Examination of Witnesses (Questions 40-59)
SIR MICHAEL
JAY KCMG, MR
RICHARD STAGG
CMG, MR RIC
TODD AND
MR DAVID
WARREN
28 JUNE 2006
Q40 Mr Hamilton: Sir Michael, when
you responded, I think to our last report, on your Annual Report
2004-05, you said to us on further plans for closures of posts
or embassies that there are, and I quote: "currently no plans
for further post closures". I wonder what rebalancing you
foresee in the global network as the strategic priorities set
out in active diplomacy change and develop? How can we do that
without further closures?
Sir Michael Jay: You can do that
partly by rebalancing the operations within posts so they focus
more on the new priorities, for example having more people operating
on climate change as a new priority than we have had in the past.
That would be one way of doing it. I think I was probably talking
about sovereign posts there. We do, of course, still have a number
of consulates general, deputy high commissions, and there is an
option open there to try to reduce some of our subordinate posts
and to transfer the resources from them to the priorities elsewhere
in the network. That would be another possibility. Of course,
these are issues we are looking at now very actively in the context
of the Comprehensive Spending Review on which there is likely
to be, as I understand it, an initial report before the recess.
Under that Comprehensive Spending Review we are looking at a zero-based
review of certain aspects of our operations, including our European
posts. The issue there is are there ways in which we could release
resources from within our European network by more efficient working,
for example, perhaps by outsourcing certain operations which are
now done within missions or perhaps by transferring resources
from subordinate posts to other parts of the network. That is
something we are considering at the moment.
Q41 Mr Hamilton: The quote I have
got says that there are "currently no plans for further post
closures". It does not mention particularly sovereign posts,
but I accept what you say. Can I ask you about a specific post
though, because I think it is of some relevance. Do you know when
we are likely to have an ambassador in Podgorica?
Sir Michael Jay: At the moment
we have one local staff member, I think, in Podgorica and he is
likely to be replaced by a small mission with one permanent UK-based
diplomat as ambassador. I do not know exactly when that will be,
but a decision has been taken to do that in view of a judgment
of the importance of our relations with Montenegro as it becomes
independent. The rationale for that is we have invested huge amounts
of resources in peace and stability in the Balkans and believe
that it would make sense in that context to have a small mission
led by an ambassador in Podgorica and also that we would expect
there to be a substantial number of British visitors as that becomes
part of the Adriatic tourist zone, so we would expect there to
be quite important consular activity there too.
Q42 Mr Hamilton: So pretty soon?
Sir Michael Jay: Pretty soon.
I do not know exactly when.
Q43 Mr Hamilton: Within the next
12 months?
Sir Michael Jay: Yes, I would
certainly expect so.
Q44 Andrew Mackinlay: Twelve weeks
or months?
Sir Michael Jay: Months.
Q45 Sir John Stanley: Sir Michael,
can you tell us of any other embassy or high commission in the
world which is staffed by one UK diplomat?
Sir Michael Jay: I would have
to have notice of that, but there certainly are some. [4]
Q46 Sir John Stanley: Could I ask, when
our one diplomat goes on holiday, who takes charge of the embassy?
Sir Michael Jay: He would be supported
by local members of staff who would take charge of it, that would
be the normal practice. This does happen. It would be great to
be able to have more people there, but we have to limit our representation
to the number of people we have got available. Clearly, that would
be reviewed depending on the nature of the operation or the nature
of the work there. That would be how we would start.
Q47 Mr Hamilton: Clearly, we could
probably spend the whole afternoon talking about representation,
but I want to move on to talk about asset sales because this Committee,
as you know, has taken a strong interest over the last few years,
and certainly our predecessor committee in the last Parliament
examined it very carefully and, indeed, had a special session,
I think it was in effect a sub-committee of the Foreign Affairs
Committee, to look into the specific sales in San Francisco. You
may remember that controversy. For example, by selling off part
of the compound in Bangkok, I understand you achieved five years'
worth of asset sales by that one sale. I do not know if that is
true or not. Are you going to stop selling off some of the family
silver?
