Ordered by the Public Accounts Committee to be printed 14 March 2001 Report: 4/00/R (Public Accounts Committee)

TABLE OF CONTENTS

Our Principal Conclusions and Recommendations
General Findings
The Adequacy of the Project Selection and Assessment Process
Weaknesses in Project Appraisal
The Circumstances Surrounding the Appointment and Subsequent Departure of the Chief Executive
The Extent to which Irish Sport Horse Genetic Testing Unit Ltd Directed Contracts and Business Towards Organisations with which Board Members had an Interest
Performance of the Project and its Future Direction

Our Principal Conclusions and Recommendations
General Conclusions
Action Taken to Reduce the Level of Fraud by Clients
Action Taken to Prosecute Offenders and Recover Subsidies Fraudulently Claimed
The Role of the Department in these Cases

Witnesses
Mr Peter Small, Accounting Officer, Department of Agriculture and Rural Development
Mr Roy McClenaghan, Chief Agricultural Officer, Department of Agriculture and Rural Development
Mr Ronnie Jordan, Head of Grants and Subsidies, Department of Agriculture and Rural Development
Mr Gerry Lavery, Director of Finance, Department of Agriculture and Rural Development
Mr John Dowdall, Comptroller and Auditor General, (C&AG)
Dr Andrew McCormick, Treasury Officer of Accounts, Department of Finance and Personnel.

1. Letter from Mr Peter Small, Accounting Officer of the Department of Agriculture and Rural
Development, Providing Additional Information Following the Hearing.

2. Second letter from Mr Peter Small, Accounting Officer of the Department of Agriculture and Rural Development, Providing Additional Information Following the Hearing.

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The Public Accounts Committee met on 24 January 2001 to consider the Comptroller and Auditor General's Report on Grants Paid to Irish Sport Horse Genetic Testing Unit Limited (HC 396) and to consider three cases of fraud reported by the Comptroller and Auditor General in the Northern Ireland Appropriation Accounts 1998-99, Vote 1 (NIA 6) and National Agriculture Support: Fraud (NIA 29/00). Our witnesses were:

• Mr Peter Small, Accounting Officer, Department of Agriculture and Rural Development
• Mr Roy McClenaghan, Chief Agricultural Officer, Department of Agriculture and Rural Development
• Mr Ronnie Jordan, Head of Grants and Subsidies, Department of Agriculture and Rural Development
• Mr Gerry Lavery, Director of Finance, Department of Agriculture and Rural Development
• Mr John Dowdall, Comptroller and Auditor General, (C&AG)
• Dr Andrew McCormick, Treasury Officer of Accounts, Department of Finance and Personnel.

1. In 1997, the former Department of Agriculture agreed to pay a County Fermanagh based company Peace and Reconciliation grant of up to £3.2 million for the purpose of implementing an innovative horse-breeding project. The C&AG's report recorded a range of departures from established standards of public conduct particularly in relation to conflicts of interest, appointments and letting of contracts. The report also identified serious weaknesses in procedures used by the Department to select and appraise the project.

2. In taking evidence the Committee focused on a number of issues raised by the C&AG's report. These were:

• the adequacy of the project selection and assessment process
• weaknesses in the project appraisal
• the circumstances surrounding the appointment and subsequent departure of the Chief Executive
• the extent to which the Irish Sport Horse Genetic Testing Unit Limited directed contracts and business towards organisations where board members had an interest
• performance of the project and it's future direction.

3.1 One of the key lessons arising from this case is that the Department could and should have done more at the outset to ensure that the Board Members were familiar with public sector standards particularly in relation to conflicts of interest, appointment of staff, and the letting of contracts.

3.2 We were encouraged to learn that many of the issues raised in the C&AG's report were first identified by the Department's own staff including Internal Audit. We commend these staff for raising some very important points of public accountability especially conflicts of interest.

3.3 In this case there is a perception that the Department failed to ensure that basic standards laid down for handling public money were met. We expect a Department dispensing a sum of £3.2 million to make sure that the judgements it makes are fully consistent with and, perceived by the wider community to be fully consistent with, the Nolan Commission's seven principles of public life.

3.4 The Accounting Officer asked us to bear in mind that the Irish Sport Horse Genetic Testing Unit was a private company and that the Department's relationship with the company had to be conducted on an arm's length basis. We are not persuaded by this line of argument. Indeed we think it is entirely inappropriate for the Department to distance itself from the catalogue of bad management practices in the company. We find it particularly disturbing that Departmental oversight was totally lacking during the first eighteen months of the company's existence.

3.5 We must make it clear that, whatever the time pressures, Departments should never override those procedures which have been carefully designed to minimise risk to the taxpayer. These procedures have been hard learned from previous cases where public money has been squandered. It seems to us that, in the early stages of this project, the Department allowed itself to be boxed into a quite unnecessary timing strait-jacket.

3.6 We found it astonishing that the Department's Peace and Reconciliation Steering Group had no criteria for assessing and scoring projects. It did not even keep minutes of its meetings. This Committee finds it unacceptable that the Department is unable to produce documentation detailing the methodology used to allocate Peace and Reconcilation Funding.

3.7 The Committee was astounded to find that proper project selection and assessment procedures did not exist for over £30 million of Peace Funding. This is another indictment of the standard of administration in the former Department of Agriculture at that time. It is, however, encouraging that the deficiencies were eventually picked up by the Department's Internal Audit. We set considerable store on the Accounting Officer's firm assurance that this will not be repeated.

3.8 The Department did not advertise the first tranche of Peace Funding to the general public. We are surprised that so much funding was allocated to the Department's own favoured projects. In our view, this was going against the spirit of the Peace and Reconciliation Programme which was supposed to be community driven.

3.9 A fundamental flaw in the appraisal of the Irish Sport Horse Project was that it didn't include any market research to test the extent to which the horse breeding community would be willing to buy into the project. In what was intended to be a commercial project the importance of properly researching the market should have been recognised at the outset.

3.10 The Department should have been much more alert to the dangers of optimistic or best case assumptions underpinning an investment decision of this nature. There are long-established rules and procedures on the dispersal of financial assistance by Government departments which are designed to deal with these dangers. These rules and procedures, which date back almost two decades, have been repeatedly endorsed by the Westminster Committee of Public Accounts. One of the key points is that Government funding of high-risk commercial projects should not proceed unless the project can stand up under a worst case commercial scenario. In the Irish Sport Horse case a worst case commercial scenario was clearly not considered. It is particularly unsatisfactory that hard-learned lessons from the past appear to have been forgotten by the Department of Agriculture and Rural Development (DARD).

3.11 Another flaw in the appraisal was that it didn't explore different site options. In our view, many of the difficulties associated with this site could have been much better managed if there had been a more careful consideration of horse-breeding requirements at the outset.

3.12 We are left with the impression that the standard of appraisal has been very poor not only in the Rural Development Division of the Department but in other divisions as well. Much more needs to be done by the Department to ensure that project appraisals meet basic quality standards. We would like to see evidence of what the Accounting Officer considers to be good appraisal work in the Department since 1995 and we invite him to select two examples and submit them to us.

3.13 Another lesson is that a Department promoting a project of this nature, through a private sector company, must have sufficient leverage in the conduct of the company's affairs to ensure that public sector standards on appointments are observed from the outset. This is absolutely necessary both to ensure that the best people are appointed and that there is no possibility of favouritism or the perception of favouritism.

