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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 933-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE THE COMMITTEE OF PUBLIC ACCOUNTS Wednesday 15 February 2006
FOREIGN AND COMMONWEALTH OFFICE RESOURCE ACCOUNTS 2004-05
FOREIGN AND COMMONWEALTH OFFICE SIR MICHAEL JAY KCMG, MR RICHARD STAGG CMG and MR RIC TODD
Evidence heard in Public Questions 1-104
USE OF THE TRANSCRIPT
Oral evidence Taken before the Committee of Public Accounts on Wednesday 15 February 2006 Members present: Mr Edward Leigh, in the Chair Mr Richard Bacon Greg Clark Mr Austin Mitchell Mr Alan Williams ________________ Sir John Bourn KCB, Comptroller and Auditor General, National Audit Office, gave evidence. Mr Marius Gallaher, Alternate Treasury Officer of Accounts, HM Treasury, gave evidence FOREIGN AND COMMONWEALTH OFFICE RESOURCE ACCOUNTS 2004-05 (HC 776) Examination of Witnesses
Witnesses: Sir Michael Jay KCMG, Permanent Under Secretary of State and Head of the Diplomatic Service, Mr Richard Stagg CMG, Director General, Corporate Affairs and Mr Ric Todd, Finance Director, Foreign and Commonwealth Office, gave evidence. Q1 Chairman: Good afternoon and welcome to the Committee of Public Accounts. I am sorry that there was a slight delay in starting due to the division and the fact that we had some private business to resolve. Today we are considering the Comptroller and Auditor General's report on Fraud at the British Embassy, Tel Aviv. We welcome back to our Committee Sir Michael Jay, who is the Permanent Under Secretary at the Foreign and Commonwealth Office. Perhaps Sir Michael you might introduce your colleagues. Sir Michael Jay: On my right is Mr Dickie Stagg who is the Director General for Corporate Affairs and on my left is Mr Ric Todd who is the Finance Director, Foreign and Commonwealth Office. Q2 Chairman: Could we look at the Resource Accounts and turn to the back to look at the report of the Comptroller and Auditor General to the House of Commons concerning the fraud at the British Embassy Tel Aviv? Could you please look at paragraph 10 which tells us that the driver was asked to pick up the letters from the Union of Clerks? Would it not have been clear to somebody in our Embassy that he stood personally to gain from falsifying these rates? Did that not occur to anyone? Sir Michael Jay: May I just make a preliminary point? I should just say that there is a judicial case going on, a criminal case going on in Israel at the moment in relation to this matter and, as I mentioned to you in a letter, there is the possibility that if the hearing is in public now, this could prejudice the outcome of the case and also the chances of restitution. I feel I ought to make that point. Chairman: Actually, I might ask Mr Bacon to comment at this point. We received your request and we decided to hold this hearing in public. Q3 Mr Bacon: Could you confirm, Sir Michael, that Mr Yechieli has pleaded guilty to the charges? Sir Michael Jay: Yes. Q4 Mr Bacon: He has? Sir Michael Jay: Yes. Q5 Mr Bacon: It is hard to see then why a hearing in public of a parliamentary committee should prejudice a criminal trial in Israel where the defendant has pleaded guilty. Sir Michael Jay: This is the advice we have received from our legal advisers in Tel Aviv, that there is such a risk. Q6 Mr Williams: Way back in history you will remember the Wright Affair out in Australia and there was an attempt to take action there. In the House of Commons the Prime Minister of the day, Mrs Thatcher, said that she could not comment on it because it was sub judice. I challenged this with the Speaker on the grounds that sub judice does not apply in courts outside the United Kingdom, as far as Parliament is concerned. The Speaker then ruled that that was correct. Mrs Thatcher had to apologise to the House for having made a mis-statement and we went ahead with our inquiry. Sir Michael Jay: I am in the hands of the Committee; I just thought it right that I should make clear at this stage the advice we have received from our legal adviser in Tel Aviv. Chairman: We shall obviously be extremely responsible. We do not want to prejudice the result of the trial but we do think it is a matter of public interest. We believe it is not covered by the sub judice rules of the House of Commons because a trial will not take place and we have noted the fact that this man has already handed in a confession in any event. Q7 Mr Mitchell: When the lawyers in Israel say it might prejudice the case, what case are we talking about, the criminal case or the civil case? Sir Michael Jay: I believe we are talking about the criminal case here. As I understand it, there are at the moment, though we are clearly not involved in this, plea bargaining negotiations going on. Q8 Greg Clark: The basis of this reluctance and this potential prejudice is that if we were to expose failings in the system under your command, this might be of use to the defendant in the trial. Sir Michael Jay: Yes. Q9 Greg Clark: Would this not be a legitimate thing if actually his offence were mitigated by the failure of controls in the Embassy? Surely it is in the interests of natural justice and in the public interest that this should be available to him in his trial? Sir Michael Jay: Yes, that is a perfectly fair point. Nonetheless, I just felt I should make clear the advice we have received from our lawyer that this could prejudice the outcome and it could prejudice the chance of restitution. I thought that was an issue that this Committee ought to be aware of. Q10 Greg Clark: So you have no view yourself on this. You are just reporting. Sir Michael Jay: I cannot and should not wish to double-guess the view of the Embassy's legal adviser in Tel Aviv. Q11 Mr Bacon: Sir Michael, on the subject of restitution, can I just confirm that of the £790,000 under discussion, the Foreign Office has already written off the chances of getting back £732,000? Sir Michael Jay: No. We would hope that there could be some restitution as a result of the outcome of the trial. Q12 Mr Bacon: Yes, but in relation to the £732,000 paid to the 255 different individuals, I am quoting from paragraph 18, it says "... having consulted their honorary legal advisor in Israel, the Department decided not the seek to recover from locally engaged staff, the