Select Committee on Foreign Affairs Written Evidence


Letter to the Clerk of the Committee from the Head of the Parliamentary Relations and Devolution Team, FCO, dated 5 June 2006

FRAUD IN ULAANBAATAR

Dear Steve,

  On 24 May the British Embassy in Ulaanbaatar, Mongolia, dismissed 11 of the 12 locally engaged (LE) staff employed there. An investigation carried out by the FCO's Financial Compliance Unit (FCU) concluded that the local staff had colluded, without the knowledge or participation of any of the three UK based diplomatic staff, to under-declare their Social Insurance (SI) contributions. They did this by using Embassy stamps without authority on a letter sent to the Mongolian authorities purporting to be from the Embassy. Although the Mongolian SI office was no doubt the intended victim of this deception, the Embassy as the employer is liable to make good the £12,500 shortfall in employee contributions: the employer has a legal responsibility to remit employee contributions to the authorities, whether or not they have been deducted from the staff's pay. This has resulted in a total loss to the FCO of approx £20,500 (£12,500 underpayment and £8,000 penalties). The FCO is investigating legal action to recover these losses from the former staff of the Embassy.

  The deception came to light when the Embassy reviewed its procedures for payment of SI contributions. This followed on from a review of Income Tax deductions. This earlier review arose from routine request, in December 2004, from the FCO to all diplomatic posts requesting them to ensure that they were following local regulations in regard to the deduction of LE staff Income Tax. Discussions between the Embassy and the Mongolian authorities took place, and by May/June 2005 it was apparent that the method by which LE staff Income Tax and SI contributions were paid was not in accordance with local regulations. This was rectified in September 2005. The Embassy has no liability under local law for past income tax due but not paid by the staff, should the tax office conclude that was the case prior to September. A liability does however arise in respect of employees' SI contributions due. The Embassy after September began a review of SI payments, during the course of which the above deception was discovered.

  In the course of discussions with the SI office, the SI office asked the Embassy to provide salary details dating back to January 2003 to enable them to review contributions. As a result of this request, Embassy diplomatic staff discovered that monthly reports had been sent, purporting to be from the Embassy, to the SI office showing falsified staff salaries and SI contributions.

  FCU have established through interviews with all LE staff that in January 2003 the LE staff held a meeting (without the participation or knowledge of UK based staff) to discuss SI contributions. At this meeting the LE staff agreed to make it appear to the SI office that the 19% employers' contribution was in fact a 29% contribution comprising the 19% employers' SI contribution and the 10% employees' contribution. Correspondence was fraudulently sent to the local SI office by an unknown member of the LE staff to give effect to this deception.

  Mongolian employment law allows the Embassy to dismiss staff for such an offence, both in respect of willful misconduct and for committing a criminal act. In line with the FCO's zero tolerance policy, the Embassy therefore proceeded to do so in respect of the 11 staff who had participated in the deception. Local law also requires that the Embassy should report any criminal action to the competent local authorities. This has been done. The FCO has the intention to pursue civil actions to recover the losses from the former staff, and the practicability of doing so is currently being investigated.

  I am copying this letter to Nick Wright at the Public Accounts Committee, and to Martin Daynes at the NAO.

Chris Stanton

Parliamentary Relations and Devolution Team





 
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