Sir Michael Jay: I am going to
ask Mr Stagg to answer some questions on this, if I may, Mr Hamilton.
Let me start by saying that I am not sure I would characterise
this as selling off the family silver, though I know this is an
issue which has been of great interest to this Committee. I think
any organisation as complex as ours with assets around the world
is going to have to be constantly looking at those that we have
and those that we may no longer need to ensure that we have the
buildings around the world, whether they are embassies or residences,
which are fit for purpose. There is a constant process of active
asset management which will inevitably involve sales from time
to time because that is proper, good, prudent and sensible management.
The issue, of course, in addition to that is do we have asset
sales targets that we are expected to meet. I will ask, if I may,
Mr Stagg to comment on how far the sale of part of the compound
in Bangkok will affect our existing asset targets, but I think
I should say that there is a proposal as part of the Comprehensive
Spending Review that we should have a new target—every government
department has a target—of disposing of £140 million
worth of assets over the period of the next spending round. [5]The
question of asset sales will, I think, inevitably become an active
one again.
Mr Stagg: As Michael says, the
Treasury, going forward, is very focused on asset recycling across
the public sector and it is a particular issue for us at the Foreign
Office. They have proposed to us that the right figure should
be £140 million in the case of the FCO estate. In terms of
our historical asset recycling, the target set in the previous
spending round will now come to an end because the Treasury, through
this process of the Comprehensive Spending Review, added on a
year to the last cycle effectively in which we do not have a new
target. Our view is whatever target turns out to be agreed with
the Treasury in due course, and we will have to have a target
just like other government departments, that should include the
money raised by selling off part of the compound in Bangkok which
raised, as you know, in the order of £50 million. From our
point of view, it was a very good sale to make at a good time.
Estate professionals were saying to us it was a good moment to
have sold and we managed to hedge the sale so as to add £2
million to the value we got against a declining currency at the
time. I think that we are going to be able to get all we want
on the site in Bangkok for our effective embassy operations and
the bit we sold off was one that was, for us, the least valuable
part of the compound, so I think it has been a quite a good outcome.
Q48 Mr Hamilton: Can I put this to
you, that very often you can decide the value of a particular
asset in monetary terms, in local economic terms and what it will
fetch in terms of bringing that kind of revenue in, but sometimes
you cannot really attach a value to the prestige that site gives
us within that country for this nation's representation. I am
thinking of, for example, Cape Town. Cape Town is not the main
residence, is it, Pretoria is the main residence? Cape Town is
absolutely valuable because when we were there we saw that half
the government came to events that the British High Commission
organised. If you had any other site, you simply would not get
not just the kind of prestige but the attendance from useful,
important people that we need to connect to. I wondered whether
you took any account of the prestige value to this country of
the site itself rather than simply its financial value.
Sir Michael Jay: Yes, we do, very
much so, Mr Hamilton. There are one or two other examples at the
moment of places where we have indeed decided that the right thing
to do is to keep and develop a prestigious residence because it
is clear that in the years ahead in a country that is really important
to us that is going to be an asset of unquantifiable but real
value. That is part of the equation, but there will nonetheless
be times when we have to make a judgment, as in the case of Bangkok,
that it is better to realise part of a compound and then to use
that money for investment, say, in somewhere like Podgorica where
we may need a new embassy and a new residence.
Q49 Mr Keetch: Sir Michael, can I
turn to consular services because you mentioned earlier changes
in the last five or 10 years on foreign policy and Britain's interests.
There has also been a step change in British travel overseas.
It is now common for people to take gap years, which certainly
when I was around we did not do, and people are travelling more
and more and more, and in a dangerous world that is clearly making
them more at risk from harm. Do you think that sometimes British
citizens overseas have an unrealistic expectation of the kind
of support that they may get or, indeed, their families back home
might get when they run into trouble which perhaps they themselves
should have been more aware of and more prepared to deal with?
