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Fraud: EU Committee Report

My Lords, the speech that I am about to deliver is made solely for the benefit of our country and the EU. First, I congratulate the noble Baroness, Lady Cohen, the chairman of our sub-committee, who has presented very well the problems that have faced us. All of us on the sub-committee are grateful to her for her leadership. Although we have some quite elderly Peers in this House, no one is old enough to remember the South Sea bubble and the huge number of investors who lost their money in the 1700s, although they may have read about it. We have, however, had several confidence tricksters in the more recent past. One whom I remember well was Emil Savundra, who had an insurance company called Fire, Auto and Marine, which was designed and set up to be fraudulent. Then there was Bernie Cornfield, who ran a fraud called the Dover plan and wrote a book called Do You Sincerely Want to be Rich?. We had a major fraud that was based principally in London and surrounded BCCI, a bank engaged in money-laundering. Even more recently, huge fraud was perpetrated by Enron, the American giant, which resulted in considerable changes to corporate governance, and continuous boiler-room share transactions have preyed on old people and greedy people hoping to make a profit from worthless shares. All these frauds defrauded greedy and naive people and created a great deal of scandal in a comparatively short time. Edmund Burke said: "““Among a people generally corrupt, liberty cannot long exist””." So it should be. Missing trader fraud, commonly known as carousel fraud, is none of those things. It does not directly defraud individuals, but it directly defrauds nation states. It has spread its tentacles throughout government, and hardly any country has not been affected by it. The sub-committee, of which I am a member, has carried out an inquiry and, along with several colleagues of mine, we have come to certain undeniable conclusions. Those of you who have not read the report should do so, as carousel fraud is certainly the most sophisticated and widespread fraud ever perpetrated on a number of countries. Our own country, Britain, admits to the loss of about £19 billion in the past eight years. The sub-committee reckons that a lot more has actually been lost, but no one can know for certain. France has not admitted the exact amount that it has lost, but certain reliable sources have said that it has lost the equivalent of €12 billion in the past year alone. Italy, Germany and Spain all have large economies and are all being severely hit by this fraud. The larger the country, the more it loses. The only countries that are partially escaping this fraud are very small and have a GNP that is low enough for them to be able to deal promptly with any attempt at fraud. The Scandinavian countries—Denmark, Finland, Norway and Sweden—have been fortunate in escaping the worst effects of this fraud, but countries such as Belgium, Holland and Portugal have all been substantially affected. We in the sub-committee believe that, because the fraud is so widespread and the amounts of money involved are so great, no Government will admit to the exact figures that their Exchequer is losing, and that when they strike out to try to stop the fraud, they succeed only in diverting it. Let me explain. Because of the large number of VAT frauds—this fraud is all about VAT—our Government decided that they would withhold VAT refunds to almost every mobile phone company. Mobile phones were and still are the principal product used to embezzle the Government, so our Government decided to withhold all payments to any trader in mobile phones. Several genuine companies and honest sole traders have gone bankrupt because the Government would not repay them their VAT. However, we must understand that the Government wanted to bring this fraud to an end and thought that stopping VAT refunds would have the desired effect. In some cases no payments have been made for over a year, and the Government hoped that this would halt the problem. It does no such thing. The Government have also introduced a reverse charge, which your Lordships will read about in our report as being one of the methods we have suggested to stop the fraud. I will come to the argument later that in the case that I put forward there is only one true way to stop the fraud, but in the mean time I will continue with what I reckon has resulted in the diversion of the fraud. Already crooked traders are starting to deal with other products. They are dealing in cosmetics, white goods and clothing. All those are smallish products but of a high value, very much in the same way as mobile phones. This was why mobile phones were the first chosen instrument to defeat the VAT regulations. There is no doubt that the Government—and every Government—want to try to stop fraud, and I commend them for trying. They have taken on an extra 1,500 staff to deal with the problem, which is costing the Exchequer billions every year. How much better would it be if those moneys were being spent on schools, hospitals and similar things which would improve the quality of life in Britain? Maybe it would even reduce the rate of tax. Many of your Lordships will remember the fraud that occurred concerning the dollar premium. For those of your Lordships not conversant with this fraud, it was an actual fraud on the Government. People dealt in the dollar premium, for which one got a 28 per cent rebate, and one rather prominent businessman left Britain never to return. That was a fraud on the Government which was much more confined in size and scope than missing trader fraud. Your Lordships may wonder what proposals I have for trying to contain and solve the problem. I have always been keen on a procedure which we used to call, in business, rattling the cage. What this means is that when and where one knows that a fraud is being committed, but one is not actually sure how it is being done or about the mechanics of it, one should send in a team that will investigate the fraud from every conceivable angle. I know that the Government have employed a huge number of extra people to deal with this fraud, but I think, with respect, that many of these are clerks checking VAT returns. I advocate—very loudly—that the police or the Serious Fraud Office, or both, raid premises at Heathrow Airport, where it is known that freight forwarders have been sending plane-loads of mobile phones abroad at least three times a week. It is not only Heathrow, but equally applies to freight forwarders all over Britain. As I said earlier, this fraud will migrate to other areas and, because the Government have been refusing repayments of VAT to mobile traders, this area of fraud may be coming to an end. But, in order for the fraud to migrate into other goods, all that will happen will be that the freight forwarders at Heathrow and throughout the country will deal in different goods. It is imperative that these are raided, papers are taken away and the trail of where these goods go is followed and dealt with in a proper and efficient manner. A bank in the Caribbean was closed as a result of questionable transactions. How many more banks are used to transfer huge amounts of money? Obviously the 1,500 extra staff employed are engaged in various areas of investigating this fraud, but one of the things that we have not been able to establish in our committee is how many of them are working at desks following paper trails, how many of them are in the field examining records in board rooms, offices and financial departments, and how many are involved in visiting banks to check the flow of funds inwards and outwards. These are questions that I would like answered. I would also like to know how many other banks have been investigated. Many banks throughout the world are of a somewhat shadowy nature and engage in money-laundering and doubtful transactions with doubtful companies. It would be helpful to know how many premises have been raided, how many prosecutions are pending at the moment, and how many individuals or companies are before the courts. That information will help present a picture of correct deployment of personnel. I go back to my suggestion of rattling the cage. Our committee knows through evidence that a number of freight forwarders have been engaged in transactions, some of which must be placed in the dubious category. How many freight forwarders have been raided, and how many of these have yielded information helpful to the apprehending of criminal gangs? It has been estimated that there are up to 100 highly organised criminal gangs spread across Europe engaged in missing trader fraud, but we do not know how many enthusiastic amateurs have jumped on to the merry-go-round and are engaged in fraud, though perhaps not as well controlled as those involved in sophisticated criminal gangs. My strong recommendation to the Government is that they raid freight forwarders, follow the paper trails in offices, and investigate banks to see where the flow of money is coming from, and where it goes. I know that it is highly difficult to stop this fraud and that the Government are genuinely doing their best. I know that VAT rates are different throughout the EU and that it will be difficult to get the VAT rates agreed in all the different countries. Rattling the cage will catch a few criminals—perhaps the less sophisticated ones—but one has to hope that Governments will treat the matter extremely seriously, and that Governments throughout the EU will come together in an effort to get rid of this dreadful problem. I hope our Government will take whatever action they can as a matter of great urgency.