overpayments made to in respect of Rest Home payments". I am not sure that is an English sentence, but it is what is written there. "The Department was advised that the chances of success were about even, but that the costs of pursuing restitution claims would be substantial". That refers to the £732,000, does it not? Sir Michael Jay: Yes, it does. Q13 Mr Bacon: So in other words you have basically said you are not going to seek to recover from locally engaged staff that amount, that is the £732,000 out of the £790,000. Sir Michael Jay: That is right. Q14 Mr Bacon: The answer to my question was, in a sense, yes, was it not? Sir Michael Jay: No, it was not, because we would hope that it might be possible to get restitution from Mr Yechieli, which would include, for example, our legal costs on top of any benefit he may have had from the case. Q15 Chairman: What I am going to rule is that I am going to ask you questions in public Sir Michael. If you think that your answer might be unduly prejudicial, I am quite happy at the end of this hearing to move to a private session. Sir Michael? Sir Michael Jay: If the Committee would prefer it to be in public, it would be better for it to be in public. It would be quite difficult, to be honest, in this case for me to answer questions which would be partially designed to be in public and partially designed not to be in public, at least yet. Q16 Chairman: Well we shall carry on in public. Let us start again. On paragraph 10, the driver apparently was asked to pick up the letters from the Union of Clerks. Should it not have been clear to somebody in the Embassy that he stood to gain personally from this by falsifying the rates they contained? Sir Michael Jay: He was not gaining very much personally from this; he was gaining a small amount. But, yes, the answer to your question is that of course it should have been evident to somebody in the management section of the Embassy that it was wrong to accept photocopies of the letter from the Union. Q17 Chairman: Can you go to paragraph 12? I have seen a copy of these photocopies and they are clearly a crude forgery, but why did the Embassy staff accept these photocopied letters? Sir Michael Jay: They should not have done. It is an absolutely basic principle of accounting, a basic rule and one which has been made clear many times to our staff, that photocopies should not be accepted as a basis for payment; you must go back to the original document. It is clearly one of the failings in this case that this was not spotted over a period of ten years. If I may say so, it is particularly regrettable in the light of the conclusions of this Committee after the frauds in Amman, which the Committee considered some years ago, in which the same issue arose. Q18 Chairman: So we can take it that these lessons have been learned now? Sir Michael Jay: They have been learned. Q19 Chairman: This does not strike me as being the fraud of the century frankly. It is pretty basic stuff is it not? Sir Michael Jay: If you mean it is not the fraud the century in terms of subtlety, I entirely agree with you that it is pretty basic stuff. It is an important fraud for us, because it is the largest fraud that the Foreign Office has been subjected to and therefore it is one we take extremely seriously. We do not, in any sense, wish to see it repeated and are doing our best to ensure it is not repeated. Q20 Chairman: If you look now at paragraph 2, which is discovery of the frauds, why do we have this use of cash payments and hand-written receipts? Surely such hand-written receipts and cash payments should have set alarm bells ringing, should they not? Sir Michael Jay: Yes. There are two separate frauds here. There is the fraud which relates to the clearance of diplomatic bags from airports in Tel Aviv, to which paragraph two refers, and then there is the fraud relating to the Rest Home payments, which were paid at a higher rate than was proper over a period of 12 years. Here we are talking about the bag arrangements and clearly, again, the documentation produced to support payments should have been examined more carefully, which would have brought out that the documents were out of date and were fraudulent. Q21 Chairman: Can we now talk about the action? This is covered in paragraph 19. What action are you going to take against your managers who failed to operate your standard accounting procedures? This is really a wider question about whether we should be concerned about whether this kind of sloppy accounting is prevalent or not? Sir Michael Jay: I do not believe that it is prevalent. We are looking, in this case, at an uncharacteristic and obviously unacceptable fraud committed by a member of our local staff. Q22 Chairman: People will always try or may often try to commit fraud and that is precisely why we have these procedures. Sir Michael Jay: Yes; indeed. As for misconduct proceedings against others in the Embassy, our financial compliance unit has interviewed all members of the management chain that they were able to from 1992 through until now and we shall be considering misconduct proceedings against them. Q23 Chairman: Let us look to the future and lessons to be learned. This is in paragraph 20. There are various points there: the need for formal contractual relationships with suppliers; the avoidance wherever possible of cash payments; procedures to ensure rotation of duties. Can you tell us that this is now going to be taken very seriously and the lessons have been learned in other posts? Sir Michael Jay: Yes, they are being learned and clearly we have issued guidance to all our posts on the weaknesses identified in this case and the lessons to be learned from it. I have asked all our posts for an assurance that if such weaknesses existed, they are addressed immediately and proper controls put in place and we have had assurance that that is being done. I also, when I see every Head of Mission who leaves this country, draw attention not only to the importance of proper financial management but to this specific case as an example of how quite important frauds can be perpetrated through quite simple oversights and that that is not acceptable. We have also amended and strengthened our training arrangements and training procedures at all levels as a result of this fraud and I should say that we are