3.14 In our view it was improper for a civil servant to have taken up a top post in a private sector body which she had been centrally involved in helping to create when she worked in the Department. We recommend that the Department of Finance and Personnel (DFP) consider the need to revise the rules on civil servants taking up private sector appointments to take on board the lessons of this case.

3.15 We look to DFP to ensure that, when early retirement schemes are designed, they are more carefully targeted at employees in older age groups where the cost to the taxpayer would be much lower.

3.16 The Accounting Officer accepted that, in the early stages of the project, there was a breakdown in the control the Board was entitled to hold over the Chief Executive. This breakdown occurred despite the fact that senior Departmental Officials had seats on the Board at that time. In our view the senior Departmental Officials on the Board failed in their duty to protect public funds during the early stages of this high-risk, high-cost project. However, we are encouraged that one lesson the Department has drawn from this is that it should have had someone on the Board from a management or accountancy background.

3.17 When we consider the full range of conflicts of interest both in relation to DARD staff and the dealings of the Board we have the impression of a set of cosy relationships which fell well short of generally accepted practices in the handling of public money.

3.18 In our view, the circumstances described by the Department did not justify issuing large sums of public money prior to the completion of formal documentation. This was taking unacceptable and unnecessary risks with public money. We note that, in August 1997, the Department eventually issued guidance to the Company on conflicts of interest, tendering procedures and appointments. Unfortunately this was after the damage had been done. The Department accepts that this guidance should have been issued at the outset before any grant had been paid over to the Company.

3.19 We welcome the assurances from the Accounting Officer that safeguards will be put in place to ensure that breeders will have an opportunity to purchase good quality stock at fair market prices and that there will be no "cherry-picking" of the best horses by the people closely associated with the project.

3.20 It is clear that the project has under-performed compared to what was expected in the investment appraisal which secured Peace and Reconciliation Funding. However, we do recognise that the project has made a contribution to the objectives of the Peace and Reconciliation Programme.

3.21 We do not want Departments to be inhibited from developing innovative and imaginative projects but we want to be sure that when they take these types of projects forward they fully recognise the risks and pay careful attention to best practice in risk management.

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4. Our report focuses on shortcomings in the Department's handling of this project but we do recognise and welcome the involvement of public-spirited individuals who bring valuable expertise and a commitment of time and effort to projects of this nature. However, not all of the people who volunteer their time will be familiar with the demanding codes of conduct expected when public money is being handled. One of the key lessons arising from this case is that the Department could and should have done more at the outset to ensure that the Board Members were familiar with public sector standards particularly in relation to conflicts of interest, appointment of staff, and the letting of contracts. Departments have a duty to ensure that the high standards of conduct expected from those running public bodies apply in equal measure to those running private companies which are almost wholly financed from public funds. We cannot over-emphasise the importance of observing these codes both to provide assurance to the public that there is no trace of favouritism and to protect the reputation of members of the public who serve on the Boards of organisations which are substantially funded from public money.

Minutes of Evidence paragraph 7.

5. We were encouraged to learn that many of the issues raised in the C&AG's report were first identified by the Department's own staff including Internal Audit. We commend these staff for raising some very important points of public accountability especially conflicts of interest.

C&AG's Report (HC 396) paragraphs 6 and 25 and Minutes of Evidence paragraph 11.

6 In this case there is a perception that the Department failed to ensure that basic standards laid down for handling public money were met. There was a lack of transparency. The principle of selflessness does not appear to have been observed. There seems to have been a lack of objectivity on the part of officials who were involved in developing the project, approving it and subsequently heading it up as either Chief Executive or Board members. We expect a Department dispensing a sum of £3.2 million to make sure that the judgements it makes are fully consistent with and, perceived by the wider community to be fully consistent with, the Nolan Commission's seven principles of public life.

7. The Accounting Officer asked us to bear in mind that the Irish Sport Horse Genetic Testing Unit was a private company and that the Department's relationship with the company had to be conducted on an arm's length basis. We are not persuaded by this line of argument. Indeed we think it is entirely inappropriate for the Department to distance itself from the catalogue of bad management practices in the company. In our view the Genetic Testing Unit was not a normal private company. In fact, it differed from a normal private company in four fundamental ways. First, it was instigated by Government. Second, it was almost wholly financed from public funds. Third, senior officials from the Department had seats on the Board of the company. Finally, its Board Members and senior executives had not invested any of their own money in the business. Where individuals have a personal stake in a business they are highly motivated to exercise tight financial control. As these normal commercial disciplines were absent in the Genetic Testing Unit, there was all the more need for the Department to exercise effective oversight of the company. We find it particularly disturbing that Departmental oversight was totally lacking during the first eighteen months of the company's existence.

Minutes of Evidence paragraphs 80-81, 96-97, 100-101 and 153.

8. The Accounting Officer told us that proper procedures on project selection and assessment appointment of staff and other matters were discarded because of intense time pressures from Brussels to get projects up and running and the importance of getting this particular project started in time for the 1996 breeding season. We must make it clear that, whatever the time pressures, Departments should never override those procedures which have been carefully designed to minimise risk to the taxpayer. These procedures have been hard learned from previous cases where public money has been squandered. It seems to us that in the early stages of this project, the Department allowed itself to be boxed into a quite unnecessary timing strait-jacket.

Minutes of Evidence paragraphs 13-15, 66-67, 74 and 91.

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9. It is a fundamental requirement of public administration that the basis on which projects are assessed, scored and selected should be properly documented and completely transparent. We found it astonishing that the Department's Peace and Reconciliation Steering Group had no criteria for assessing and scoring projects. It did not even keep minutes of its meetings. We made it clear in our Report on Rural Development (Report: 2/00R) that we will not accept assurances from Accounting Officers that controls were operating when there is no record to support this. This Committee is entitled to evidence from civil servants when seeking to establish the basis on which they have allocated public funds.

C&AG's report (HC 396) paragraph 6 and Minutes of Evidence paragraphs 89-91 and 211-213.

10. Our concern about this goes beyond the Irish Sport Horse Case. The Committee was astounded to find that proper project selection and assessment procedures did not exist for over £30 million of Peace Funding. This is another indictment of the standard of administration in the former Department of Agriculture at that time. It is, however, encouraging that the deficiencies were eventually picked up by the Department's Internal Audit. We set considerable store on the Accounting Officer's firm assurance that this will not be repeated.

Appendix 1 Note 7.

11. The Department did not advertise the first tranche of Peace Funding to the general public. The Department told us that £12.3 million of the first tranche was allocated to internal DARD projects such as Irish Sport Horse and the Loughry Food Business Incubation Centre and that £18 million was allocated to community driven projects. We are surprised that so much funding was allocated to the Department's own favoured projects. In our view, this was going against the spirit of the Peace and Reconciliation Programme which was supposed to be community driven. The Department should also have been much more alert to the perception that community projects were not competing on a level playing field with internal DARD projects.

C&AG's Report (HC 396) paragraph 8, Minutes of Evidence paragraphs 226-229 and Appendix 1 Note 7.

12. The C&AG's Report indicated that there was an insufficient division of responsibilities between those who developed the Irish Sport Horse project and those who approved it. The former Chief Agricultural Officer was deeply involved in the development of the project from the outset and he was also a member of the Steering Committee that approved all the projects including community driven projects. The Accounting Officer defended this by saying that the Chief Agricultural Officer was only one of ten Steering Group members and would not have been in a position to unduly influence the decisions of the Group. However, when pressed he accepted that, without proper Steering Group records, he was in no position to demonstrate that this was the case. In our view, the Chief Agricultural Officer is likely to have been influential as he was not only one of the most senior civil servants on the Steering Group but would also have been seen by others to have particular expertise in the subject area. His very presence on the group created a perception of conflict of interest that should not have been allowed to occur.

