Examination of Witnesses (Questions 173
- 179)
TUESDAY 30 JANUARY 2007
MR JOHN
ARNOLD, MR
IAN HAYES
AND MR
CHAS ROY-CHOWDHURY
Q173 Chairman:
Good morning. Welcome to this inquiry. Thank you very much for
coming. You will be provided with a transcript of what is said,
so that it does not need to be a total mystery. I know we sent
you a truckload of questions which we are going to group this
inquiry around, but I would like to ask whether all or any of
you would like to make a short opening statement or whether you
would like us to go ahead and ask questions.
Mr Hayes: John is going to make a more general
statement but I would like to state my concern. In looking at
the issue of missing trader fraud, there are two distinct problems.
One is the European legislation relating to cross-border transactions
and the single market; the other is the issue of criminal activity.
It is very easy to confuse the two and, in dealing with one, not
to deal with the other. Our responses to the questions that have
been put forward are very much framed to take account of that
point.
Mr Arnold: I will be brief. When my colleague
said this was the main statement, that is not so, but it is just
trying to bring out some of the main points that we will perhaps
get to in some of the questions later. The position we have on
MTIC fraud is a little like that if we had a chain of jewellery
shops from which there had been a series of thefts and we then
discovered that the main opportunity for the theft was because
there was no glass in the window of any of the shops. The response
seems to be to look at controls on passers by and on customers,
whereas we see the answer—one can debate how and we can
discuss that later—as really being the question of how you
put the glass back, how you close the gap that we created in 1993.
We see difficulties in the approach from HMRC because they are
having their policies determined elsewhere, so one needs to look
at the state as a whole perhaps. They are short of staff, they
are reducing staff, as we have seen, and they have archaic computer
systems which cause problems in looking at any of the modern ways
of tracking transactions, the real-time tracking of transactions
like we have with credit cards and so on. I think the question
of the UK derogation will come up later. The final point which
causes a little concern, which comes out in some of the questions
as well, is that we have seen some evidence through the courts
and elsewhere of the pursuit, if you like, of the innocent rather
than the guilty. That has come through in the papers and I wanted
to repeat that here. There is a group litigation order of 50 companies
in front of the High Court looking for damages. We saw the FTI
announce last week—and I think they are giving evidence
to this Committee—that they are also seeking judicial review.
There is a big question of proportionality here. They are the
points I would like to make at the beginning, my Lord Chairman.
Mr Roy-Chowdhury: I would echo what John Arnold
has said and also what Ian was saying. The point of all this is
that we have a system within the European Union which is very
much predicated by national governments trying to control their
own national fiscal pot. As long as we have that mindset, we are
not going to get to the bottom of trying to resolve the key problems
which give rise to the opportunity for MTIC fraud. The opportunity
was there in the late nineties, with the idea of the origin system,
the definitive VAT system which was going to come in, but the
political will was not there to take that forward. We really need
a proper debate and discussion about how to deal with a wholesale
approach to the VAT system which will block the opportunity for
MTIC fraud and I just do not think the political will is currently
there to do that. All we are really doing is taking a sticking
plaster approach. We have IT systems which are not able to operate
effectively across borders, where one fiscal body does not have
access to the IT system of another fiscal body in another state.
We are giving the fraudsters a real leg up in being able to conduct
the frauds because of the way that we have different VAT systems
in different jurisdictions. We do not have proper IT tracking
available real-time. I just wonder at what stage the loss of revenue
is going to be big enough for governments to have the political
will to come together and create a single VAT system across Europe.
Q174 Chairman:
Thank you very much. Perhaps I could start off by asking, as a
general item, to not repeat each other where you agree. Of course,
that said, I welcome any comment from anybody. As an opening question,
I would like to ask whether missing trader fraud is a bigger problem
in the UK than other European countries or is it just that we
are better at detecting and measuring it? As a supplement to that,
can you offer any insight into why Germany have proposed a reverse
charge on goods?
Mr Arnold: We see no particular reason why the
UK should be a more popular place. The only point, perhaps, is
that VAT returns in the UK cover three months and they normally
cover one month in most Member States, so other Member States
would be alerted to the transactions at an earlier stage. If we
take the Netherlands, for example, there is e-filing as well of
your returns, so you would tend to get the information in a form
that you could also use and put in risk parameters and so on that
much faster rather than having to input manually as we do here.
I saw from some earlier evidence that we were saying the UK repays
faster. That is true in some cases, but the Netherlands would
make a normal VAT return repayment within two to four weeks, so
we are not looking at a big difference there. I think it is just
that there has been more publicity and more candour as to the
existence of the fraud in the UK. There was a press report in
France that the French equivalent of the Federation of Trades
Unions had said that there was €14 billion of fraud last
year in France and that was quickly denied by the French Government.
We do not have estimates that are accurate.
Mr Roy-Chowdhury: I would tend to agree with
John that we are more candid in the UK, but, also, the repayment
point is something. Certainly some European countries, when I
speak to HMRC, have pointed a finger at the UK, saying "you've
brought it upon yourself" to paraphrase the kind of comments
that are made. I think the real problem is that we do not really
know what the estimates or the real fraud amounts are but I do
suspect that perhaps in the UK we are better at airing the figures.
The £2 billion to £3 billion I mentioned in my note,
and which is generally mentioned by HMRC, probably is realistic
and based on that we have quite a lot we need to get done. At
the same time, we are going the right way around it in the UK
by debating fairly openly what the problem is, the quantum of
the problem and how we need to resolve it.