continuing to work towards minimising cash payments throughout our overseas network. Our experience is that the vast majority of frauds which take place are in relation to cash payments. This is not always completely straightforward because a lot of the countries in which we operate are countries which tend to operate on the basis of cash, but we are not accepting that that is a reason for not doing what we can. If I may give one example, our High Commission in Pakistan has now said that it will not accept any contracts with suppliers who will not accept non-cash as the basis for payment. So we are moving as fast as we can towards a non-cash basis with the aim partly of increasing efficiency, but also the aim of reducing the risk of fraud. Q24 Chairman: Just to go back to bag clearance fraud again, this is mentioned in paragraph five where it says you could only go back to 2000. Could this fraud have started well before 2000 then? You just do not happen to know or you cannot find out. Sir Michael Jay: We do not think so. We believe that it started in the very late 1990s and probably in 1999, just because of the pattern of payments and so on. We cannot be completely certain and certainly the figures for the fraud are based on figures starting in the year 2000 because that is the year in which we are certain it was there. It was probably 1999, but we cannot be completely certain about that. Q25 Chairman: Lastly, if you look at page 44 of this report paragraph 29, it seems that there is another large fraud under investigation worth £590,000. Perhaps you do not want to tell us anything about this or perhaps you do. Can you tell us about any other investigations? Can we get some feel for what else is going on in your department in terms of fraud? Sir Michael Jay: Let me say first of all, if I may, that the incidence of fraud in the department has been historically extremely low and that is something which we would like to continue. I should also like to say that the incidence of restitution has been historically high. Up until last year, it has been somewhere between 95% and 100%; last year it was 17% which is in comparison with what I believe is the overall figure of 3%. So a low incidence of fraud and a high restitution is a record we should like to continue and it is for that reason that I very much regret these two frauds that we are discussing today. The first is in Tel Aviv and the second is in relation to the satellite phones which was the other one to which you were referring. That is, of course, a fraud which was discovered during the course of this financial year, so it will properly appear in the accounts for this financial year. If you would like me to, I could say a few words about that. I am very happy to do so and here too there are lessons to be learned. I should say that our investigation into the case is continuing and we do not at the moment have full answers, in particular we are still examining a number of e-mail accounts and electronic files which have been taken from our IT system so we can get a full picture of exactly what happened. The position, as we understand it at the moment, is that there has been a total loss of £594,000 which is almost all the result of the theft of two satellite phones, which were part of a batch of ten satellite phones which were sent to Iraq in October 2003. Two of those ten satellite phones were stolen or misappropriated in some way; we do not know exactly how. Those two phones ran up bills, very substantial bills, over the next 17 months in a variety of ways. Let me say to start with, that, contrary to what I have read in the press --- Q26 Chairman: May I just interrupt you for a moment? This seems extraordinary. Two phones ran up bills for £590,000. Sir Michael Jay: Yes. Q27 Chairman: And nobody spotted this? Sir Michael Jay: That is correct Chairman. Q28 Chairman: Do you mind me saying that this sounds extraordinary. Sir Michael Jay: It sounded extraordinary to me when I first heard about it too. Q29 Chairman: I know my children are rather generous with their mobile phone bills, but nothing like this, thank goodness. Sir Michael Jay: As I say, the investigation is continuing but I am happy to try to explain what we understand happened. Let me say first of all, it is an important point, that contrary to some of the things I read in the press, there is no indication or evidence at all that there was any terrorist connection to this. All the pattern of usage of these phones, in so far as we have been able to understand it, points to some kind of criminal activity following their theft. They initially seemed to have been used for a huge number of calls made locally. It was almost as though they were taken and used as a kind of mobile phone booth at the end of the street where anybody could come along and use them. That seemed to be happening for the first few months. After that, they appear to have been used for a couple of scams based on what are known as personal numbers and premium numbers. A personal number apparently is when you can have a phone which is not linked to a particular piece of equipment but to you and the charges are higher than they otherwise would be. The second is a system which is used, for example, for betting agencies or adult phone lines or other kinds of activity in which the lessee of a phone, as well as the person who listens to it at the other end, gets a benefit. There are rather complicated circumstances in which you could, as was the case as we understand it here, have a phone on virtually full time with the person who is, at it were, making the call getting some benefit from it. That is as we understand it and I cannot claim that I completely understand the system, but one of these phones at least seems to have been on almost all the time to a number in the Wallis and Futuna Islands which are very small and unknown French dependencies in the Pacific and we do not know why. Q30 Mr Mitchell: Do you know the number? Sir Michael Jay: We do know the number and we have rung the number and we got no reply. Q31 Chairman: In terms of this mobile phone being on permanently at the end of a street in Iraq, that gives a whole new meaning to winning hearts and minds in Iraq, but it is quite serious. Why did nobody spot this? You have not really answered the question I asked you. Sir