C&AG's report (HC 396) paragraph 9 and Minutes of Evidence paragraphs 82-95.

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13. A fundamental flaw in the appraisal was that it didn't include any market research to test the extent to which the horse breeding community would be willing to buy into the project. This was a commercial project which was expected to generate significant income and eventually survive without grant assistance. Yet, a revised assessment carried out over three years after the company was set up, indicated that the project, in its existing form, would be totally unviable once the cushion of Peace Funding was removed. The income projections in the original appraisal should have been underpinned by market research.

C&AG's report (HC 396) paragraphs 15 and Minutes of Evidence paragraphs 32-35 and 113-127.

14. The Accounting Officer told us that the appraisal was based on the best information available at the time and that the flaws in the original appraisal only became evident with the benefit of hindsight. We do not agree. In what was intended to be a commercial project the importance of properly researching the market should have been recognised at the outset.

Minutes of Evidence paragraphs 25-38.

15. The Department has accepted that a fundamental assumption underlying the financial viability of this project was optimistic. The Department should have been much more alert to the dangers of optimistic or best case assumptions underpinning an investment decision of this nature. There are long-established rules and procedures on the dispersal of financial assistance by Government departments which are designed to deal with these dangers. These rules and procedures, which date back almost two decades, have been repeatedly endorsed by the Westminster Committee of Public Accounts. One of the key points is that Government funding of high risk commercial projects should not proceed unless the project can stand up under a worst case commercial scenario (Twenty-fifth Report of the Committee of Public Accounts Session 1983-84 HC 127-I). In the Irish Sport Horse case a worst case commercial scenario was clearly not considered. It is particularly unsatisfactory that hard-learned lessons from the past appear to have been forgotten by DARD.

Minutes of Evidence paragraphs 119-127.

16. Another flaw in the appraisal was that it didn't explore different site options. The appraisal stated that the project "will operate" from the Ulster Lakeland Equestrian Centre, Necarne Castle, Irvinestown owned by Fermanagh District Council. No other site options were considered. In the event, it emerged that the Necarne site was far from ideal. A subsequent review commissioned by the company itself concluded that "the land was extremely fragmented, very wet in places and that the soils were totally unsuited to the rearing of horses". The company even had to share the site with other users. External events taking place on the site such as a car rally and pop concert contributed to poor breeding results. In our view, many of the difficulties associated with this site could have been much better managed if there had been a more careful consideration of horse-breeding requirements at the outset.

C&AG's report (HC 396) paragraphs 15 to 17. Minutes of Evidence paragraphs 128-135, 148-153 and 232-244.

17. The Accounting Officer told us that the particular difficulties associated with the pop concert and car rally arose not because of flaws in the appraisal but because Fermanagh District Council had breached a clause in the leasing agreement which required it to keep the site free of noise and disturbance. We then asked the Department whether it had considered taking legal action against the Council. The Accounting Officer told us that no action had been taken at the time and that, in any event, this was a matter for the company not the Department. However at the request of this Committee, the Department wrote to the company suggesting that it should consider taking legal action against the Council. The Company has now given its view which is that there is unlikely to be any benefit from taking legal action. It said it was consulted about both the rally and concert and, in advance, moved the horses away from possible disturbance.

Minutes of Evidence paragraphs 136-147. Appendix 1, Note 5 and Appendix 2.

18. The Accounting Officer informed us that the official who completed the appraisal of this £3.2 million project appeared to have had no training or previous experience in project appraisal. We note the Department's explanation that the appraisal was subsequently reviewed by qualified people in its Economics Unit and DFP. However, in our view, subsequent review is no substitute for ensuring that those who undertake the original appraisal work are properly equipped to do the job.

Minutes of Evidence paragraphs 160-165. Appendix 1, Note 6.

19. When the Accounting Officer gave evidence last October on the Rural Development Programme he assured us that project appraisal systems had become progressively more rigorous from 1995. The Irish Sport Horse project was, of course, approved after 1995. We are left with the impression that the standard of appraisal has been very poor not only in the Rural Development Division of the Department but in other divisions as well. Much more needs to be done by this Department to ensure that project appraisals meet basic quality standards. We would like to see evidence of what the Accounting Officer considers to be good appraisal work in the Department since 1995 and we invite him to select two examples and submit them to us.

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20. Many of the difficulties experienced by this project can be traced back to a lack of thought given, at the outset, to the types of skills needed to manage it. This was a high-risk innovative venture which required high quality management skills as well as technical skills to make it work. Yet from the evidence we have heard it is clear that the Department made little attempt to identify the skills required to run the business successfully. The Chief Executive and other posts were not even advertised and only one candidate was considered for the Chief Executive position.

C&AG's report (HC 396) paragraph 12. Minutes of Evidence paragraphs 63 and 70-71.

21. The Accounting Officer told us that because the Company was a small private sector employer it was not required in law or by the rules of the Peace Funding to advertise the posts. Another lesson, therefore, is that a Department promoting a project of this nature, through a private sector company, must have sufficient leverage in the conduct of the company's affairs to ensure that public sector standards on appointments are observed from the outset. This is absolutely necessary both to ensure that the best people are appointed and that there is no possibility of favouritism or the perception of favouritism.

Minutes of Evidence paragraph 65.

22. The 43 year old civil servant who helped to develop the project was given what we regard as a very generous early retirement package with effect from 30 November 1995. Her contract was extended to 15 March 1996 to enable her to complete the appraisal of the Irish Sport Horse project. Once this was done she was immediately appointed as Chief Executive of the private sector company which had been set up to take the project forward. In our view, it was improper for a civil servant to have taken up a top post in a private sector body which she had been centrally involved in helping to create when she worked in the Department. At the very least there is a perception that the principle of selflessness was not observed. We should not have to remind Departments that selflessness was the first of Lord Nolan's seven principles of public life. Nolan stated that "holders of public office should take decisions solely in terms of the public interest. They should not do so in order to gain financial or other material benefits for themselves". In this case, a civil servant was working up a project proposal knowing that, if it were approved for funding, she was likely to become the Chief Executive of the private company which would take it forward. In these circumstances we think there must be a question mark against her objectivity.

C&AG's report (HC 396) paragraphs 3 and 11-13. Minutes of Evidence paragraphs 40-62 and 78.

23. The Accounting Officer told us that if this official had been more senior she would have been prevented, under civil service rules, from taking up any position in the private sector which had links with the work she had been doing in the Department. In our view, the seniority of the civil servant is not the only factor which determines whether there is a potential perception of impropriety. This case illustrates that there can be similar problems with a more junior official who is moving to take a post in an organisation with which they have been closely involved. We recommend that DFP considers the need to revise the rules on civil servants taking up private sector appointments to take on board the lessons of this case.

Minutes of Evidence paragraph 53.

24. We also note that this official was one of the youngest to be offered an early retirement deal by DARD in recent years. Because of her age the cost to the public purse was particularly high. The Accounting Officer explained that this particular deal was fully consistent with the rules of the early retirement scheme. We look to DFP to ensure that, when early retirement schemes are designed, they are more carefully targeted at employees in older age groups where the cost to the taxpayer would be much lower.

