud figure is likely to be substantially higher than £0.5 million. We would strongly urge the Department to look again at this matter.

23.  Over the past 10 years, the Department has spent almost £1.4 billion on livestock subsidies. With such enormous sums of taxpayers' money at stake, the Department must make fraud a decidedly unattractive proposition, by ensuring that it has an effective inspection process, a rigorous prosecutions policy and penalties that far outweigh the potential gains from fraud.

24.  We commend the Livestock and Meat Commission for drawing attention to the substantial inaccuracies within the Department's statistics on sheep marketings. We note the Department's assurances that it now has actual data on all marketings and no longer needs to produce an estimate.

25.  Our overall impression is that the Department has in the past been soft on fraud and this has contributed to unacceptably high levels of fraud within Northern Ireland agriculture. Indeed, having carefully examined the evidence, we are convinced that many fraudsters would have regarded an attempt to cheat the scheme as a risk worth taking, given the slackness in control and the Department's poor record of prosecution. We welcome the Accounting Officer's assurances that his Department now operates a policy of zero tolerance to fraud and that attempts to cheat the system are being tackled in a much more vigorous way.

26.  It is clear that this scheme has not received the close management and supervision that it deserves. The most damning aspect of the Department's handling is the extent to which key requirements of the scheme were repeatedly ignored, over a long period of time. Non-compliance was not confined to unscrupulous claimants—there is evidence that Departmental staff were at times complicit in turning a blind eye to the rules. As a result, the integrity of the scheme has been undermined. With non-compliance often leading to overpayment of premium, we can only conclude that the Department has been failing in its duty as custodian of the public purse.

27.  We want to emphasise that a '£' of EU subsidy is as much taxpayers' money as any other form of voted money—this Committee makes no distinction between the rigorous safeguards we expect to see operated for EU subsidies and any other form of grant payment. The Department must be in no doubt that we expect all of its schemes to be administered in line with best practice.

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Prepared 18 December 2003