Michael Jay: No. I wanted first of all to explain the background. A number of things went wrong; I shall be honest about this. First of all, the phones were sent activated to Baghdad instead of deactivated. That is something which will not happen again. Then in Baghdad they were not properly logged in. That is, I shall not say justifiable, but understandable in the chaos in Iraq in October 2003. More serious is the fact that the controls at this end did not work properly in that bills were received, bills were not challenged and bills were paid. That clearly should not have happened and it is exactly that which is now the subject of fuller investigation by our financial compliance people here to work out exactly what systems failed and why. The investigation is continuing, but I should stress that even on the basis of the evidence that we have already, we have taken a number of steps in controlling the mobile telephony equipment in Baghdad, in all our posts overseas and, in particular, in London. I might add that our internal audit people had already identified well before this, a possible weakness in the control of mobile telephony and had conducted an investigation which has resulted in a strengthening of controls on the number of phones and on the billing arrangements. Q32 Greg Clark: My questions are about the resource accounts rather than the fraud. Can we turn to page 21, paragraph 2.2, and just look at the number of people employed across Objective six? I assume Objective six is the work of the Foreign Office through embassies and high commissions overseas. Is that correct? Sir Michael Jay: Objective six is one of our seven objectives and Objective six is visa and consular work. Perhaps I should say at the beginning, because it is rather confusing here, that in looking at our staffing figures you need to separate out the figures for consular and visa operations, which are self-funded and demand-led, and our staffing for other aspects of our operations, which are not and are therefore subject to quite tight efficiency reductions at the moment. Q33 Greg Clark: That was my question. Obviously the numbers of consular staff are going up because there is more demand for visas, more people travelling. Outside that, in the non-consular sections of the Foreign Office, what is happening to staff numbers there, in embassies rather than King Charles Street? Sir Michael Jay: The consular and visa staff numbers have been going up because that is demand-led. The rest of the FCO has been falling. That has gone down from 5,400 at the end of April 2004 to 5,227 as at 1 February of this year. So that is falling and that is in response, in part at least, to the efficiency targets. Q34 Greg Clark: Will that continue to fall in the two or three years ahead? Sir Michael Jay: That will continue to fall until April 2008 because we have an obligation under our efficiency review to reduce our staff by 310 full-time equivalents. So we shall reduce by 310 full-time equivalents, but there is going to be a contrary trend, which is the increase in visa and consular staff in order to respond to demand and quite where the overall figure, if you look at those together, will be, by comparison with what it was say two years ago, I cannot at the moment tell you. Q35 Greg Clark: That is quite understandable. What about the number of embassies and high commissions? What has happened to the number there? What has happened in the last year and what is expected to happen in the next two or three years? Sir Michael Jay: At the end of 2004, the Foreign Secretary announced a programme of adjustments of our overseas network which has resulted in the closure of 11 sovereign posts and a number of consulates, particularly consulates in Western Europe. That was partly as a result of financial pressure, but it was equally a result of the need to continue to try to shift our resources from lower priority to higher priority areas, whether areas in terms of regions of the world or areas in terms of functions; for example, more on counter-terrorism, more on weapons of mass destruction, more on energy security, more on environmental issues. Q36 Greg Clark: Could you give me some examples of the consulates in Europe that have been closed under this? Sir Michael Jay: Some have been closed and some have been localised in the sense that they are now run by local staff. That is true, for example, in Bordeaux and Marseilles in France and the same is true for a number in Italy and some in the United States. Q37 Greg Clark: Have they been closed or localised? Sir Michael Jay: They have been localised. Q38 Greg Clark: Give me some examples of things that have been closed? Sir Michael Jay: Some of our embassies and high commissions which have been closed include --- Q39 Greg Clark: No, consulates in Europe. Sir Michael Jay: I am afraid I do not have the list in front of me. Mr Stagg: Hamburg in Germany is one that is being closed, but, for the most part, we have tended to keep residual local representation, because it is a relatively low cost compared with the previous arrangements. Q40 Greg Clark: So tell me why Hamburg has been closed. Obviously this is a value for money committee rather than a policy committee. Was it the Foreign Secretary's policy to close Hamburg or were you acting on a policy to slim the numbers down and you chose Hamburg in applying the policy? Sir Michael Jay: It was essentially the need to try to shift our resources, both at home and overseas in line with our priorities. If we were going, for example, to open more posts in China or strengthen some of our posts in China or India given the increasing importance of India and China to our external policy, not just our foreign policy, then that means --- Q41 Greg Clark: My question was: was it your decision or the Foreign Secretary's decision to close Hamburg? Sir Michael Jay: The decision on these closures was taken by the Foreign Secretary and announced to the House at the end of 2003. It was obviously a result of discussions between us and ministers collectively as to what was the right balance of the network in the years ahead. Q42 Greg Clark: Using Hamburg as an example, in what ways was this not a priority place to have a consulate? Sir Michael Jay: It is a question of whether the work that was being done in Hamburg could be done as effectively