Minutes of Evidence paragraphs 40-42, 78 and 414-424. Appendix 1, Note 1.

25. The Accounting Officer accepted that, in the early stages of the project, there was a breakdown in the control the Board was entitled to hold over the Chief Executive. This breakdown occurred despite the fact that senior Departmental Officials had seats on the Board at that time. Two examples illustrate the serious nature of this control breakdown. First, the Chief Executive negotiated a £304,000 deal with Fermanagh Council for the use of land and buildings. An independent valuation, which was carried out later, suggested that this was up to three times the going market rate. It would appear that the senior Departmental Officials on the Board were not aware of this deal until after it was signed and sealed. Second, the Chief Executive bought more horses than originally planned. This contributed to a £135,000 over-spend in 1997-98. The senior Departmental Officials on the Board were not aware that these extra horses had been purchased. We were also surprised that the Chief Executive had the power to write very substantial cheques without having to get Board authorisation. In our view, the senior Departmental Officials on the Board failed in their duty to protect public funds during the early stages of this high-risk, high-cost project. However, we are encouraged that one lesson the Department has drawn from this is that it should have had someone on the Board from a management or accountancy background.

Minutes of Evidence paragraphs 166-177.

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26. Avoidance of conflicts of interest is a fundamental principle in handling public money. In this case, the 1996-97 audited accounts which the company sent to the Department did not disclose any Board Member or Director interests. Subsequent investigations by the Department revealed a number of conflicts of interest, which in some cases involved Peace and Reconciliation grant money going to parties in which Board Members had an interest. For example the former Chief Executive directed contracts worth around £14,000 to her husband's business. There was no tendering and, in one case, she appeared to be sending quotations to herself.

C&AG's report (HC 396) paragraphs 22 to 38. Minutes of Evidence paragraphs 75-97.

27. When we consider the full range of conflicts of interest both in relation to DARD staff and the dealings of the Board we have impression of a set of cosy relationships which fell well short of generally accepted practices in the handling of public money.

28. We think a factor contributing to these bad practices was the fact that the Department paid over a substantial amount of money to the company before the terms and conditions of grant had been fully worked out. The C&AG's report indicates that the Department paid out six instalments of grant in advance of any formal application by the Company for funds and that a total of £613,000 was paid to the company before legal documentation was finalised. The Accounting Officer told us that the formalities were bypassed because of the importance of getting the project started for the 1996 breeding season. He said it was necessary to get the project started quickly in order to ensure that it would be self-financing by the time that the Peace Funding had run its course. We are not persuaded by this argument as even now in 2001 not all of the first tranche of Peace Funding has been spent. In our view, the circumstances described by the Department did not justify issuing large sums of public money prior to the completion of formal documentation. This was taking unacceptable and unnecessary risks with public money.

C&AG's report (HC 396) paragraphs 20 and 21. Minutes of Evidence paragraphs 72-74 and 224-225.

29. We note that, in August 1997, the Department eventually issued guidance to the Company on conflicts of interest, tendering procedures and appointments. Unfortunately this was after the damage had been done. The Department accepts that this guidance should have been issued at the outset before any grant had been paid over to the Company.

Minutes of Evidence paragraphs 106-108.

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30. The Accounting Officer told us that the project had now received its full £3.2 million grant allocation and that no further public sector grant would be paid. As to the future, the Department said it was currently working out with the company how the community in Fermanagh could best benefit from the output of the project.

Minutes of Evidence paragraphs 204-206.

31. The Committee is aware that there are public concerns about the propriety of procedures currently employed by the company to dispose of surplus horses. We welcome the assurances from the Accounting Officer that safeguards will be put in place to ensure that breeders will have an opportunity to purchase good quality stock at fair market prices and that there will be no "cherry-picking" of the best horses by the people closely associated with the project.

Minutes of Evidence paragraphs 196-201.

32. The main purpose of the project was to establish a foundation population of Irish Sport Horse breeding to assist rural breeders to embark on a breeding programme producing high performance horses for the international market. The Accounting Officer indicated that it was too early to judge the likely contribution of the project to the development of an export market in Irish Sport Horses. We were told that, so far, no horses produced by the Company have been exported. They are still being performance tested.

Minutes of Evidence paragraphs 193-195.

33. It is clear that the project has under-performed compared to what was expected in the investment appraisal which secured Peace and Reconciliation Funding. However, we do recognise that the project has made a contribution to the objectives of the Peace and Reconciliation Programme. We were told, for example, that over thirty small farmers are paid to rear horses on behalf of the Company. These farmers are gaining new skills as well as receiving cash payments.

C&AG's report (HC 396) paragraphs 48 to 50. Minutes of Evidence paragraphs 184-192.

34. In view of the prospects of Peace II Funding we asked the Accounting Officer whether he would put forward a project of this nature again. He told us he would want to put a question mark over whether the Department would do a project that consumed as much public resource at the outer levels of technology and understanding. He said his Department would need to have a debate as to whether bigger projects, if there are any, should be on less risky territory. We think this is very sensible. We do not want Departments to be inhibited from developing innovative and imaginative projects but we want to be sure that when they take these type of projects forward they fully recognise the risks and pay careful attention to best practice in risk management.

Minutes of Evidence paragraphs 207-210.

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1. The first two fraud Cases, A and B, involved the over-declaration of land by the applicants and subsequent overclaims of £105,793 for livestock subsidies. In both cases the police were unable to pursue a criminal prosecution because of serious shortcomings in the Department's systems.

2. The third Case, C, involved fraudulent claims for EU Beef Special Premium subsidies. In this case, 60 per cent of the applicants' claims between 1995 and 1999 were fraudulent and remained undetected until the Department's investigation in 1999, even though all documentation supporting the claims and animals had been inspected. Despite the scale of the fraud, which was calculated at £127,253, the Department decided not to refer the fraudulent claims to the police.

3. In the light of these cases, it was important for this Committee to explore with the Accounting Officer whether the Department was 'a soft touch' on fraud. We were encouraged by his evidence that he:

• operates a 'zero' tolerance to fraud
• is continuing to develop an anti-fraud culture throughout the Department by regularly circulating its fraud policy
• has expanded the Department's Fraud Investigation Unit
• has tightened its control environment
• has established an anti-fraud 'hotline'
• holds staff accountable through 'stewardship statements'.

4. However, there are still important lessons to be learned and these are set out in the body of our report and in the principal conclusions and recommendations. In taking evidence, the Committee focused on three issues. These were:

• the action taken to reduce the level of frauds by clients
• the action taken to prosecute offenders and recover subsidies fraudulently claimed
• the role of the Department in these frauds.

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5.1 Overall, one of the most worrying features of our work in the Public Accounts Committee has been to consider the scale of actual and suspected fraud in the public sector. This is a massive waste of scarce resources. It can also be a serious threat in other ways, for example, the recent spread of Foot and Mouth disease to Northern Ireland through illicitly traded sheep has underlined the dangerous links between fraud and animal health and the way in which this can jeopardise the viability of the whole industry.

5.2 We want to emphasise that there is no acceptable level of fraud. Fraud is spread across many departments and seems to be tackled in different ways by different departments. However, combating fraud is a challenge to which the public sector needs to rise. We expect the Department of Finance and Personnel (DFP) will take a message from this and we look to them to set a clear lead in ensuring that combating fraud is given increased priority across departments and that best practice is shared. This Report identifies some lessons that will help with this.