Sir Michael Jay: I think sometimes
they do, yes. Let me say first of all that you are absolutely
right, the nature of the operation in which we in the Foreign
Office are engaged now has changed markedly over the last few
years. There are now 65 million visits a year by British citizens
and a proportion of those are bound to get into trouble and get
into difficulties and will indeed require and deserve, and we
are very keen to give them, our support. Then, of course, there
are the terrorist attacks, the hurricanes, the natural disasters,
which can strike at any moment and cause real difficulties for
British citizens overseas. The nature of the operation has changed
and we have responded over the last few years in order to meet
that. I do think that there has been a risk of excessive expectations.
It was against that background that the last Foreign Secretary
published a guide called Support for British Nationals,
which was a guide which was published on 21 March which was the
first time the government had set out comprehensively what citizens
can expect from consular services overseas, but also what they
should not expect from consular services overseas, otherwise there
was a risk of unrealistic and unrealisable expectations which
would then cause people inevitably to be disappointed. That was
as a result of very wide consultation, including with this Committee,
and I think it has been a very valuable document.
Q50 Mr Keetch: I certainly welcome
that, and the Committee welcomed it at the time. There is clearly
a difference between what you might expect to occur to you on
your travels and an event, for example, like Hurricane Katrina
or, indeed, the Tsunami or, indeed, a terrorist attack. There
was some criticism of FCO officials after both Katrina and the
Tsunami. When dealing with an incident like that where you have
to bring people in from other posts to deal with a mass incident
as opposed to an individual incident, do you think you are in
a better position now to respond to an event like that than you
were perhaps before those tragic events?
Sir Michael Jay: Yes, I do. First
of all, let me say that I think the criticism, particularly after
Katrina, was wholly unjustified, and I want to put that on the
record because I think our people did an extraordinarily good
job in helping people after Katrina. It was very clear to us immediately
after that hurricane season that we needed to change the way in
which we responded in particular to hurricanes. What we have done,
therefore, is to extend the concept of rapid deployment teams.
We have a rapid deployment team now in the United States which
will be able to go immediately to a likely hurricane zone, whether
in the United States, the Caribbean or Mexico, so that we can
get people pre-positioned more quickly earlier and make known
that they are there in order to respond more effectively than
we were able to last time. We are better placed to do that. I
know this has come up in this Committee before, and I know Sir
John Stanley had a very considerable interest in it after the
first Bali bombing attack in October 2002. We have worked very
hard to ensure that we are able to respond more effectively and
more quickly to disasters of whatever kind abroad. We do now have
rapid deployment teams based here in London, in Delhi, [6]in
Hong Kong and in the United States. We are learning with each
emergency—every one is different, you learn lessons from
each one—about how we should try to ensure we have got the
right mix of skills in order to help people who get into difficulties.
Q51 Mr Keetch: It will be very often
the case, will it not, Sir Michael, that it will not just be the
Foreign Office that will be the British department responding
to an event such as that, you might require assistance from the
Ministry of Defence, DFID, the Home Office conceivably in other
circumstances. Are you confident that not only can you co-ordinate
your own people to respond well but also that you can co-ordinate
and take the lead to respond for other departments as well on
behalf of UK plc because it may well be that in response to an
event like Katrina or, indeed, the Tsunami you will need to draw
assets and people from other government departments?
Sir Michael Jay: I think we are
getting better at that. The rapid deployment teams, depending
on the nature of the emergency, will include people from the Metropolitan
Police, the Red Cross, medical staff, people from the Department
for International Development, for example. The rapid deployment
team that went to Pakistan after the earthquake there was a mixture
of Foreign Office people and DFID people and others. One of the
things that we are learning is this has to be a joined-up cross-government
exercise and not just ourselves.