in Germany in another way, operating for example through Berlin. That is the judgment we have to make all the time. Do you need to have the network configured exactly as it is now? Can you change that configuration in order to continue to be as effective, or almost as effective, as you have been but release funds to be used where the value added to the British taxpayer is greater? Basically the judgment is that the value added to the British taxpayer these days is likely to be greater in parts of the world, say India or China or parts of the Middle East, than in some parts of Western Europe. Q43 Greg Clark: Indeed; so it is a value for money assessment effectively? Sir Michael Jay: Yes. Q44 Greg Clark: What is behind my questions is how can we, as a value-for-money committee, assess whether these judgments are being made correctly? You appear before us once a year to look at your report and accounts. It is difficult for us to make that assessment of whether actually closing down Hamburg and opening one somewhere else was value for money? How can we get a handle on that? Sir Michael Jay: We should be very happy to let you have our own judgment on that or the rationale for it. Q45 Greg Clark: I am thinking more on a regular basis. Clearly, how you choose to deploy your resources is a very important aspect of value for money in the Foreign Office. I do not really have a sense of how we can, as a Committee, effectively scrutinise that. Mr Stagg: On consulates it is slightly easier because we tend to be dealing with services delivered to people, either helping British travellers through the consular network or helping British businesses through and we can measure it and have a reasonably clear idea. Q46 Greg Clark: I understand that one; it is demand led. Mr Stagg: The question about whether you get more value for money in terms of your impact on energy security in Brasilia or in Moscow is a very difficult one. We try to do it as best we can but there is no simple metric as you are implying. Q47 Greg Clark: I quite understand that you aim to do it as best you can, but it would be important for us to be able to scrutinise that and have a conversation. I do not know whether perhaps that is something Sir Michael and Sir John might think about because we can have a meeting discussing your accounts but actually this is the heart of it. I am sure we are broadly content with how much you spend, but it is how it is deployed for best value for money that is difficult to get a handle on. Let me move on to a couple of particular things. On Germany for example, I notice on page 39 of your accounts that the service charge for the new embassy out there is £4.6 million a year. How do you benchmark that against the service charges for other embassies, either of other countries or our own embassies in other places? Is there any comparative data? Mr Todd: The contract which we reached in Berlin was made a few years ago in response to a very carefully thought through business case which weighed up the cost of the capital and the associated costs of that compared with the efficiencies which would be gained by having a PFI solution. I am not aware of any particular benchmarking we are now doing between that sum of money and what other embassies are doing in Berlin, but we should be happy to write to you on that. Q48 Greg Clark: Would it not be a sensible operating principle that if you are going to enter into service charges, you might look at what a typical service charge is for a similar project? Mr Stagg: We are in fact going through an exercise of looking at the cost of our residential and office overseas estate to try to establish whether we are getting the best value for money in terms of the balance between owned and rented accommodation and in terms of comparing our costs to those of others, whether big international organisations, UK businesses and so on. We are trying to manage fairly actively, particularly in the bigger places where there are some quite good comparators; it gets more difficult in the less well developed areas. Q49 Greg Clark: And will you publish that? Mr Stagg: Yes, we shall certainly publish the figures. Q50 Mr Bacon: Sir Michael, who authorises severance payments in the Foreign Office to Foreign Office staff? Sir Michael Jay: They would be authorised by the Early Retirement Committee, which looks at the claims. Q51 Mr Bacon: Who sits on the Early Retirement Committee? Mr Todd, you sit on the Early Retirement Committee, so you know about severance payments, is that right? Mr Todd: We recently had an exercise in which we offered early retirement to a number of members of both the delegated grades --- Q52 Mr Bacon: I am sorry, I asked a very simple question which was: do you sit on the Early Retirement Committee and therefore know about severance payments? It is a very simple question. Mr Todd: Yes, I sat on the committee which looked at this particular exercise of early retirements. Q53 Mr Bacon: What is the largest severance payment that the Foreign Office has made? Mr Todd: In the context of early retirement, it depended on the individual's circumstance. I shall have to write to you with the individual largest sum, but it was in excess of £400,000. Q54 Mr Bacon: In excess of £400,000? Mr Todd: Yes. Q55 Mr Bacon: What was the next largest? Mr Todd: I do not have those figures in my head, but some of them were of that order. Q56 Mr Bacon: It is a very large amount of money to pay to someone. When you say "some of them", how many are we talking about? These are the sorts of things that one would tend to remember. Mr Todd: It depends entirely on the age of the officer and their years of service. Q57 Mr Bacon: How many payments were there of this scale? Mr Todd: We offered early retirement terms to over 100 staff. Q58 Mr Bacon: Could you send us a note? Mr Todd: We could certainly send you a note. Sir Michael Jay: We could certainly send you a note about the process. Let me say two things. First, the rates which we pay are the rates which are set by the Cabinet Office as part of the terms and conditions of service. The background to this is the need for restructuring of the Foreign and Commonwealth Office in order to reduce staff and also to reduce the over-weighting of staff at the top in order to allow good staff to come through and in order to