Mr Hayes: This is a fraud that is cross-border,
so it involves more than one country. I think you need to consider
the criminals who perpetrate the fraud. They are clever; they
know what they are doing; they know how to use the system or the
systems; and, when they look at the systems, they will choose
that country which is the easiest target and they will locate
themselves in another country. The Netherlands, for example, will
maintain that they do not have very much of this fraud activity
because of the measures that they take against it. Those measures
do not seem that different from ours, although, as John said,
they have electronic filing of VAT returns and they have VAT returns
done on a monthly basis rather than a three-monthly basis. But
it is quite conceivable that criminals using the system for their
own benefit may decide that they are going to locate themselves
in the Netherlands because that community is where they are going
to site the profits of their activities and launder them or use
that location—and not necessarily the Netherlands, it could
be some other country. I thought it noteworthy that in the evidence
of Commissioner Kovacs he said that the reason he thought the
French objected to our derogation was the fact that if it were
granted the criminals would move from here to France.
Q175 Lord Steinberg:
I often think, since this problem arose, that it is a question
of closing the stable door after the horse has bolted. It is obvious
that this fraud has been going on for some considerable time.
I completely agree with you that the people who are perpetrating
this type of fraud are very sophisticated people. It is not, in
my opinion—and I would ask you whether you agree with me
or not—some little guy selling mobile phones or washing
machines and fiddling for a few thousand pounds or euros. These
are highly sophisticated people who have been planning and dealing
with this and they switch. Maybe I am the only one old enough
to remember the dollar premium. You are? When the dollar premium
was used, sophisticated criminals found a way to be able to claim
that. Is this fraud a coordinated and sophisticated attack, on
the VAT system—although surely it is on any system—which
they can use to their advantage? I know that some of them—and
I have to say "so-called criminals" because some of
the cases are still under court hearings—are actually suing
the authorities to reclaim money which the authorities believe
they are not entitled to receive. My question is: how sophisticated
is the operation in your opinion? Obviously we will then come
to how we can adequately take steps to deal with it.
Mr Arnold: I personally have not come across
these criminals at first hand, as such, but my understanding is
that it is very sophisticated. It is similar to money laundering
activities, I guess, done in a way that is highly professional,
by people who are very bright, using the system. If we did not
have VAT, then clearly, as you say, we would not have this fraud.
It is probably the level of VAT which we have, double-digit rates
of VAT, which is the inducement in Europe. In terms of ways to
combat it, I have already mentioned the political will for a VAT
system across Europe. There may be other halfway houses, such
as the reverse charge derogation which the UK is seeking, but
there may also be a need to think of the idea of operating a certain
level of VAT and maybe just on specific goods across borders,
which would then reduce the profit from MTIC fraud. It could be
we would operate a cross-border rate of VAT of, say, 10 per cent
on specific goods. That could be another way of perhaps tackling
it, but it is really a sticking plaster approach and it is very
difficult to see how we can totally eradicate the fraud as long
as there is a disconnect between Member States and the VAT systems.
Q176 Chairman:
We are really trying to get our hands on whether, should any two
Members here decide to set up a fraud, we could do it. Or is it
more complicated and sophisticated than that?
Mr Arnold: No, it is not more complicated. In
1992 when these proposals came out—and perhaps I should
stress that it was a joke but it is a sick joke now in view of
the results—I was with a very senior official of the Commission,
a very senor official of the then Customs and Excise and we had
this sort of fantasy partnership to commit this fraud. It was
really an intellectual exercise in seeing the weaknesses of the
system. This was even before it came in, so this is why, when
we say people knew about it, that is not hearsay, it is to my
certain knowledge. Yes, you could. It is probably, with the additional
controls we have now, harder than it would have been a couple
of years ago, but you could.
Mr Hayes: The comment I would make is that this
particular fraud in some ways picked the perpetrators. They stumbled
across it by accident rather than deciding this is where they
would go. However, having found it and the monies that could be
made from it, word spread very quickly. The one thing that is
required within the fraud is some financier coming in to provide
the funds and, at that stage, I think organised crime saw this
as an opportunity to make a lot of money at the expense of the
Member States of the Community. It was at that point—and
I think that is something that has happened within the last seven
to 10 years—not immediately from the introduction of the
single market, but now I think the players in there are very hardened
criminals.
Q177 Lord Steinberg:
I think we would all accept that somewhere in these criminal activities
there is Mr Big and that Mr Big probably does the financing, but
are you saying that the system is so capable of being overthrown
that if we were able to get some agreement with cross-border activities
we would still have this degree of fraud? We had Commissioner
Kallas here last year, not dealing directly with missing trader
fraud. He was, at the time—and I think he still is—in
charge of OLAF and he had, if I am correct, 586 cases investigated
but there has not been one single prosecution. That kind of information
frightens me. Surely the only way we can solve this is by going
out after Mr Big and his organisation?
Mr Hayes: I think we would all totally agree
with that. As Mr Roy-Chowdhury said, with which we totally agree,
there is a lack of political will within the European Member States
to deal with this. The solution to this is a solution that is
dealt with at Community level by cooperation between the Member
States, because the fraud is a fraud that is perpetrated on the
Member States collectively, not individually. Going back to the
point about the use of Member States, I think this fraud is a
fraud that does have a degree of locality, to the extent that,
in the UK, the other countries that we see involved are Spain,
Ireland, France; in other words, the local countries. In Germany,
one is looking more at Austria, going over the border, out of
the Community, into Switzerland. Whether there is anything in
Sweden or Denmark, I do not know. That is not an area that I am
au fait with. I think the solution to this problem must
come at Community level and it must have the entire support of
all the Member States, very proactive support.
Q178 Chairman:
Could I be allowed a supplementary question on financing. They
told us in Brussels that it had greatly helped to close one of
the banks behind this.
Mr Hayes: Yes.
Q179 Chairman:
I do not quite know how you close a bank but that is what they
did.
Mr Arnold: Arrest the major shareholder and
hold him in jail in the Netherlands is one way.
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