Press Release - Losses to the Revenue from Frauds on Alcohol
Duty
19 July 2001
Sir John Bourn reported today on the Customs response to
an independent investigation into losses of customs revenue of £668
million because alcohol destined for export had been fraudulently
diverted onto the UK market.
In February 2001, the National Audit Office reported on the
losses of £668m million that had arisen between 1993-2000 because
alcohol destined for export had been fraudulently diverted onto the
UK market without the payment of excise duty or VAT. Another £216
million was accounted for as revenue lost from diversion onto
overseas markets where duty would have been due in the country of
import had the goods not been fraudulently diverted. The Government
is publishing separately today the independent report by John
Roques into the causes of these frauds and recommended action. This
further report by the Comptroller and Auditor General focuses on
the action already taken and planned by Customs to tackle the
underlying weaknesses.
The creation of the Single European Market in 1993 removed
restrictions on the movement of goods between EU Member States with
the aim of making trade easier. At the same time Customs completed
their removal of their regular physical checks of goods and adopted
a risk-based approach both in order to facilitate trade and target
their resources better. In 1994, following National Audit Office
and Public Accounts Committee concerns about possible new
opportunities for fraud that the introduction of the Single Market
arrangements might present, Customs said that they were watching
carefully but had found no sign of increased fraud.
However, Customs began to detect a series of frauds from 1995.
By 1996, the level of fraud investigations and reports from both
the National Audit Office and Customs’ Internal Audit indicated
significant weaknesses in controls in the warehousing of alcohol.
Customs took a range of action to investigate the frauds and
strengthen their controls. In total, Customs investigated some 130
cases of this kind of fraud between 1995-1998. Over 100 successful
prosecutions were made and the Courts confiscated over £23 million
and the level of this type of fraud fell dramatically after
1997-98. Later, in response to a review of alcohol and tobacco
fraud, Customs made further changes and introduced new legislation
in 1999 to provide for the registration of warehousekeepers and
owners of excise goods.
In June 2000, following an internal review by Customs of their
handling of diversion fraud, the Paymaster General commissioned an
independent investigation, headed by John Roques, who presented his
report in December. Customs have accepted or partially accepted 62
of the 65 recommendations made in his report. Forty two have
already been implemented although some key changes are still to be
introduced.
In his report, Sir John concludes that Customs’ response to the
frauds could have been more effective in a number of ways. They had
no overall strategy for dealing with alcohol diversion fraud until
2000 and this encouraged decisions at the operational level without
the benefit of a high level approach to guide them.
Investigators sometimes ‘let loads run’ (with the inevitable loss
of revenue) in order to gain more evidence for prosecutions rather
than disrupting them immediately. However, although they made no
assessment of whether this policy was effective, even with the
benefit of hindsight it is difficult to determine which policy
would have led to a lower level of revenue loss. Customs also had
poor information systems, which meant that the first signs of
significant losses from fraud were not fully appreciated.
Sir John considers four initiatives are crucial. These are:
- developing an approved anti-fraud strategy, with explicit
recognition that there is going to be a level of revenue loss if
trade is to be facilitated (because this requires looser controls),
an estimate of the unavoidable level of loss and an estimate of the
risks (and the relative attractiveness and potential gain to
fraudsters of different types of fraud);
- developing and publishing reliable estimates of revenue
"leakage", to give earlier warning that fraud risks may be
maturing. Customs already publish such estimates for tobacco and
some alcohol smuggling figures. Extending such estimates to cover
all indirect taxes would provide a starting point for measuring the
effectiveness of Customs and help indicate where resources should
be targeted;
- developing systems to give management information on anti-fraud
activities, including the progress of investigations, and to
provide anti-fraud intelligence; and
- ensuring the unification of anti-fraud resources under a single
command works effectively, both internally and with other parts of
the Department.
Sir John said today:
"The need to ensure goods can flow freely sets a challenge
in managing the risk of revenue losses. In this case Customs failed
over a number of years to get to grips with a major breakdown in
their control systems which led to an unacceptable loss of revenue.
They should, from the outset, have put in place a strategy to
manage the risks.
"The actions taken or now planned should lead to tighter controls
against fraud, improved management of investigations, and a better
strategic approach to countering fraud.."
Notes for Editors
The full NAO report is available at http://www.nao.org.uk/publications/nao_reports/01-02/0102178.pdf
The Roques Review is published by Customs at the same time as
this report.
The National Audit Office first reported to Parliament on these
losses in February 2001 in their annual report on Customs accounts.
In 2000-2001 Customs collected £6.7 billion from duty on alcohol
– seven per cent of the total revenue they collected.
The Comptroller and Auditor General, Sir John Bourn, is the head
of the National Audit Office employing some 750 staff. He and the
NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 39/01
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