ensure that we are getting the right balance of skills. Q59 Mr Bacon: I take it that individual severance payments are not confidential when you are using taxpayers' money? Sir Michael Jay: I do not know what the answer to that is. Q60 Mr Bacon: They are certainly not in the Health Service and the Department of Health issues guidance that they not be confidential and that trusts not enter into confidentiality agreements. When Mr Craig Murray was retired from the Uzbekistan Embassy is it correct that he was paid in the region of £350,000? Sir Michael Jay: He was one of those who sought and was granted early retirement under this scheme. Q61 Mr Bacon: Is it correct that he was paid in the region of £350,000? Sir Michael Jay: I have seen him say that. I am afraid I do not have independent verification of that at the moment. Q62 Mr Bacon: Mr Todd, this was a well known case, it was commented on in the press, you must have some memory of what Mr Murray was paid? Mr Todd: I do not have any memory of what Mr Murray was paid. Q63 Mr Bacon: You have no memory at all? Mr Todd: No. Q64 Mr Bacon: Perhaps you could write to us with that. Mr Todd: I am happy to find out. Sir Michael Jay: I just do need to come back on one point. I shall need to check, because clearly there will be rules, which are not just those of the Foreign Office, about whether or not it is proper to release details of the severance terms of public servants when they leave. The answer is that it may be, it may not be, but I just need to check on that before I can give an assurance that we shall write to you with the details of any individual case. Q65 Mr Williams: May I indicate that we have investigated or looked into cases on numerous occasions, as Sir John will know, where we took the severance packages of civil servants into account. I am not sure whether WDA was one of them, but we seemed to have quite a few at one time and it was never a problem. Sir John Bourn: That is right. Q66 Chairman: So it is not a problem as far as you are concerned. Sir John Bourn: It is public money and public money paid to anybody is a matter which can be drawn to the attention of the Committee. Q67 Mr Bacon: Well, Sir Michael, I am sure you will find that as comforting as I do. If we could move onto page eight. In the last paragraph, it says "... financial controls weakened in 2004-05 and significant control issues have been identified, particularly in relation to the reconciliation of cash and bank balances, the evidence to support them and the explanation of reconciling items". This is all pretty basic stuff and it appears to relate to the Resource Accounts being closed on Prism, is that right? Sir Michael Jay: It relates to the introduction of the Oracle-based financial information system Prism, which we are in the process of introducing and that was being introduced in the course of last year and that did lead to some difficulties, in particular in the case of reconciliation of bank accounts. Q68 Mr Bacon: How much money is in question when we are talking about difficulty in reconciliation? Mr Todd: The answer is that the introduction of the Oracle-based Prism system did, as the statement on internal control notes, lead to some issues about control but, working with the NAO, we resolved all those issues. Our accounts were unqualified, therefore there are no sums at issue because they were resolved. However, the Prism control, given that they were new and being introduced at a time of transition, led the NAO to be concerned as to whether controls were working and finally we were able, together, to reassure them that they were. Q69 Mr Bacon: Sir Michael, I should like to return to the satellite phones briefly. It is correct, is it not, that it would have been possible to turn off or disable the phone remotely as one can with a stolen mobile phone? Sir Michael Jay: I am not sure that it would have been possible to disable it, but it would have been possible to instruct the service provider to stop it. Q70 Mr Bacon: When you noticed these big bills coming through. Sir Michael Jay: Yes. Q71 Mr Bacon: Who set up the premium rate line? Sir Michael Jay: We do not know. As I understand it, that would have been whoever had the phones in their hands at the time. Q72 Mr Bacon: Is it correct that at one point - you said the phone was on, more or less, continuously - there was a bill of around £80,000 for one week? Sir Michael Jay: I do not know whether it was £80,000 for one week. There was a bill of £212,000 for one phone for one month. Q73 Mr Bacon: Which, as you say, would more or less imply that the phone was on continuously? Sir Michael Jay: It seems so. Q74 Mr Bacon: How long after that was the problem identified and the bills stopped, because this £212,000 bill was paid, was it not? Sir Michael Jay: That was paid, yes. Q75 Mr Bacon: How long after that payment of £212,000, when the phone must have been on pretty much continuously, did the problem get identified? Sir Michael Jay: It was stopped almost immediately after that, but it is a perfectly fair question as to why the payment was made. Q76 Mr Bacon: Have you asked GCHQ to help you identify who set up the premium rate line? Sir Michael Jay: As I said at the beginning, the investigation into all this is continuing and I do not want to go into details as to exactly who is looking at what. Q77 Mr Bacon: Although they have quite a few resources available in this sort of thing I understand and they are tax payers' resources, so I hope you are leaving no stone unturned. May I turn to the question of the Rest Home payments? On page 50 it refers in paragraph 20 to lessons learned. The first is "Hand written receipts should not be accepted or used retrospectively to authorise cash payments; The incidents of making cash payments should be restricted where possible, as they provide greater opportunity for irregularities to take place". Is it correct that both those items were already in extant guidance? Sir Michael Jay: Yes, they were. Q78 Mr Bacon: Is it possible that you could send to the Committee, a copy of that guidance so that we can look at the exact wording of it? Sir Michael Jay: Certainly. Q79 Mr Bacon: So these lessons learned are really just a reiteration of things that they should have been doing anyway. Sir Michael Jay: Again, as I said at the beginning, it is