5.3 We welcome the Department's proposed review of its anti-fraud measures and note that its likely recommendations will include a more pro-active role for its Fraud Investigation Unit, including taking a strategic overview of agricultural fraud, identifying trends and enhancing targets. There will also be enhanced co-ordination through the formation of a Fraud Group which will act as a think tank, information exchange and a co-ordination group.

5.4 It is important that the Department's strategies for combating fraud are based on realistic estimates of the annual quantum of fraud. The Accounting Officer's estimate of annual fraud, at between £240,000 and £480,000, appears particularly low, given the value of the three cases before us. This needs to be reviewed. In addition, we are concerned that the Department has not established annual targets to combat fraud as part of its 'zero tolerance' policy. However, we welcome the development of a counter fraud strategy. We recommend that, as part of this strategy, the Department establishes a sound methodology for estimating the quantum of fraud in each business area; sets clear objectives and demanding targets aimed at reducing the level of fraud; and monitors the extent of its achievements.

5.5 It is disappointing to note that in all three cases we examined there were no prosecutions. The Department's inability to prosecute blatant fraud does not send the right signal to those in society who might be tempted to claim public money dishonestly. In our view the prosecution of fraudsters, through the criminal and/or civil process, carries a strong deterrent effect. We recommend that the Department rigorously reviews its control systems to ensure not only that fraud is deterred, but that where it is attempted there is a high probability of it being detected and that the system ensures the proper evidence is available for prosecution. We also recommend that where the department secures a successful prosecution against fraudsters, that it seeks maximum publicity from the case to heighten public awareness of its commitment to beating fraud and further deterring fradulent activity.

5.6 Even though the Department has statutory powers to impose penalties, the Committee was concerned to find that no penalties were levied and extended repayment terms were afforded in these frauds. In our view, this conveys the impression that the Department has not achieved the right balance between taking a firm line and appearing too soft with fraudsters. We were concerned to hear that these fraudsters, in all three cases, have a record of previously defrauding the Department and some of the fraudsters from each case are currently under investigation by the Fraud Investigation Unit. We welcome the Accounting Officer's assurance that serial fraudsters, such as these, are specifically targeted for special attention when fresh claims are submitted.

5.7 However, we also recommend that where penalties are available they must be applied. In particular, in cases such as these, where there is clear evidence of serial fraud, the penalties should be stringent. If the Accounting Officer believes that the current framework of penalties does not give the Department sufficient latitude to meet this Committee's expectations, we would like him to review the scope for strengthening the Department's position, by legislation, if necessary.

5.8 It is a characteristic of public sector fraud that those who dishonestly attempt to obtain public money in one area, frequently repeat the attempt in other areas of public expenditure. Effective anti-fraud action in the public sector requires a joined-up approach from Departments such as DARD. In our view, this is a matter that needs to be taken forward centrally by DFP who should establish formal arrangements to enable departments (including Cross Border Bodies, Northern Ireland Office, Northern Ireland Court Service, Inland Revenue and Customs and Excise) to share information about individual fraudsters when they are identified. If there are obstacles preventing the exchange of information, then these need to be addressed as a matter of urgency.

5.9 The 'free-phone fraud hotline' is a useful weapon in the battle against fraud and we welcome its introduction. However, the Accounting Officer has accepted that more needs to be done to raise awareness within the farming community of the actions taken by the Department to combat fraud. We recommend that the Department draws up (and implements), as part of its counter fraud strategy, a plan of action setting out its programme for raising awareness; the timescales involved; and the criteria for measuring success.

5.10 We were informed that the Fraud Investigation Unit produces an annual report on its activities. This is good practice and provides a medium for communicating details of the Department's policies for combating fraud; its strategies, objectives and targets; and publicising its achievements. In the interests of transparency this annual report should be published.

5.11 We welcome the increase in resources in the Fraud Investigation Unit from three to four Investigators. We are, nevertheless, concerned that the Unit still appears to be under-resourced to deliver a timely and effective investigation service, given the scale of expenditure in the Department and the risk of fraud in many of its programmes. We recommend that the Department's Internal Audit Unit should be asked to undertake a cost-benefit exercise to determine if the benefits accruing from the appointment of extra Investigators would outweigh the costs involved. We would like to be informed of the outcome.

5.12 We were impressed by and commend to other departments the accountability process operating in the Department. As the Accounting Officer is held accountable to this Committee, Heads of Divisions are held accountable to him for their business units through signing 'statements of stewardship'.

5.13 We were surprised at the confusion in the Department over the requirement to notify the C&AG of all frauds. We would like to be assured by DFP that there is no scope for further misunderstanding on this important point.

5.14 The Department established three primary systems that prevent and detect fraud and are operated by 600 administrative, inspection and veterinary staff. Against this background it is therefore very worrying that, even though the procedures within the systems were routinely applied, they allowed a fraud to be perpetrated for four years until it was detected in 1999. This does not suggest that the controls were as tight as the Accounting Officer seems to believe. We welcome the Accounting Officer's assurances that further action has been taken to correct and strengthen the systems of control.

5.15 We were astounded to hear that maps as old as 1938 and 1963 were still being used by the Department and that this contributed to the ridiculous outcome that grants were being claimed on the basis of land at Clement Wilson Park, Barnett's Demesne (including car park area), Sir Thomas and Lady Dixon Park and Dunmurry Golf Club and included large areas of recreational land, a wildlife reserve and rosebeds. It is equally surprising that staff in the Lisburn Office handling these claims did not recognise their fraudulent nature. We welcome the assurances by the Accounting Officer that they are moving very quickly towards a much more sophisticated mapping system and that site inspections are now undertaken of all new land registered by farmers.

5.16 The Department's Animal Public Health Information System (APHIS) which can trace animal movements is a powerful weapon in the fight against disease. It is also a potentially powerful weapon in the fight against fraud. It is important that the system is used to its full potential and that the information held on it is accurate and up to date and that discrepancies in information are fully investigated. We welcome the Accounting Officer's assurances that steps have been taken to improve the reliability of information on this system. However, it is worrying to hear that APHIS has been compromised and contains details of animals illegally imported into Northern Ireland. The Accounting Officer told us that a combination of measures are in place to detect such animals. We recommend that the Department should, as a matter of urgency, intensify its enquiries into illegal imports of animals to ensure both a high probability of detection and thorough investigation of suspected cases. We also ask the C&AG to keep us informed of progress. In addition, the Department needs to have in place rigorous quality control procedures to ensure the integrity of the information held on APHIS.

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6.1 We consider it vital that a Department such as DARD, which pays out hundreds of millions of pounds in subsidy payments, is perceived to vigorously and effectively pursue those who dishonestly attempt to misappropriate taxpayers' money. We welcome the Accounting Officer's clear enunciation of his anti-fraud policy but cases such as these outlined in this report make it clear that much remains to be done.

6.2 Since the evidence session, we have noted a worrying press report concerning a case where Brucellosis was deliberately introduced into a cattle herd for the purposes of making a fraudulent claim for compensation. The scope for fraud of this type seems to be related to the scale of compensation being offered by the Department and the volume of claims appears to be increasing. The C&AG has informed us that he is currently clearing a report on Brucellosis with the Department and it is our intention to return to this particular issue in due course. In the meantime, we would like the Department to provide us with a note, giving its assessment of the risk to public funds from this type of fraud and the action which it is currently taking to address it.