Q52 Sir John Stanley: Sir Michael,
I want to turn to the subject of the adequacy or otherwise of
the Foreign Office's systems of internal financial control. I
need to go back to the fraud at the Tel Aviv Embassy which the
National Audit Office correctly described as "the largest
identified loss by fraud in the Department's history". It
revealed an extraordinary state of affairs where absolutely fundamental
internal financial controls were not followed, it showed cash
advances being made on the basis of handwritten receipts and your
own Financial Compliance Unit, I quote: "found no evidence
that invoices were ever demanded, seen or authorised by Embassy
staff". The NAO report concluded that: "There were clear
breaches of longstanding accounting procedures". I have in
front of me the letter that your colleague, Mr Todd, sent round
to all sub-accounting officers on 3 November last year, and clearly
you have tried to take corrective action, although I have to say
I was somewhat worried to read Mr Todd's comments to the sub-accounting
officers: "You should ensure . . ." and he goes on,
" . . . that the relevant checks are in place as far as possible".
That seemed to me a very strange qualification. Surely the relevant
checks should be in place full stop and not qualified by "as
far as possible". The key issue I want to put to you is anyone
reading this from any sort of financial background can only come
to one conclusion, and that is that the Foreign Office has not
got in place a system of internal financial control and internal
audit that begins to measure up to professional auditing standards.
Do you agree that is the case?
Sir Michael Jay: I do not agree
that is the case, Sir John. I do agree with everything that you
have said and that the National Audit Office have said about the
fraud at Tel Aviv. That was a very straightforward and quite unacceptable
failure over a number of years of some rather simple procedures
and there is no excuse for that. That is why we have tried to
ensure through a number of measures that that does not and cannot
occur again. I would not draw the conclusion that that means we
do not have adequate internal systems in place. I think it is
a wake-up call for us about the need to be extremely vigilant
about the risk of fraud anywhere in the world, particularly bearing
in mind that we are operating in a large number of countries where
what we would call fraud is the normal way of doing business.
It does require us to have systems in place in each post, constant
visits, some of them announced, some of them unannounced, by our
internal audit people and our Financial Compliance Unit. It also
requires us to ensure, and this is why Mr Todd wrote his letter
and is something I attach a huge amount of importance to, that
every Head of Mission as sub-accounting officer realises that
it is his or her responsibility to ensure that these procedures
are in place. The buck stops at the sub-accounting officer. That
is something which I have been reinforcing every time I see a
Head of Mission before he or she goes overseas. I refer specially
to Tel Aviv and say, "This is what can happen. The simplest
controls failing can lead to a very serious fraud and loss of
public funds and that is not acceptable."
Q53 Sir John Stanley: Sir Michael,
I did not ask you whether in your Department's and your own subjective
judgment you felt there was an adequate financial control system
in place. I chose my words very carefully. I asked you whether
you were satisfied that you had an internal financial control
system and an internal audit system that came up to professional
standards. Can I ask you further, in the time you have been the
Permanent Under-Secretary have you at any point asked a professional
firm of auditors to come into your Department to examine your
system of internal audit and internal financial control and to
produce a report to you on that?
Sir Michael Jay: I do not think
we have done that. I will ask Mr Todd to comment in a moment.
What we have done is to strengthen very considerably the Audit
and Risk Committee. When I took over this job we had something
we called an Audit Committee and I expanded that pretty early
on to be an Audit and Risk Committee. It is chaired by one of
our non-executive directors at the moment, Alistair Johnston,
Vice-Chairman of KPMG, who is bringing a degree of rigour to that
Audit and Risk Committee which we have not had before. We work
extremely closely on all financial management and fraud issues
with the National Audit Office and if at any time we see weaknesses
in our systems we work to strengthen them.
Q54 Sir John Stanley: I would like
to put it to you that from the evidence that is in front of us
it certainly would appear to me to be glaringly necessary for
your Department to commission a leading firm of auditors to examine
your system of internal financial control and internal audit and
to present you with their conclusions as to its adequacy. That
seems to me to be an absolute minimum requirement that should
be upon your Department.
Sir Michael Jay: I will certainly
consider that, Sir John. I would like also to discuss it with
the National Audit Office to see whether they would regard that
as something which we need to do given the state of our internal
audit arrangements at the moment.
