Examination of Witnesses (Questions 320-339)
HM REVENUE &
CUSTOMS
22 MARCH 2006
Q320 Lady Hermon: Was any form of
compensation paid to those traders who went out of business?
Mr Gerrard: Not that I am aware
of.
Q321 Chairman: What is the percentage
of illegitimate fuel?
Mr Gerrard: HM Revenue and Customs
are one of the few fiscal authorities in the world that will estimate
the size of the revenue loss that we have so I can tell you that
in cigarettes it is currently 16% across the UK. In Northern Ireland
I cannot tell you what the volume of illegal fuel is, be that
smuggled or laundered, but I can tell you what the volume of fraudulent
fuel and legitimate cross-border shopped fuel is, that is people
going to visit relatives in the south, filling up with fuel and
coming back, is. We estimate there is something like £245
million that is lost in Northern Ireland as a result of fraud
and shopping. That is currently about 30% of the market. That
is down from over 40% of the market four years ago but it is still
a significant share. What element of that £245 million is
fraud I am afraid I cannot tell you but I would suggest it is
a significant proportion.
Q322 Lady Hermon: As a point of information
I would like to clarify some evidence that was given on another
occasion. The illicit fuel that is moved around Northern Ireland,
is it primarily moved in tankers marked with well known brands?
Do these organised, sophisticated criminals have lorries disguised
as a legitimate brand? Would you say that there are more illegitimate
branded lorries and containers on the roads than legitimate ones?
Mr Gerrard: I think it is a mixture.
Certainly we are well aware of illegal fuel being moved in legitimate
road tankers that are built just to move fuel. Equally I am well
aware of instances where fuel is moved in vehicles that are not
intended to move fuel. I think it depends on what the organisation
perceives as the risk. Certainly five years ago they were moving
tankers and they quickly worked out that we were stopping as many
tankers as we could so they moved to concealment. So I think it
is a mixture; it depends on what they think they can get away
with. At present a large volume of fuel is moved in informal vehicles
rather than legitimate road tankers.
Q323 Sammy Wilson: We had evidence
that—and we know this has been the case in Northern Ireland—this
has been going on for years. The retailers as far back as 1996
met with you and highlighted the effect of this and I notice that
in your submission to us it was not until 2000—despite all
the evidence that was available to you—that you increased
the number of officers you had working on this from 25 to 160.
Why did it take so long, given all of the evidence? The second
question is that in paragraph 17 you have given us what, on the
face of it, appears to be an impressive commentary that between
2000 and 2004 you have dismantled 13 criminal organisations, seized
eight million litres of fuel and blown up 65 laundering plants.
Given that the revenue loss that you have estimated as £245
million and even assuming that 60 pence per litre was taxed, that
means that there is 400 million litres of illegal fuel per year
and you are seizing two million. It is hardly a success, is it?
Mr Gerrard: I will take the first
question first. I have been working in this field for a long time.
I started in April 2000 and on the evidence we had then we took
action very quickly. I have to say that I am not clear what the
evidence was earlier than that but certainly I think this Committee
in an earlier form took evidence on that in 1999 and part of that
response was the action we took in 2000. In terms of our success,
the only point I would make is that the ultimate success measure
that we must use must be how much fuel is legitimately sold in
Northern Ireland. That has gone up by 22%. There is significantly
more fuel legitimately sold in Northern Ireland than there was
four years ago, 22% more. We did that through a range of interventions
and I think that as a fiscal authority of which we have a law
enforcement arm we have an awful lot of tools available to us
that are not necessarily criminal justice tools. So we can, for
example, seize fuel, we can impose assessments, we can control
the supply chains of things like red diesel and kerosene. There
are a whole range of interventions that we make and I think judging
us just on the outputs on those kinds of figures does not really
capture the whole picture. The ultimate measure must be: is the
legitimate market healthier than it was four years ago? The answer
is yes. Can we do more to make it healthier still? You are absolutely
right, we can and we should and we are determined to do so.
Q324 Sammy Wilson: The fact that
99.5% of the illegitimate fuel is not being seized by you hardly
marks a success against the illegal fuel.
Mr Gerrard: I take your point
but as I say I think we need to be measured by the impact we have
on the market that we face, the illicit revenue loss, and that
is going down. I am sure we can do it better and quicker, but
I think the ultimate measure must be on our impact.
Mr Toon: One additional point
is that of that £245 million only a proportion of that is
actually illicit fuel. The point that Paul made before is that
also included in that is legitimate, perfectly legal, cross-border
shopping. The 99.5% is probably a significant over statement of
the position.