very regrettable that these things have recurred and it is something which we do not wish to see continued. We are very happy to send you all the documentation before that or indeed documentation which we have sent afterwards. Q80 Mr Bacon: May I move on because I have limited time. I should like to turn to the diplomatic bags. Could you say how much British Airways charged for clearing diplomatic bags? Sir Michael Jay: Towards the latter end of this particular operation, they did not charge anything at all. Q81 Mr Bacon: That is what is says on page 48, is it not? "British Airways confirmed that all official diplomatic bags for Tel Aviv and Jerusalem were cleared free of charge". Sir Michael Jay: That is indeed the point. The point was that this chap was presenting receipts for payments which had not been made. That was the nature of the fraud. Q82 Mr Bacon: In the case of Maman, the clearing agents, they did not accept cash payments did they, so an invoice was raised and sent to the Embassy which was paid by cheque? That is correct, is it not? Mr Todd: Yes. Q83 Mr Bacon: So am I right in thinking that in the case of British Airways, you were paying them for something which they actually said they provided free and that in the case of Maman, you were paying twice for the same thing? Sir Michael Jay: No, we were not paying British Airways. As I understand it, we were just picking up the bags and the fraudster was using an old form from British Airways to bring back to the Embassy and say "This is what I have had to pay in order to get these bags". Q84 Mr Bacon: I am not saying the money ended up with British Airways, obviously the money ended up with the fraudster, but the claims were for services that British Airways itself said it would provide free but, nonetheless, the Embassy was making those payments. Sir Michael Jay: I stand to be corrected by one of my experts here, but I do not think the Embassy was making any payments to British Airways. Q85 Mr Bacon: I did not say that. At the risk of labouring the point, British Airways provided these services free. That is correct, is it not? Sir Michael Jay: Yes. Q86 Mr Bacon: This fraudster was claiming, among others, Lufthansa, Cyprus Airways and Swiss Air, that British Airways was one of the services for whose claims he was putting in chitties. Sir Michael Jay: Yes; right Q87 Mr Bacon: So you were paying out money through the Embassy that was at least ostensibly destined for British Airways, for a carrier that itself said it would do it for free. The person authorising the payments surely ought to have known that British Airways was offering these services for free. Sir Michael Jay: Yes. Q88 Mr Bacon: In the case of Maman, it is true that you were in essence paying twice, because you were paying the cheque in response to the invoice which Maman sent to you and you were also paying via the fraudster, is that correct? Sir Michael Jay: I am afraid I am not clear. Q89 Mr Bacon: Mr Todd is nodding. Is that correct? Mr Todd: Yes, it is. Sir Michael Jay: But no supplier was getting money that they should not have got. Mr Bacon: No-one has any doubts about the fact that the suppliers were not getting the cash. Thank you very much. Q90 Chairman: Why would anybody in the Embassy think that British Airways would charge for baggage? Sir Michael Jay: They had done in the past, but then did not. The question as to why nobody rang them up and checked is a perfectly fair one. Q91 Mr Mitchell: It is a pretty low-level scam, is it not, of the kind which used to abound in ITV, when ITV was awash with money? I most remember the scam at Thames where £5,000 was issued by the expenses department to a Mr O H Boy, who was never seen again, on the basis of a programme budget. That is low-level stuff. The important point is the one we have just been on: there must be a point in the Embassy or in the Foreign Office generally where there is an internal audit or where all the receipts come together. You are saying that you had at one stage been getting bills from British Airways for something which was later provided for free. You would almost certainly be getting bills from Lufthansa and SwissAir or whatever the other airlines were and you were getting bills from Maman. At what point did these bills meet the hand-written receipts which were also being submitted for the same service? Sir Michael Jay: The answer to that is that clearly a number of checks are carried out in any Embassy at any one time; there has to be a 100% check by the management officer and there is supposed to be a 10% check by the Deputy Head of Mission and then random checks by the Head of Mission before the accounts are signed off at the end of each month. Clearly this was not happening for a number of years. Q92 Mr Mitchell: A 10% check for a scam which was going on for 10 years must have turned up something before now. Sir Michael Jay: Well it should have done and it does not seem to have done. It did turn it up in the end; it was indeed the 10% check by the Deputy Head of Mission who got a receipt and asked for the invoice which revealed the scam. It is regrettable that did not happen much earlier. Q93 Mr Mitchell: Was it a new Head of Mission, a keen young man who had just been appointed? Sir Michael Jay: It was a fairly new Deputy Head of Mission who discovered it. Q94 Mr Mitchell: A new one? Sir Michael Jay: I am not sure how long he had been there. The only good thing that can be said about this is that in the end the procedures worked, but clearly they were not working for some time and that is the issue which we now have to consider. Q95 Mr Mitchell: Let us move on to the Union. It is said that the fraudster made only £6,800 out of the Union. I do not know why that was, but this is an amazing act of altruism on his part, to increase the payments to everybody in these Rest Homes. That suggests to me not that he is a concerned man trying to better the conditions of retired civil servants, but that there is somebody else in on the act and the money is going somewhere. It cannot all have gone to people in the Rest Homes. Sir Michael Jay: No, it did not. They are called Rest Home payments, but this is a payment which is made by Israeli law to all people employed. The rate of this payment is set once a year by one of the unions. What happened here was that