Examination of Witnesses (Questions 140-159)
DR DAVID
LONG, MR
PETER SCULLY,
MR IAN
GOOD, MR
GAVIN HEWITT
AND MR
IAN SHEARER
8 DECEMBER 2004
Q140 Mr Walter: I am just trying to get
a handle on the figures. To what extent is this excise duty fraud
totally domestic? Is any of it totally domestic?
Mr Good: What we are talking about
principally is domestic duty; it is where duty is not being paid
in the UK market. What probably would be happening would be that
someone would sell, let us just take our company, we would sell
to another company in warehouse X. That would be sold without
paying duty. The expectation would be that when that company were
putting it onto the shelves, they would pay duty and that would
be gathered in the normal way. The problem would tend to be where
that company, not necessarily that company, but a company in that
warehouse, was selling onto another party who was not paying duty
and was perhaps saying "I`m now selling it to France"
and it was coming back in without duty being paid.
Q141 Mr Walter: So basically you as an
industry are losing control of the goods.
Mr Good: Correct. That is one
of the reasons why we are as keen as the Customs and Excise and
the government to stamp out fraud.
Mr Shearer: The big frauds of
the 1990s were the so-called outward frauds where it started in
a warehouse, a third party warehouse, and then it went off to
the continent allegedly, but disappeared into the UK market.
Q142 Mr Walter: It never actually went
to the continent.
Mr Shearer: It never actually
got there. Then huge controls were put in place around about 1998
to stop that type of fraud and we believe that those controls
were largely effective, though there have been one or two instances—
Q143 Mr McFall: Give us a flavour of
those controls.
Mr Shearer: The warehouse controls
were significantly improved. In the mid-1990s Customs had possibly
been approving one or two people as warehouse keepers whom they
perhaps should not have been approving and they clamped down on
looking at what these warehouse keepers were doing in their warehouses.
It is really just all about effective oversight of the warehouse.
Q144 Norman Lamb: Are you talking about
the London and City Bond?
Mr Shearer: There have been one
or two well-known cases.
Q145 Norman Lamb: That is still in place
and still doing business.
Mr Shearer: It is a very large
and successful third party warehouse and it is still widely used.
I do not think there is any suggestion that it is fraudulent at
the moment. But anyway, when that fraud was stopped, there was
a risk of this other type of fraud called inward fraud where the
stuff goes out to the continent, then comes back in again and
then disappears. Customs picked up on that in around about 2000-01
and the secret to that is just putting more intelligence-based
controls at the ports. John Rocques, who investigated all this
in about 2001, said the only way to do this was to put controls
at the ports. Customs have done that; in around about 2001, they
put a whole lot more people in the ports. We help those people
because they phone us up and say "What do you know about
this brand or that brand". That has led to this decline in
seizures at the ports that I reported, so we think the lid is
on that type of fraud as well.
Q146 Mr McFall: It was John Rocques who
suggested duty stamps, was it not?
Mr Shearer: It was among his recommendations.
Q147 Mr Walter: May I just get a quantification?
May I just look at the, if you like, cross-border fraud and try
to get a quantification on that and the white van trade and so
on? How much of that is through the corner shop as you have described
it and how much is off the back of a van or through unofficial
networks and so on? I have heard evidence, not in your industry
but in the tobacco industry and we are going to hear evidence
from the tobacco manufacturers later in this inquiry, that in
terms of hand-rolling tobacco most of this is out of the back
of a van on a Friday night. How much of that is there in the spirits
industry?
Mr Hewitt: You need to look at
where the spirits are sold in the UK. About 70% is in the supermarket,
the big supermarkets where the supply chains are very tightly
controlled between the producers and appearing on the shelf. Fifteen
per cent is in the controlled off-licences, the off-licences which
are controlled by the big companies and where the supply chain
is very, very tightly controlled. We do not believe that there
is very much fraud at all within those tight supply chains. That
leaves, at maximum, 15% for the corner shop. As Ian said before,
on the figures which they produced last year in the PBR at 16%
of £600 million, every single bottle sold, and that was the
equivalent of 200,000 bottles a day, was going to have to be illegitimate
in the corner shop, that is had escaped duty.
Q148 Norman Lamb: What about sales to
pubs and clubs? Does that not happen?
