Examination of Witnesses (Questions 270
- 279)
TUESDAY 27 FEBRUARY 2007
MR ROYSTON
FORD
Q270 Chairman:
Good morning. May I welcome you to this meeting. It is the Missing
Trader Fraud inquiry; the session is on record, is being recorded
for a webcast, and you will also receive a transcript of what
is being said during this session. Can I first congratulate you
on your written submission to us, which is a very detailed insight
into what is going on and certainly arouses our interest. If I
may I would like to ask you whether you think that missing trader
fraud is a bigger problem in the UK than in other European countries,
or are we better at detecting and measuring it?
Mr Ford: My feeling is that the UK is not suffering
to any greater extent than many of the other larger European economies,
and I am thinking particularly of France and Germany. We have
become better at recording and detecting it but my experience
has been that there has been perhaps a reluctance to face up to
the scale of the problem and that estimates from HM revenue and
customs have been somewhat on the low side. Those estimates have
ranged dramatically from £2 billion to £5 billion to
£7 billion and similar figures. There seems to be little
consistency in the numbers that come forward, and I have noted
that Eurostat in July of last year recorded dramatically higher
figures than HMRC ever have. For the UK they estimated eight billion
euros, a similar figure for France, and nine billion euros for
Germany, so I see a variety and a range in the figures; I think
they are becoming better, but the true extent I am not sure we
have discovered.
Q271 Chairman:
You have placed great emphasis in your written evidence on the
reverse charge solution. Could you tell us why? Also, if that
were implemented, even from what you have said it seems that the
one thing they are good at is mutation, so why do you think they
will not get round that?
Mr Ford: I believe that if a reverse charge
is implemented on specified goods then these fraudsters simply
will mutate the fraud to other product, and I see no reason to
think they should stop simply because their favoured devices and
goods are no longer available to them. For this reason I think
the universal reverse charge is the most likely variant of reverse
charge to be successful and, as we may discuss later, we have
come across in the insurance industry already mutations of the
frauds to other goods, and we can expect that to continue, I believe.
Q272 Lord Kerr of Kinlochard:
Why do you think the mobile phone and computer chip sectors have
been particularly targeted? Is it a recent phenomenon fuelled
by high value/low volume consumer goods, or was it inevitable
that something like this should build up? Has it been building
up since the first introduction of VAT-free intra-Community trading?
Mr Ford: Yes. I believe it has been a steady
increase since the introduction of the intra-COM system in the
early '90s. Obviously high value/low volume goods are the favoured
commodity for VAT fraudsters because of the ease of moving them
around, and the greatest potential VAT recovery for them on each
transaction. Over the years we have seen initially clothing, in
the early '90s—fashion garments were a very popular ruse
for carousel traders but at a much smaller level; in the mid to
late '90s we saw computer memory as a much favoured vehicle for
carousel fraud because of the sheer price of that particular product
at the time; and I believe now they have settled with mobile phones
and CPUs simply because of the availability and the relatively
high price. Mobile telephones were not so universally available
until around the late 1990s when the price came down, manufacturing
shifted to China, the volumes increased, and the same of course
for CPUs, so I think it is a combination of availability and,
as you say, the high value/low volume.
Q273 Lord Kerr of Kinlochard:
Towards the end of your fascinating memorandum you describe a
number of other groups of commodities where, in your view, it
is not simply a risk of the fraud migrating from mobile telephones
to them, but it is already happening in your view. Would you like
to say any more about that?
Mr Ford: Yes, indeed. Obviously purchasing genuine
mobile phones and CPUs is one way to perpetrate the fraud. It
is much better if one can use counterfeit goods, or even non existent
goods, or find a commodity that has a low intrinsic value upon
which you can imply a much greater value. So as the pressure has
increased on mobile phone and CPU traders we have witnessed some
of the same companies who have been trading phones, CPUs, switching
to pharmaceuticals, which may or may not be real goods, they could
be counterfeit; we see them switching to designer clothing, where
they register their own patents and trademarks and then claim
these goods and these brands to have a high value, when, in fact,
they are relatively worthless Chinese cotton T-shirts with a home-made
label put on them. Cosmetics is one that concerns us greatly because,
as we see on television every day, miracle cures, Q10 creams,
lipid this and lipid the other—these base creams and moisturisers
are freely available from chemical companies like BASF and AGFA;
they can be purchased at relatively low cost, bottled or potted
at low cost and, again, one's own trademark applied to them followed
by a claim of extreme high value. In this way fraudsters can acquire
high paper value commodities at almost no cost, which is much
more attractive than actually purchasing real mobile phones and
CPUs which are, of course, genuinely expensive. We have been doing
risk management work for a number of UK insurers who have been
covering mobile phone traders, and of late they have asked us
to investigate these companies for the potential exposure to fraudulent
trading, and in interviews with the owners of the companies these
people have discussed moving into cosmetics, beauty products,
mineral waters, clothing. Computer software is another excellent
example. In one face-to-face interview the owner of a mobile phone
trader indicated that he was becoming a software trader with a
new whiz product, an accounting system described as "Web
Accountant". A quick search on the Internet showed this was
an open source programme, not fully developed, freely available
with no commercial value, yet he was selling on paper this product
at several hundreds of pounds a unit, and that, of course, is
a simple CD-ROM in a box.
Q274 Lord Kerr of Kinlochard:
We took evidence from the Treasury who gave us the clear impression
that the Government believe that carousel fraud in mobile telephones
is on the way to being defeated and that the incidence is now
going down. Would you like to comment on that? If your evidence
is correct then the chances are, if the Government has cracked
down successfully on this particular fraud in this particular
sector, mobile telephones, fraud will migrate to another sector.
