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National Audit Office report: HM Customs and Excise: The Misuse and Smuggling of Hydrocarbon Oils

HM Customs and Excise: The Misuse and Smuggling of Hydrocarbon Oils

"The estimated revenue losses from the misuse and smuggling of hydrocarbon oils duty reveal that growing sums of revenue are being lost through smuggling and the illegal use of rebated fuel. Customs have recognised this problem by producing a strategy to deal with the frauds and are developing that strategy further. "Every effort must be made to combat this criminal activity which not only results in large amounts of lost duty but also poses threats to health and safety."

"The estimated revenue losses from the misuse and smuggling of hydrocarbon oils duty reveal that growing sums of revenue are being lost through smuggling and the illegal use of rebated fuel. Customs have recognised this problem by producing a strategy to deal with the frauds and are developing that strategy further. "Every effort must be made to combat this criminal activity which not only results in large amounts of lost duty but also poses threats to health and safety."

Sir John Bourn

 

In November 2001, Customs produced estimates for the first time of the revenue loss from frauds on petrol and diesel. Customs estimated that in 2000 the loss could be between £450 million and £980 million in the UK, compared to revenue receipts of £22.6 billion on oils duties. Of this, diesel frauds on the UK mainland in 2000 amounted to £450 million, while for Northern Ireland, the estimated revenue loss from fraud and legitimate cross border shopping was £380million for 2000, up from £140 million in 1998.Customs are concerned that fraud losses on the UK mainland in the diesel sector could continue to grow if concerted action is not taken to tackle the problem.

These findings appear today in a report to Parliament by Sir John Bourn, head of the National Audit Office. According to the report, Customs believe that the smuggling of fuel is a material problem only between the Republic of Ireland and Northern Ireland. This is because of the long land border, the lower price of diesel and petrol in the Republic compared to the UK – for example, on diesel there was a price difference of about 29 pence (38 per cent) per litre in January 2002 – and the presence of sophisticated criminal groups with experience in smuggling.

Since 1999-2000, when Customs started to develop their strategy for tackling frauds on hydrocarbon oils duty in Northern Ireland, the amount of fuel seized by Customs there has doubled and the number of vehicles seized involved in smuggling has more than tripled. But Customs estimate that, of the 700 filling stations in Northern Ireland, around 400 to 450 sell illicit fuel to some extent of which around 200 to 250 sell only or largely illegal fuel. Where Customs detect a filling station selling illegal fuel they seize the fuel, may seize the fuel pumps, raise an assessment for the duty and VAT owed and may prosecute. However, the Northern Ireland Petrol Retailers Association are concerned that these filling stations are quickly back in business and that if Customs are not more effective their members will continue to go out of business.

Customs see the illegal use of rebated fuels in road vehicles as the main risk they face on hydrocarbon oils duty on the UK mainland, although it is also a problem in Northern Ireland. Customs have undertaken a number of intelligence led operations in both areas to track duty-rebated supplies from the point of production through the distribution system to detect and disrupt illicit consumption.

The rebated fuels of red diesel and kerosene are chemically marked, so that Customs can detect illegal use by testing samples from fuel tanks. Fraudsters can use laundering techniques to remove the markers from red diesel and kerosene, or mix red diesel with other agents to mask the dye. Laundering plants are a problem in Northern Ireland where in 2000-01Customs found more in operation than on the UK mainland.

Customs have moved towards a risk-based fraud detection system: by tracking the sale and purchase of kerosene and red diesel from oil producers to retailers and consumers they are identifying the illicit use of fuel.

Customs are building on their strategy by considering initiatives including: increased numbers of intelligence-led checks and investigations; tougher penalties against those engaged in the supply of fuels for illicit purposes, or for those found using such fuel in road vehicles; as part of the Organised Crime Task Force in Northern Ireland, working with other public sector agencies to tackle the supply and sale of illicit fuel there; and developing their intelligence data to provide anti-smuggling teams with profiles of vehicles and individuals most likely to be smuggling oil.

There has been a constructive dialogue between the NAO and Customs throughout the development of Customs strategy. Sir John recommends that Customs could:

  • examine the cost effectiveness of chemically marking all duty paid fuel in Northern Ireland; this could act as a deterrent to smugglers and launders of fuel;
  • give fresh guidance to road fuel testing units to ensure that current penalties and sanctions are used to best effect in order to act as a sufficient deterrent to others; and
  • assess the effectiveness of measures taken by other EU member states in the oils fraud sector.

 

Publication details:

ISBN: 0102914079 [Buy a hard copy of this report from TSO]

HC: 614 2001-2002

Published date: February 15, 2002