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7. The Accounting Officer provided us with a memorandum summarising his action plan for combating fraud. He told us that his first priority is to prevent fraud and this is achieved by maintaining a strong anti-fraud culture, careful design and review of schemes and the deployment of field staff to conduct on-the-ground physical checks. His action includes, the issue of a fraud policy; stewardship statements; rigorous administrative checks; high level physical checks and the operation of a Fraud Investigation Unit. The Accounting Officer also told us that his Department will be developing a counter fraud strategy for publication in 2001 and reviewing its anti-fraud measures. It is likely that the proposed review will recommend a more pro-active role for its Fraud Investigation Unit, including taking a strategic overview of agricultural fraud, identifying trends and enhancing targets. There will also be enhanced co-ordination through the formation of a Fraud Group which will act as a think tank, facilitate information exchange and act as a co-ordination group. We welcome these developments.

Minutes of Evidence paragraphs 379-380, Appendix 1, note 11

8. It is important that the Department's strategies for combating fraud are based on realistic estimates of the annual quantum of fraud. We asked the Accounting Officer for an estimate of the value of fraud perpetrated against his Department annually and how much of this is detected. We also asked for details of any specific anti-fraud related targets which had been set. The Accounting Officer told us that his Department has a zero tolerance to fraud and their objective is deterrence. His Department is aware of all the areas of fraud and estimates the value of fraud at between £240,000 and £480,000. This strikes us as particularly low, given the value of the three cases before us and, in the light of this, we recommend that the Department establishes a sound methodology for systematically estimating and reviewing the quantum of fraud in each of its main business areas.

Minutes of Evidence paragraphs 262-263.

9. We are concerned that the Department has not established annual targets to combat fraud as part of its zero tolerance policy. In our view it is very important that the Department devises and implements a strategy to reduce the level of fraud, which includes clear objectives and demanding targets as well as monitoring achievements. However, we welcome the Accounting Officer's assurance that a counter fraud strategy will be developed and will include targets for a reduction in the level of fraud.

Minutes of Evidence paragraphs 262-263, Appendix 1, note 11

10. We were surprised that the Accounting Officer did not know how much of the total annual value of fraud his Department is detecting, although he did tell us that, in the last financial year, they inspected 70,000 claims. Of these, they disallowed and rejected 550, applied penalties to 2,500 and adjusted a further 3,000 claims. They referred 281 cases to the Fraud Investigation Unit, of which 68 went to the Director of Public Prosecutions. During the year they secured 51 convictions. The Accounting Officer considered that these high figures demonstrate that their combination of measures is detecting fraud and acting as a deterrent.

Minutes of Evidence paragraph 267.

11. While we welcome these figures we are not convinced that they act as a sufficient deterrent. For this to happen, it is crucial for the Department to raise awareness among the farming community of its anti-fraud measures, level of activity and results. The Accounting Officer accepted that more needs to be done to raise awareness within the farming community of the actions taken by the Department to combat fraud. We recommend that the Department draws up (and implements), as part of its counter fraud strategy, a plan of action setting out its programme for raising awareness; the timescales involved; and the criteria for measuring success.

Minutes of Evidence paragraphs 395-397.

12. Only days before giving evidence to this Committee the Department installed a 'free-phone fraud hotline'. The 'hotline' is a useful weapon in the battle against fraud and we welcome its introduction.

Minutes of Evidence paragraphs 252-255.

13. As part of its anti-fraud measures the Department has a Fraud Investigation Unit which had been expanded from three to four Investigators to deal with an increasing workload of referrals. When we asked if this was sufficient for the purpose, the Accounting Officer told us that the anti-fraud effort has a high priority and if four Investigators could not cope there would be a high priority attached to increasing the Unit further. We welcome the increased resourcing of the Fraud Investigation Unit. However, we are concerned that the Unit still appears to be under-resourced to deliver a timely and effective investigation service, given the scale of expenditure in the Department and the risk of fraud in many of its programmes. We would like to be assured that sufficient resources are in place to deliver a fast and flexible high quality service and we recommend that the Department's Internal Audit should be asked to undertake a cost-benefit exercise to determine if the benefits accruing from the appointment of extra Investigators would outweigh the costs involved. We would like to be informed of the outcome.

C&AG's report (NIA 29/00) para 21; Minutes of Evidence paragraphs 341-344.

14. In outlining the Department's strategy for combating fraud and developing an anti-fraud culture, the Accounting Officer explained the accountability procedures that operate. As he is held accountable to this Committee, Heads of Divisions are held accountable to him for their business units through signing 'statements of stewardship'. We were impressed with these arrangements which we regard as a good model for generating a culture of awareness and we commend it to other departments.

Minutes of Evidence paragraph 258.

15. The Department has issued two anti-fraud policy statements and has established three primary systems that prevent and detect fraud. The systems are the Integrated Administration and Control System (IACS); the Animal Public Health Information System (APHIS) and the Field Management System (FMS). We asked the Accounting Officer how he checks if the anti-fraud policy is being observed and reflected in the Department's control systems. The Accounting Officer explained that the anti-fraud policy is part of its fraud fighting strategy which is regularly communicated to staff and will be circulated again in 2001 with the purpose of developing an anti-fraud culture throughout the Department. The Accounting Officer also explained that the procedures within the systems were routinely applied by some 600 administrative, inspection and veterinary staff and it was through the operation of these systems that all three frauds were detected.

C&AG's report (NIA 6) para 57; C&AG's report (NIA 29/00) paras 2 & 21; Minutes of Evidence paragraphs 257-261.

16. While this sounds impressive, it is worrying that, even though the procedures within the systems were routinely applied, they allowed the fraud in Case C to be perpetrated for four years until it was detected in 1999. This does not suggest that the controls were as tight as the Accounting Officer seems to believe.

C&AG's report (NIA 6) para 57; C&AG's report (NIA 29/00) paras 2 & 21; Minutes of Evidence paragraphs 257-261.

17. We were informed that the Department's Fraud Investigation Unit produces an annual report on its activities. This is good practice and provides a medium for communicating details of the Department's policies for combating fraud; its strategies, objectives and targets and publicising its achievements. In the interests of transparency this annual report should be published.

Minutes of Evidence paragraph 258.

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18. In NIA 29/00 the Department sought to demonstrate how seriously it viewed fraud but we noted that in the three cases we examined there were no prosecutions. When we asked what his policy was on prosecutions, the Accounting Officer told us that it was the department's policy to prosecute when it will lead to a conviction, as there is no greater deterrent than a conviction.

C&AG's report (NIA 29/00) paras 21, 23; C&AG's report (NIA 6) paras 61 & 72; Minutes of Evidence paragraphs 316-317.

19. The Department referred Cases A and B to the police with a view to prosecutions. In Case A the police decided that a criminal prosecution would not be pursued mainly because of serious shortcomings in the Department's IACS monitoring system and the fact that the maps used were provided by the Department. In Case B the police reported that there were fundamental difficulties in pursuing a prosecution, such as the use by applicants of maps provided by the Department.

C&AG's report (NIA 6) paras 61 & 72

20. In NIA 29/00, we noted that, despite the enormity of the fraud, Case C was not referred to the police with a view to prosecution. The Investigators were convinced that a prosecution, if pursued, would not be successful because of the very high standards of evidence required to bring a successful prosecution. We accept these points, but believe that this places an even greater onus on the Department to ensure that its systems, procedures and investigation standards are such that, even in complex cases, a successful prosecution becomes a reality.