Sir John Stanley: I look forward to you
or your successor coming back to the Committee on the conclusions
you have on that. [7]
Q55 Chairman: Sir Michael, I am surprised
by your answer because to my own knowledge the Foreign and Commonwealth
Office has insisted that non-departmental public bodies, like
the Westminster Foundation for Democracy and other bodies which
get money from the FCO, are subjected to more rigorous processes
of audit with outside people as well as internal audit. If it
is good enough for the NDPBs which are funded through the FCO,
why is it not good enough for the FCO itself?
Sir Michael Jay: That is why I
would like to discuss it with the National Audit Office because
the decisions that we have made in relation to some of our NDPBs
were taken in consultation with the NAO and we should do that
as far as our own internal arrangements are concerned.
Q56 Sir John Stanley: Sir Michael,
could I just ask you to consider a further dimension to this.
The point I am putting to you is not one which is something that
I think should most clearly apply to your Department, these sorts
of arrangements to have professionally acceptable standards for
internal financial control apply, of course, to every single company,
whether quoted or not, in this country but, just as important,
for example, there are the most rigorous requirements of this
sort that apply to every single pension fund and, indeed, every
single registered charity in this country, including very small
charities. If these sorts of requirements of professional auditing,
professional financial control, apply to charities, small charities,
up and down the country then, for goodness' sake, surely they
should apply to the Foreign Office.
Sir Michael Jay: We do have professional—
Q57 Sir John Stanley: You have not
had anybody in to tell you whether your systems come up to a professional
standard.
Sir Michael Jay: We have the National
Audit Office whose job it is to give us advice on that. We are
constantly in touch with them. We have our own Audit and Risk
Committee. May I ask Ric Todd if he wants to add on this point?
Mr Todd: We do have a professional
internal audit department headed by a professional auditor who
was hired from the private sector. We have a Financial Compliance
Unit which contains people who are professionally trained in financial
compliance. We have an Audit and Risk Committee which is chaired
by a professional accountant, Vice-Chairman of KPMG. We have the
NAO as our external auditor. We are very happy to discuss with
the NAO whether they share your opinion that we need to be reviewed.
Q58 Sir John Stanley: All I would
say to you is if it was a satisfactory system of internal audit
this sort of fraud committed in this sort of way, payment out
of cash on the basis of handwritten receipts, could not survive
any possible scrutiny by a professionally qualified and professionally
performing audit system. It could not survive for at the most
a calendar year, let alone survive for some 10 years as happened
here.
Sir Michael Jay: I am not in any
way defending what happened in Tel Aviv.
Q59 Mr Purchase: It has been a very
gentlemanly exchange, if I might say so. I have in front of me
four instances and we are talking in excess of one and a half
million pounds' worth of fraud. I speak as a humble representative
of the taxpayers of this country and of my constituency. My first
duty is to ensure the safety of the nation. My second one, surely,
is to ensure the safety of the way in which its taxes are spent.
I find that absolutely, completely unacceptable. I am amazed that
there is no real sense of urgency and you are not able to say
to us today, or any of your staff, "We have seen to it".
Discussions with the NAO, I find that incredible, I really do.
You should have seen to it by now. I think this Committee has
to say today, Chairman, that this is an unacceptable position.
I understand, I worked in the private sector long enough to know
there is nothing the working man cannot beat—nothing—but
you limit it and all around the world there will be opportunities
for people to take bits and pieces out of it here and there, and
that is why it needs to be tighter. In the case of huge amounts
of money like this you should have attended to it immediately,
never mind discussing it with anybody else. You are the senior
manager, it should have been done. I find no excuse is acceptable
that that has not been attended to. If you had told me today,
"What a mess we had but we have done it", I would have
been completely happy, but you have not told us, you have told
us who you are talking to, who has done this, who has done that,
and in the end, as far as we know, there is another one brewing
somewhere else.
Sir Michael Jay: I was responding
to a specific question from Sir John Stanley about whether we
should have external auditors.
4 Ev 38 Back
5
See Ev 38 Back
6
Correction by the FCO after the Evidence Session: We are working
to set up a regional Rapid Deployment Team in New Delhi by the
end of 2006. Back
7
See Ev 38 Back
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