Mr Ford: Yes, I believe it will, and in those
examples we have already seen this happening. I am not a lawyer,
my Lord Chairman, but I have concerns about the Government approach
and the Customs approach to this problem and what they describe
as a crackdown on fraud in fact is a crackdown on the trade. Very
little has been done to stop the fraud and prosecute the fraudsters,
but the trade itself has been stopped. Now, how long the Government
might sustain that, because there is a concerted legal action
for traders, would take somebody with more legal expertise than
me to say, but I have concerns that this may not be a long-term
solution.
Q275 Lord Cobbold:
In your memorandum you say that MTIC fraud has become the largest
growth criminal industry that Europe has seen in recent years.
In your view is this fraud a co-ordinated and sophisticated attack
on the VAT system by organised crime, or is it a series of opportunities
being exploited by casual fraudsters?
Mr Ford: I would suggest that it is a combination
of both. We have seen examples of what might be classed as casual
fraudsters setting up relatively simple carousel rings. They tend
to be caught fairly easily and fairly quickly because they stand
out; they are too close, they are too amateur, it is too easy
to link the various trading companies together, so that relatively
rare casual carousel trading exists. There is also the aspect
of one hit wonders, as I call them; companies or individuals that
hold themselves out to be VAT-registered, or alternatively steal
the identity of a VAT-registered company in order to make often
a very small number of transactions nonetheless stealing VAT in
the process, but that kind of deception, appearance of VAT-registration,
does not last very long so these tend to be transient criminal
operations. But the vast majority of the carousel trade that we
see is most certainly characterised as serious and organised and
generally from outside of the UK. I have worked extensively in
the Middle East on these types of fraud where Dubai is of principal
note, and I have met and had discussions with individuals that
leave me in little doubt of a genuine fear as well that this is
funding terrorism.
Q276 Lord Cobbold:
What sort of numbers of serious criminal fraudsters are we talking
about? Two or three big gangs? Twenty? Fifty or a hundred?
Mr Ford: My sense of this problem is that there
are probably between 10 and 15 serious organised co-ordinators
of VAT fraud, with a similar number of individual significant
players who are in it for reasons we cannot establish, but it
does appear to us that the fraud revolves mainly around a number
of freight forwarding companies because, of course, a tame freight
forwarder is essential for perpetrating this type of activity.
Q277 Lord Steinberg:
I was taken particularly by Lord Kerr's question to you in which
you indicated that you do not think the Government is doing enough
to try and stamp out this type of criminal activity. I have been
an advocate for a long time of what I call "rattling the
cage", and there are in your comments a number of identifiable
gangs who are dealing with this on a basis of a long-term fraud.
Would it not, firstly, be a good idea if those targets were rattled
with a detailed investigation to try and break them up, and going
on, then, to the next part of the question, you have already indicated
that carousel fraud does not purely rely on mobile phones and
that effectively any comparatively low-priced commodity can be
used to do it, so if the crackdown is taking place at the moment
according to the Government but not according to your mobile phones,
will it switch to cosmetics, will it switch to cheap electrical
goods and so on ad infinitum, and is that problem not going to
be resolved only by breaking up these gangs who, according to
you, are already known as active criminals in this area?
Mr Ford: Yes, my Lord, I think the question
of rattling cages, or the objective, is an extremely good one.
When I mentioned freight forwarders, these are the places at which
the fraud becomes most apparent, where we see small freight forwarding
companies in west London who are chartering cargo-carrying aircraft
three times a week to carry pallets of mobile phones to and from
Dubai. It is in those offices where the paperwork begins and ends
and at their branch offices in Dubai, where the other half of
the fraud is, of course, being perpetrated. These are very obvious;
very visible targets. On the face of it the problem is that they
appear to be doing nothing wrong—they receive instructions,
they ship mobile telephones: "We have no knowledge",
they say, "of any wrongdoing. We are simple freight forwarders".
It needs concerted investigation by law enforcement to uncover
and prove the conspiracy, yet this is not being done. The trade
has been paralysed by the withholding of VAT refunds and the denial
of banking services, to mobile phones and CPU traders; almost
no other business is affected by this. So it is abundantly clear
that these people will migrate to other untargeted commodities.
Q278 Lord Steinberg:
If I can quickly follow up on that would you advocate, then, the
serious fraud squad going into some of these freight forwarders?
When you say that planes are being loaded up three times a week,
it is absolutely colossal.
Mr Ford: It is.
Q279 Lord Steinberg:
Surely to goodness the Serious Fraud Office, which unfortunately
has not had a great success rate so far, or an organisation like
that should go in and take apart one of these places here and
simultaneously try and deal with the opposite number abroad—which
might be rather more difficult, I accept, but is that not the
way to try and put fear into these gangs?
Mr Ford: It most certainly is, my Lord Chairman.
The carousel traders have been very good at putting distance between
the various nodes of the carousel networks, so that any one party
appears to be entirely unconnected to any earlier theft of VAT
or any conspiracy, so proving a criminal act on the part of any
one entity is extremely difficult and it needs resources. In some
ways it may be the resources of the intelligence services as well,
where we have the overseas networks and potential links into the
terrorist funding. I do not know what facilities or resources
HMRC have available to them for this type of surveillance and
intelligence in proving the conspiracy connecting the various
nodes. It is something that could well need more input from law
enforcement, yes.
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