Q325 Stephen Pound: Mr Gerrard, you
referred to a 16% illicit market share UK-wide in cigarettes which
equates at about two billion. Can I ask the obvious and what may
seem absurdly na-£ve question, why can you not make a Northern
Ireland estimate?
Mr Gerrard: I will answer that
in my layman's way. I have economists and statisticians back in
the office who will be pulling their hair out at the thought of
my providing you with this answer. We estimate the size of the
illicit market using a technique called gap analysis and what
we do is that we estimate the overall theoretical consumption
using survey data from things like the General Household Survey
and the Omnibus Survey. We then take away what we collect—our
receipts—and that gives you a gap. That gap is made up of
both fraud and shopping. We can do that for Northern Ireland for
the consumption of oils but we cannot then do that split for fraud
and shopping. For the UK for cigarettes we have this gap. We can
then split that between fraudulent (because we have an estimate)
shopping. We cannot estimate the cigarette consumption in Northern
Ireland as we do not have data releases for receipts as they relate
to Northern Ireland. For those two we do not have the base data
specifically collected in that way by the statisticians in order
to be able to make that assessment.
Q326 Stephen Pound: Your colleagues
in London frequently mount a very skilful operation now where
they visit football grounds and they pick up all the empty cigarette
packets at the end of a football match. The Glentoran Oval is
a pretty large football ground and it is pretty well attended
and well supported, have you ever thought of doing that? It does
give a body of empirical data and apparently there is a fairly
accurate read-across in terms of penetration. Have you ever tried
that or would you prefer not to answer that in public?
Mr Gerrard: The pack swap survey
carried out by the Tobacco Manufacturers Association does exactly
that. They do a pack swap, approaching people giving them a voucher
for a new packet if they give them their old packet. There is
quite a decent corollary between their estimates and our estimates.
I am not aware if this sample size is big enough in Northern Ireland
to allow that to do Northern Ireland, but I would be happy to
discuss with them.
Q327 Stephen Pound: Following on
from Lady Hermon's point about the actual point of sale, in my
experience in buying cigarettes in Northern Ireland I was asked
if I was interested in "cheapies" and it took me quite
some time to work out exactly what was being offered me, but they
were ordinary legitimate traders who had cheap cigarettes underneath
the counter. Is that a typical form of sale or are we more in
the realm of the street corner trader? How are they actually sold
and is there any evidence that the sellers to the ultimate consumer
are complicit in the process?
Mr Gerrard: It is certainly unusual
in our experience today. It is unusual for illegal cigarettes
to be sold through legitimate tobacconist retail sites. The vast
majority of illegal sales of cigarettes throughout the UK are
through informal networks, that would be family circles, social
circles (pubs and clubs), car boot sales, the work place, often
on the shop floors of big factories and also on street corners.
Certainly in places in London and throughout the UK there are
street sellers selling cigarettes. The Holloway Road is the most
infamous example here in London. That is the typical experience,
including in Northern Ireland. Certainly if a retailer is selling
illegal cigarettes they run some pretty serious risks. The risk
getting a criminal record because it is an absolute offence to
sell non-fiscally marked cigarettes and there is a risk of a £5,000
fine. With that they will lose the lottery terminal if they have
it; we can oppose certain licences necessary to sell other products.
They are running a significant risk.
Q328 Stephen Pound: In terms of our
inquiry, if there was street selling being done in Northern Ireland
on the Holloway Road basis, there would be criminal gang involvement,
but the Holloway Road cigarette selling is almost entirely dominated
by Kosovo and Kurdish gangs who pay their local protectors. Are
you saying there is very little street selling or is there some
street selling and, if so, is it done by agreement with local
organised crime?
Mr Gerrard: There is undoubtedly
some street selling in Northern Ireland, as there is in the rest
of the UK. Those street sellers may appear at a relatively low
level, but of course they are being supplied and that supply chain
will ultimately and undoubtedly lead back to organised criminality.
It will not be an amateur operation. Our experience in the UK
is that those street sellers are supplied by organised criminality.
Mr Toon: The supply chain for
cigarettes has become stronger, more heavily organised over the
last few years. During the first few years of the tobacco strategy
I think we took out an awful lot of the smaller scale importers
and distributors and we now find ourselves tackling what are very
large, complicated and very organised networks of criminals. That
applies in the UK as a whole and it applies in Northern Ireland.
Q329 Stephen Pound: In that evidence
are you differentiating between smuggled cigarettes and counterfeit
cigarettes? Is there a difference?