C&AG's report (NIA 29/00) para 23; Minutes of Evidence paragraphs 318-319.

21. It is disappointing to note that in all three cases we examined there were no prosecutions. The Department's inability to prosecute blatant fraud does not send the right signal to those in our society who might be tempted to claim public money dishonestly. In our view the prosecution of fraudsters, through the criminal and/or civil process, carries a strong deterrent effect and we recommend that the Department rigorously reviews its control systems to ensure not only that fraud is deterred, but that where it is attempted there is a high probability of it being detected and that the system ensures the proper evidence is available for prosecution. We also recommend that where the department secures a successful prosecution against fraudsters, that it seeks maximum publicity from the case to heighten public awareness of its commitment to beating fraud and further deterring fradulent activity.

22. In the light of the weaknesses revealed by Cases A and B, we asked the Accounting Officer to provide us with details, for the past five years, of similar suspected fraud cases where his Department was unable to prosecute because of the actions of his officials. We have noted his assurances that there were no other such cases during the past five years. This is encouraging but we never want to see cases like this again where inadequacies on the Department's part have hindered the prosecution of suspected fraudsters.

Minutes of Evidence paragraph 331, Appendix 1, Note 9.

23. When we asked the Accounting Officer how many fraud cases were prosecuted in the past five years, we were told that there were 51 successful prosecutions in 2000. The information for the prior years was not readily at hand but the Accounting Officer thought that the number of successful prosecutions would be lower.

Minutes of Evidence paragraph 322.

24. We asked the Accounting Officer what penalties and sanctions are applied in those cases where there was no prosecutions. We were told that the Department has a zero tolerance to fraud - they want to detect it and to prosecute the fraudsters. The Department also told us that where it is unable to prosecute, it attempts to recover the money. However, our concern is that in the cases which we considered, serial fraudsters have been able to rip off the Department and, in the absence of prosecution, the recovery of money fraudulently gained is not a penalty or a sanction.

Minutes of Evidence paragraphs 263, 332-333, 386-387 and 392.

25. In NIA 29/00, the C&AG reported that the Department has statutory powers to impose sanctions so that if claimants do not observe the conditions of the Beef Special Premium Scheme they will lose some or all of their entitlement to premiums. However, when we questioned the Accounting Officer on this we were told that it was unable to apply the sanction of excluding the family in Case C from the scheme in the subsequent year because the fraud was not caught soon enough.

C&AG's report (NIA 29/00) para 8; Minutes of Evidence paragraph 385.

26. Furthermore, we note that the C&AG's Report refers to extended repayment terms being given to this family. The Accounting Officer defended his Department's actions by stressing the need to act in a manner deemed reasonable by the Courts. It is disappointing to hear that the Department believed it was unable to apply a penalty or sanction in this case. In our view this conveys the impression that the Department has not achieved the right balance between taking a firm line and appearing too soft with fraudsters.

C&AG's report (NIA 29/00) para 12; Minutes of Evidence paragraphs 392-394.

27. We recommend that where penalties are available they must be applied. In particular, in cases such as these, where there is clear evidence of serial fraud, the penalties should be stringent. If the Accounting Officer believes that the current framework of penalties does not give the Department sufficient latitude to meet this Committee's expectations, we would like him to review the scope for strengthening the Department's position, by legislation, if necessary.

28. The Accounting Officer provided us with a memorandum setting out new financial data to that reported in NIA 6 and 29/00; and updates the figures at paragraphs two and three above. The families in these Cases, A, B and C were overpaid £228,578 which was later adjusted to £217,530. Interest charges of £26,850 were levied. An amount of £82,086 including interest has still to be repaid and £52,360 has been written-off. Of the amount written-off, £34,000 (including interest) relates to NIA 6, Case A, where one family member could not be traced. In Case B of the same Report, the family fraudulently claimed £42,000, later adjusted to £32,000, but none of this amount is being recovered because the family has since claimed that it acted in good faith and the Department, after taking legal advice, has accepted this.

Minutes of Evidence paragraphs 276-282, Appendix 1 note 8.

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29. We consider that it is good practice when fraudsters are identified to share the information with other departments and agencies, such as the Social Security Agency, and we were therefore surprised that formal arrangements have not been established to enable this to happen. The Accounting Officer accepted that there was room for improvement in the exchange of information, notwithstanding the constraints imposed by legislation.

Minutes of Evidence paragraphs 283-286.

30. This is a disappointing example of the Department's failure to see beyond its own immediate responsibilities in tackling public sector fraud. It is a characteristic of public sector fraud that those who dishonestly attempt to obtain public money in one area, frequently repeat the attempt in other areas of public expenditure. Effective anti-fraud action in the public sector requires a joined-up approach from Departments such as DARD. In our view, this is a matter which needs to be taken forward centrally by DFP who should establish formal arrangements to enable departments (including Cross Border Bodies, Northern Ireland Office, Northern Ireland Court Service, Inland Revenue and Customs and Excise) to share information about individual fraudsters when they are identified. If there are obstacles preventing the exchange of information then these need to be addressed as a matter of urgency.

31. Contrary to DFP instructions, the C&AG was not informed about the frauds in Cases A and B because the Department failed to interpret the instructions correctly. The Accounting Officer explained that in his view his Department had complied fully with the instruction as set down by DFP but, once informed of the C&AG's view, had changed its reporting system to meet his requirements.

Minutes of Evidence paragraphs 332-336.

32. We were surprised at the confusion in the Department over the requirement to notify the C&AG of all frauds. The Committee wants to make it absolutely clear that it regards it essential that when the C&AG is certifying accounts (to give the Assembly assurance that the accounts are 'true and fair' or 'properly presents') that he has made a judgement that there is no material fraud and that his judgement is informed by knowledge of all fraud cases, proven or suspected, of which the Department is aware. We would like to be assured by DFP that there is no scope for further misunderstanding on this important point.

Minutes of Evidence paragraphs 337-338.

33. The C&AG's Report (NIA 6) states that some of the land in question which formed part of the claims for Cases A and B was not physically farmed by the applicants, but rather was leased to provide additional hectarage to satisfy stocking density requirements and thus maximise subsidy payments. The lands were located at Clement Wilson Park, Barnett's Demesne (including car park area), Sir Thomas and Lady Dixon Park and Dunmurry Golf Club and included large areas of recreational land, a wildlife reserve and rosebeds. In both cases the applicants grossly inflated the hectarage of the land available for forage and recorded the details on copies of maps provided by the Department from Ordnance Maps originally printed in 1938 and 1963. The Department also said that even with a more up-to-date map, a person with fraudulent intent could have indicated to a departmental official a larger area of parkland available to him than was in fact the case.

C&AG's report (NIA 6) paragraphs 59, 62, 65, 68 and 70.

34. When we questioned the Accounting Officer about this, he agreed that allowing farmers to use and claim grant on remote land from their farms which are never actually used for forage, provides an opportunity for someone who wants to commit fraud. We find it surprising that staff in the Lisburn Office handling these claims did not recognise their fraudulent nature. However, the Accounting Officer told us that nothing like this could recur as all applications are checked for duplication against the Field Management System. Any possible duplicates are subject to a specific investigation.

Minutes of Evidence paragraphs 271-272 and 357-362.