Mr Hewitt: This is another form;
there are other problems associated there.
Mr Good: That is the difference
between the on and the off trade. Gavin is talking about the off
trade. There is the on trade, which is selling to the pubs and
that would tend to be done through wholesalers, cash-and-carries.
Q149 Mr Beard: What steps do you take
in the industry to vet the people who are driving the lorries
or running the warehouses, to make sure they are bona fide
people? In the London bonded warehouse which has just been referred
to, some of the people involved there had criminal records.
Mr Hewitt: Companies who have
controlled supply chains know exactly who it is they are using,
whether it is Edrington, Diageo or Allied.
Q150 Mr Beard: In the past they have
not done, have they?
Mr Hewitt: They do.
Q151 Mr McFall: Could you tell me, when
you lose control, at which stage you lose control? I think that
is what Nigel is getting at.
Mr Good: When you say lose control,
we always know the bottle, because it has a lot code number on
it. On the back of the label there will be a lot code number which
will say when that was bottled, the time it was bottled, that
would lead to a case and the case is then controlled. So we can
control the bottle. What we cannot do is control it once it goes
from our warehouse or our distribution company's warehouse to
the third party. At that point, the third party can either quite
legitimately put it onto its shelf, quite legitimately sell it
onto another party. There is nothing to stop him doing that, but
what we have to hope is that when he sells it on to another party,
if he is selling it duty paid there is not a problem, if he is
selling it under bond, we need to be sure that the warehouse that
he is selling it to has the same controls as the original warehouse.
Q152 Mr Beard: If we are just talking
about when it is under bond, it would not take a lot to vet the
people properly who are handling it.
Mr Good: Let us talk about guarantees.
Mr Hewitt: What we as the industry
had proposed to Customs was that most of the fraud was coming
and produced out of third party warehouses, not out of the primary
producer and the distributor. Those third party warehouses, in
our view, were not being adequately controlled by Customs.
Q153 Norman Lamb: Were not or are not?
Mr Hewitt: They were not being
adequately controlled and we still believe there are aspects which
are still not being adequately controlled. I use one example and
this is within the last year, a Liverpool bond third party warehouse
where I have been told that one of the directors of that company
has a criminal record for fraud and that bond is still operating.
Q154 Norman Lamb: Outrageous, is it not?
Mr Hewitt: That is a fact and
that is a question of control by Customs.
Q155 Mr McFall: Yes, but is it not a
question for the industry as well, for the industry to alert Customs
to check what is happening?
Mr Hewitt: Yes; absolutely.
Mr Good: I think the other thing
is that legitimate companies, the Allieds, the Diageos, the Pernods,
the Edringtons, the Grants, these kinds of people know that because
we have intelligence on which warehouses we would not send our
goods to and we would not think of sending our goods to that warehouse.
Q156 Norman Lamb: There was a period
in the 1990s, which went on for quite a long time, when we knew
that massive frauds were going on and yet the products were still
going through those warehouses.
Mr Good: Yes, but they were not
going direct to those. That was the point. We were selling it
to them.
Q157 Norman Lamb: I appreciate that,
but you could see what was happening, because you were tracing
your goods.
Mr Good: Yes.
Q158 Mr Walter: I just want to try and
get a quantity. We have talked about the measurable fraud, but
what is the black market? How do you know how big that is of the
people who are either selling direct to the consumer into the
back door of a pub or a club or the restaurant or whatever? How
big is that market?
Mr Hewitt: It goes back again
to the estimates of fraud and the basis on which you calculate
that fraud and there are different data sets which have produced
different figures.
Q159 Mr Walter: What do you think it
is?
Mr Hewitt: We think the figures,
obviously working on the GHS, the General Household Survey, together
with the consumption, together with the clearances, taking all
that together, indicate that fraud at the moment is in the region
probably of 2 to 3% maximum. Maybe even less, but I am willing
to accept that there is fraud and let us put it at that. We believe
that it is not even at 7%. That is because we are looking at an
official government set of statistics, using that in exactly the
same way as Customs and Excise are using a different set of statistics,
hence the ONS study of which is the right data set to use. We
are in a difference now between a very low percentage figure,
let us accept 2 to 3% or less, and the 7% which Customs are now
using.
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