Mr Gerrard: In terms of the duty
loss no there is not.
Q330 Stephen Pound: I was thinking
in terms of the providers and those who oversee the operation.
Mr Gerrard: When we first started
this strategy back in March 2000 the vast majority of illegal
cigarettes—about 16 billion in 2001—that came to the
UK were genuine UK manufactured cigarettes that had been genuinely
exported abroad, had been bought up overseas by smugglers and
then smuggled back in. They were a genuine product; they looked,
tasted and were genuine products. Increasingly now—I think
it was 48% of our seizures last year—they are counterfeit
cigarettes. When I talk about illicit cigarettes I talk about
both genuine smuggled and counterfeit smuggled, but of course
counterfeit cigarettes carry significantly higher health risks.
Smoking is not good for you—it kills 120 thousand people
a year—but counterfeit cigarettes are even worse for you.
They contain more arsenic, more cadmium and more lead; they have
more tar and produce more carbon monoxide.
Q331 Stephen Pound: Will people intentionally
buy counterfeit cigarettes?
Mr Gerrard: If they are sold on
the street corner or at the car boot sale, a packet of cigarettes
for £2.50 or £3.00 they will think they are buying genuine
cigarettes because they look like genuine cigarettes. It is only
when they smoke them that they realise that they taste particularly
unpleasant.
Q332 Gordon Banks: The Committee
recently heard that pre-1993 protection money was clawed back
as a legitimate tax deduction; since that time it has no longer
been the case. What effect has this change since 1993 had and
in particular what kind of impact has this had? How much was being
tax deducted in the first place? What effect has it had on businesses
and on the people who are carrying out the extortion? Have they
changed the levels that they would seek to extort from businesses
because it was a taxable expense and now it is not?
Mr Gerrard: I am afraid I am not
an expert on tax deductible issues. I apologise for not being
able to answer those questions and I would be very happy to provide
a note[1].
Chairman: We can pick that up at a later
session and we would very much appreciate your note.
Q333 Gordon Banks: We have heard
about the 1.4 million seizure in the middle of March and described
by Sean Woodward as being a priority. What would your view be
on the harmonisation of fuel duty across the island of Ireland?
Would this be of benefit and do you see it as a possible solution?
Mr Gerrard: Those are matters
for my minister rather than for me. In terms of the island of
Ireland, because Northern Ireland in oils is unique in that there
is an issue around cross-border smuggling that we do not have
in terms of oils in the rest of the UK, were you to harmonise
duty rights in the island of Ireland then that would stop cross-border
smuggling. However, that would not, I would suggest, stop oils
fraud because then I think the criminality would simply look to
replace that lost opportunity with a new opportunity. You would
still have a differential between road fuel and rebated fuels
and certainly speaking to my colleagues in the Republic of Ireland
they have a significant problem with rebated fuels fraud. I think
harmonisation of duty rates would impact on a specific kind of
fraud in Northern Ireland but it would not solve the oils fraud
problem.
Q334 Gordon Banks: I appreciate that
but it would also undoubtedly free-up a lot of your available
man hours to follow up the then on-going fraud which is part of
the fraud just now.
Mr Gerrard: I think we would be
facing the same criminality. They would be looking to exploit
the rebated fuel issue more in the absence of the ability to exploit
the cross-border smuggling issue.
Q335 Gordon Banks: You would have
the same level of resources to combat one aspect of criminality
and you are saying they would grow to compensate, but in some
ways it is much easier to address the counterfeit fuels than the
smuggled fuels.
Mr Toon: I am not sure that I
would necessarily agree with that. I think that because you are
dealing, particularly in diesel, with market product—green
diesel in the south—if that is smuggled without a laundering
process you have a very easily detectable fraud. You still have
a laundering process; you still have the cleaning of the fuel
to make it useable and invisible, which is precisely the same
as you have with rebated red diesel in Northern Ireland and in
the UK more generally. I am not sure it would actually make a
significant difference. It would make a difference in the cross-border
shopping on the legitimate side and it would make some difference
in terms of smuggling, but in terms of actually reducing the level
of fraud, given that we are still talking about a laundering process,
I would find it hard to see just how much difference it would
really make from an operational point of view.
Q336 Mr Anderson: We have heard from
a number of people at the sharp end of this in terms of the people
you represent and they have said that despite the increase in
numbers in terms of officers and setting up the various bodies
to deliver, the effect of all this put together has not been very
positive. It has been said that the increase in fuel paid for
legitimately could be explained by higher vehicle usage but also
they believe Revenue and Customs have only scraped the surface.
