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.