In the early 1990s a simple, but highly effective, scam ended up costing the treasury hundreds of millions in lost revenue as one warehouse became the centre of a black market spirits trade on a massive scale. But HMCE's efforts to stop it proved disastrous.
HMCE is one of the most powerful UK law enforcement agencies
As the BBC's Panorama programme reveals, HMCE's decision to go after those making millions from the fraud, rather than shut it down at source, was to cost the Treasury an estimated £2 billion in lost revenue and, more crucially would lead to Customs losing both their reputation in the courts and their powers to prosecute.
How it worked
In the early 1990s a group of fraudsters spotted that the new European border controls meant they could exploit the bonded warehouse system and evade duty on alcohol. The focused their activities around one warehouse in particular, the London City Bond (LCB), in the East End of the city.
Bonded warehouses are part of a system which allows alcohol to be bought and sold without duty being paid. They realised that all they needed was a lorry, a driver and fake paperwork to show that the alcohol was going to another bonded warehouse somewhere in Europe, for example Spain.
The London City Bond investigation cost millions in lost revenue
Once the alcohol had left the warehouse they could then divert it from its declared route and sell it on in the UK market, thus making a massive profit by pocketing the huge sums that should have accounted for tax. Panorama reporter Andy Davies explains with the example of one bottle of whiskey.
In the cash and carry it'll cost you £10.80. Of that over £7 accounts for the tax. Now take 17,000 of these bottles, load them onto a lorry, swerve them onto the black market and we, the tax payers, have just lost over £100,000.
John Early, a south London haulier who took part in the swerve, helping dodge £35 million in duty, says
"I think it would be fair to say that we moved close on a hundred loads a week before I finished working."
By the mid-1990s the fraud was worth tens of millions and Customs needed to step in and put a stop to it but their actions would only serve to worsen the situation.
Leaving the door open
Instead of immediately disrupting the fraud by arresting the drivers, Customs National Investigation Service (NIS) decided that it wanted to catch the major criminals behind the swerve rather than those moving the goods. As Allan Brown, a former customs officer who worked for the NIS describes it
We were told that was the philosophy. You're wasting your time effectively arresting people in white vans selling cigarettes around pubs. That's more of a control problem. Your job is to go after the principals, to attack the very top of the organisations.
It was open season at London City Bond as the controls were relaxed and the fraud flowed freely. According to haulier John Early:
"They couldn't have made it any easier because what did they do to try and stop us? They did absolutely nothing to stop the diversion, they simply encouraged it, sucked people into it, and spat them out again eventually."
A situation, according to defence lawyer Matthew Frankland, that risked creating crime.
"By completely opening the door and completely relaxing any control, you effectively created an industry that at one stage was worth £10 million, but was now worth £500 million a year. Now that's not targeting an existing criminal enterprise, it's creating one."
This involved using the warehousekeeper, Alf Allington, who was well aware of who was involved in the scamas an "informant", turning a blind eye to the fraud going in front of them while they ran surveillance operations in an attempt to catch those running the operations. Usually Allington would have been liable for any tax losses but, with a nod and a wink, Customs let him know he wouldn't have to pay for any losses.
By 1996, according to an audit, looking at cases actually investigated, at least £100 million had been lost through LCB and similar warehouse frauds. By mid-1997 it is estimated that over £300 million in revenue had escaped through the doors of LCB and other warehouses nationwide. Business was booming and LCB had to open additional premises to cope with the demand.
According to the audit of cases investigated £640 million had been lost. But according to figures estimated by Jan Wanstall, a senior customs official who had voiced her doubts about the way in which the LCB investigation was being carried out, the figures are considerably higher.
She estimates that, at the height of the scam, 90 out of every 100 lorries leaving LCB was fraudulent, meaning that by her calculations £5.4 million a day was being lost in revenue. That would mean that potentially the revenue lost could be almost £2 billion through LCB alone.
The estimated cost of The Swerve at London City Bond
At its height 9 out of 10 lorries were fraudulent
Equivalent per day: £5.4 million in lost revenue
Total cost: almost £2 billion at LCB alone
Eventually, in 1998, the frauds were closed down and controls tightened at LCB. Over 100 people were arrested in connection with the frauds and 40 prosecutions had been launched.
A Panorama Special - Nothing to declare is shown tonight on BBC One at 21:00 GMT.