There is a lot of crime going on. There is a lot of resource and
the business of feeding through information to yourselves they
do not believe it is being acted on. Can you comment on that?
Mr Gerrard: The revenue loss figure
that I gave you, the £245 million, as a proportion of the
shared market takes into account increased vehicle usage. The
overall amount of fuel used in Northern Ireland that is not UK
duty paid—shopped, smuggled and laundered—has dropped
from over 40% to under 30% so I would dispute that. In fact I
have had letters over the past few years from petrol retailers
complaining about something we have done but also saying they
have seen their products increase. That is the first point. I
think the second point is that I certainly do not think there
is a lack of will on our behalf. We have devoted significant volumes
of resource for a significant period to do this and we are very
determined to continue to make that impact. In terms of the information
we have seen over the last three years the volume of information
that comes into our Customs Confidential Hotline (which is, if
I can give it a little plug, 0800 595000) increase in Northern
Ireland in relation to oils, but it is still at relatively small
levels and I think one of the things that we need to do with our
joint forum with the industry is to look at ways to get more information
from them. We have a very sophisticated intelligence set up and
we take a lot of information from that, but they are on the ground
at the sharp end and they can get the information and I think
sometimes that does not always get through to us.
Mr Toon: In terms of the core
criminality there are two aspects to this. One is the way in which
we are actually working very closely with PSNI, that we are involved
on a very regular basis—weekly, if not multiple weekly basis—in
dealing with detections which are made of illicit fuel as it is
being transported, moving then to seizure and then taking enforcement
action. That is happening very, very often. In terms of the more
sophisticated criminality, the more organised criminality, I think
that we are beginning to see that it is feeding through in terms
of the kind of figures that Paul was talking about. We are being
able to put out of business in Northern Ireland and elsewhere
some significant players who have been involved in oils fraud
and oils laundering for quite an extended period of time. These
are people who are operating in the South Armagh cross-border
area. We are working very regularly again with PSNI. We are working
regularly with the Assets Recovery Agency and with CAB and the
Revenue Commissioners in the South. We were involved obviously
in the operation which got quite a lot of publicity 10 days or
so ago in relation to Mr Thomas Murphy. There is a lot of that
sort of work being done. We are dealing with some very sophisticated,
very long term criminality and that takes time and a lot of effort.
I do not think that the will or the effort is lacking either in
our agency or indeed any of the others to tackle that problem.
Could we do more with our resources? The simple answer of course
is yes because any organisation can always do more if it has more,
but we, as all organisations, are limited to the amount of resource
available but also limited in relation to the information that
is available to us to act on. As Paul says, there is a limited
pool of information that is coming to us from the legitimate trade
and from elsewhere.
Q337 Mr Anderson: Another suggestion
was that the security forces are not working as well with you
as the retailers would like them to and perhaps you could do with
more officers on the ground. I think you have probably answered
the second part; what about the first part?
Mr Toon: I would think that quite
categorically our operational relationship with the PSNI is better
now than it has been in a very long time. The level of cooperation
is very high; we work very closely on joint activity both in terms
of targeted investigations and in terms of a reaction to low level
fraud. I find it difficult to see how much more cooperation we
could receive from agencies like the PSNI. We also work closely
with the Assets Recovery Agency; that is a growing relationship.
Only a few days ago you saw the Assets Recovery Agency take action
in the High Courts on Malachy Maloy where there was a £1.4
million restraint. That was a referral from Revenue and Customs.
That is direct, effective operational cooperation where we cannot
take an enforcement action because of availability of evidence
but the Assets Recovery Agency is able to have an impact. That
is real co-operation.
Q338 Mr Hepburn: I would just like
to clarify some of the things that have been mentioned in the
last few minutes. Do you routinely check fuel or is it always
lead-based?
Mr Gerrard: We try to work with
as much intelligence as we have but as Donald says there is a
limit to the amount of information available and we do do roadside
work as we call it, particularly with colleagues in the Vehicle
Licensing Agency. We are stopping vehicles without very specific
intelligence and certainly over the last two years we have done
significantly more challenges on the roadside than we have ever
done before.
Q339 Mr Hepburn: What about the testing
of fuels in the forecourts, speculatively?
Mr Gerrard: We will do that, yes,
but for that work we tend to rely on intelligence, intelligence
in the broadest terms and not necessarily intelligence that says:
"The filling station run by Mr X is selling illegal fuel";
we use data that we have as official authorities as to where there
is potential risk and therefore we will go and say, "There
is a risk and we want to satisfy ourselves".
1 See note page Ev 164. Back
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