this chap, Yechieli, had the task of discovering this rate and then passing it on to the local staff union and then to management. He did that, but for a number of years he forged the amount and the date, photocopied the document, presented it to the Union, who then presented it to the management who then paid it. So there were some failings along the line. Q96 Mr Mitchell: So not receiving it but O H Boy was getting all this money. Sir Michael Jay: No. You are right that he only got a very small amount himself. The other beneficiaries were all the local staff in the Embassy in Tel Aviv, the British Council in Israel and the Consulate in Jerusalem. The result was that all local staff got marginally increased payments as a result of the rate being higher than it should have been for a period of years. Q97 Mr Mitchell: And said nowt. Sir Michael Jay: There is no evidence and no evidence was turned up by the police in their inquiry that others were aware that the payment was above that which it should have been. Q98 Mr Mitchell: I think the Rest Homes were lap-dancing clubs at that rate. You said that this was against procedures. You have also said today that procedures have been tightened up. If it is against procedures but undetected and it is now against procedures which are presumably tighter, how do you know that it is going to be detected if it goes on again? Sir Michael Jay: I cannot give you an absolute assurance that it will not. What I can say is that we are determined to do all we possibly can to ensure that it should not, that a combination of better training, of drawing everybody's attention to these specific frauds and also moving away from a cash to a cashless accounting basis should reduce the risk. I would be very surprised if there were another scam of this sort, but we have to be eternally vigilant. We have 240 posts around the world, for some of whom these kinds of practices are fairly routine and it is a constant, constant, constant task to reduce the risk by proper risk management of these kinds of fraud occurring. That is what we try to do. We do that at the centre by a stronger audit and risk committee chaired by one of our non-executives, by having a proper top risk register, which the Board of Management considers every two months, with red, amber and green risks and at the top right-hand corner at the moment is financial control. These kinds of issues show just how important it is for us as the Board of Management in London to focus on these issues and ensure that they are properly communicated and cascaded down to our staff both home and abroad. Q99 Mr Mitchell: I think you said earlier that the rate of restitution had fallen substantially from 97% to 17%. Is that correct? Why is that? Sir Michael Jay: It is because of this case. It fell in the year in question and in this year. Q100 Mr Mitchell: Let us turn to the phones. That happens to a lot of people: the phone is swiped and people start making calls. Somebody was using my Barclaycard to bet with a firm called EuroBets; as though I would be connected with a firm called Euro anything. That was the chief clue. There is an obligation on the operator to trace this and to try to provide restitution. If you paid the bills, that lessens their keenness to do that, but surely you can get the operating agent to provide some compensation and if they do not do that, you can threaten them with the loss of Foreign Office business. Sir Michael Jay: We shall be trying to do just that. This is work in progress in the sense that the investigation is not yet concluded; we do not understand all the facts. Clearly one of the issues we need to look into is the relationship between the Foreign Office and the service provider precisely to see what scope there is for seeking restitution for some of the bills we received from a company which should have noticed itself that this was an unusual pattern of billing. Q101 Mr Williams: I was a little puzzled to see on the back page that the man concerned rarely took annual leave. Did nobody wonder about that? Sir Michael Jay: They should have done. I think the answer is that he never took a Wednesday off and Wednesday was the day on which he went along to collect the diplomatic bags. One of the specific points I am making to every Head of Mission is that when they get to their post they should just look at the leave records and check to see whether there are some people who have some rather odd patterns, who are not taking leave, send them away for a couple of weeks and see what happens. Q102 Mr Williams: I sat here when Sir John Kerr was sitting there explaining the situation in Amman. There we had a situation where the individual concerned, an accountant if I remember correctly or an assistant accountant, had not taken annual leave for years. A recommendation was made in our 34th report in 1997-98 that this was something which should be drawn to everyone's attention as an indicator. Why on earth, when we had only just made recommendations two years before, recommendations which had been accepted by the Government, does the same department go and do the same thing again? Sir Michael Jay: I know. As I said, that is why I specifically mentioned the Amman precedent when I was introducing this, because I am very conscious of what this Committee recommended and we have not honoured our commitment to you and I very much regret that. There is human error around and we have to try to minimise it and put in place the processes which will reduce the risk to an absolute minimum. This question of leave is exactly one which I am now personally focusing on as I see each Head of Mission when they go out. Q103 Chairman: We were rather hoping, Sir Michael, as you are retiring that you might be able to have a word with us about your advice for the future. Is that all right with you? We have a practice with retiring permanent secretaries that we just have a private session and ask about any advice they may have for us on how to improve public accountability. Is that all right with you? Sir Michael Jay: I should say that I am not, as far as I know, planning to go until the end of July. Q104 Chairman: We are told there will be no more hearings with you. Sir Michael Jay: That is a matter for you and the NAO. Chairman: We have no more questions for the public session. Thank you. |