35. There is also a five per cent check of applications under the Integrated Administration and Control System, two per cent of which is random and three per cent is targeted specifically at those claimants who have previously submitted fraudulent claims. As an additional check, site inspections are now undertaken of all new land registered by farmers. We welcome the action that has been taken to correct and strengthen the systems of control.

Minutes of Evidence paragraphs 271-272, 347-350 and 361-362.

36. The C&AG's Report, (NIA 6), stated that the 1938 and 1963 maps supplied by the Department and used by the applicants were the only ones available. When we asked about this, we were astounded to hear that some of the older maps are still being used though the Accounting Officer is satisfied that they meet their requirements. We were also told that, with digital technology, they were moving very quickly towards a much more sophisticated mapping system. We welcome these statements by the Accounting Officer but the test of this is that we never see another case of this nature.

C&AG's report (NIA 6) Para 62; Minutes of Evidence paragraphs 351-356.

37. In NIA 29/00, Case C, the Department stated that the animals on the family's claims had moved from their natal herds into the family's herds. These animals were recorded on the Animal Public Health Information System (APHIS) but could not have been born into the herds of the other farmers, who sold the calves to the family, as there were insufficient cows on these farms to give birth to the number of animals recorded. The suspicion was that the animals could originally have come from sources outside Northern Ireland.

C&AG's report (NIA 29/00) para 4

38. We asked the Accounting Officer for an estimate of the number of animals illegally imported into Northern Ireland that were on the APHIS. In a memorandum reply he stated that, the fact that animals are illegally imported precludes the possibility of their identification on APHIS, as all animals recorded on the system purport to be legitimately in Northern Ireland and have either a Northern Ireland tag or an officially imported tag. He added that while it is likely that there are illegal importations, they would be done in such a way as to be indistinguishable on APHIS. He explained that their detection is therefore dependent on surveillance and enforcement on the ground. The cattle identification inspections which are carried out on farms each year assists in the identification of those holdings where movement fraud is being perpetrated. Additionally, Veterinary Service enforcement officers liaise closely with their counterparts in the Republic of Ireland to identify those involved in this illegal trade.

Minutes of Evidence paragraph 375; Appendix 1 note 10

39. The Accounting Officer also told us that departmental systems have been strengthened to deter this activity and include:

• more information on movement of animals
• immediate notification of all births
• confirmation that all mothers of calves are alive after six months.

40. The Department's Animal Public Health Information System which can track animal movements is a powerful weapon in the fight against disease. It is also a potentially powerful weapon in the fight against fraud. It is important that the system is used to its full potential and that the information held on it is accurate, and up to date and discrepancies are fully investigated. We welcome the Accounting Officer's assurances that steps have been taken to improve the reliability of information on this system. The recent spread of Foot and Mouth disease to Northern Ireland, through illicitly traded sheep has underlined the dangerous links between fraud and animal health and the way in which this can jeopardise the viability of the whole industry. In the light of this, we strongly recommend that APHIS is extended to other animal livestock.

Minutes of Evidence paragraphs 295-297.

41. When we pressed the Accounting Officer about the illegally imported animals on APHIS and whether this meant that these animals could be carrying diseases, such as brucellosis, he accepted that this was the case. It is worrying to hear that APHIS has been compromised, though we are heartened by his assurance that a combination of measures are in place to detect these animals, such as a 100 per cent inspection by the Veterinary Service of 1,800 herds every year. As to whether these animals could enter the food chain, we were told that within Northern Ireland and the United Kingdom as a whole, no animal over thirty months of age can possibly get into the food chain. We note these assurances as we consider that it is vitally important that public confidence in the farming industry is maintained.

Minutes of Evidence paragraphs 298-303 and 371-372.

42. We recommend that the Department, should as a matter of urgency, intensify its enquiries into illegal imports of animals, to ensure both a high probability of detection and thorough investigation of suspected cases. We also ask the C&AG to keep us informed of progress. In addition, the Department needs to have in place rigorous quality control procedures to ensure the integrity of the information held on APHIS.

43. When we asked the Accounting Officer if all three families have a history of fraudulent activity and if any of the families are currently under investigation, we were not surprised that this was indeed the case. The Accounting Officer also told us that some of the fraudsters from each case are currently under investigation by the Fraud Investigation Unit. In cases such as this where we are dealing with serial fraudsters, we were pleased to hear the Accounting Officer's assurance that all fresh claims from fraudsters are targeted for special attention (see paragraph 35). The test of this is that serial fraudsters will no longer be able to perpetrate fraud against the Department.

Minutes of Evidence paragraphs 361-370.

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Members Present: Mr Billy Bell in the Chair
Mr Roy Beggs Jnr
Mr Mervyn Carrick
Mr Seamus Close
Mr John Dallat
Mr David Hilditch
Mr Donovan McClelland
Ms Jane Morrice
Ms Sue Ramsey

Mr John Dowdall, Comptroller and Auditor General (C&AG) was examined

Dr Andrew McCormick, Treasury Officer of Accounts was examined.

The Comptroller and Auditor General's reports on Grants Paid to Irish Sport Horse Genetic Testing Unit Limited (HC 396), Northern Ireland Appropriation Accounts (Vote 1) 1998-99 (NIA 6) and National Agriculture Support: Fraud (NIA 29/00) were considered.

Mr Peter Small, Accounting Officer, Department of Agriculture and Rural Development, Mr Roy McClenaghan, Chief Agricultural Officer, Department of Agriculture and Rural Development, Mr Ronnie Jordan, Head of Grants and Subsidies, Department of Agriculture and Rural Development and Mr Gerry Lavery, Director of Finance, Department of Agriculture and Rural Development were examined

* * * *

Members Present: Mr Billy Bell in the Chair
Mr Roy Beggs Jnr
Mr Mervyn Carrick
Mr Seamus Close
Mr John Dallat
Mr David Hilditch
Mr Donovan McClelland
Ms Jane Morrice
Mr Danny O'Connor
Ms Sue Ramsey

Mr John Dowdall, Comptroller and Auditor General, was further examined.

The Committee deliberated.

Draft Report (Grants Paid to the Irish Sport Horse Genetic Testing Unit Ltd and National Agriculture Support: Fraud), proposed by the Chairman, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Introduction read and agreed to

Para 1 to 2 read and agreed to.

Para 3.1 to 3.21 postponed

Para 4 to 14 read and agreed to

Para 15 read and agreed subject to amendment

Para 16 read and agreed to

Para 17 read and agreed subject to amendment

Para 18 to 30 read and agreed to

Paras 3.1 to 3.21 read and agreed subject to changes to be made to reflect amendments agreed in paras 4-30

Para 1 to 4 read and agreed to.

Para 5.1 to 6.2 postponed

Para 7 to 39 read and agreed to

Para 40 read and agreed subject to amendment

Para 41 to 43 read and agreed to

Paras 5.1 to 6.2 read and agreed subject to changes to be made to reflect amendments agreed in paras 7-43.

* * * *

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Members present:
Mr B Bell (Chairperson)
Ms Ramsey (Deputy Chairperson)
Mr Beggs
Mr Carrick
Mr Close
Mr Dallat
Mr Hilditch
Mr McClelland
Ms Morrice

Witnesses:
Mr P Small )
Mr G Lavery ) Department of Agriculture
Mr R McClenaghan ) and Rural Development
Mr R Jordan )
Dr A McCormick ) Treasury Officer of Accounts
Mr J Dowdall ) Comptroller and Auditor General

1.

The Chairperson: Welcome to the Committee, Mr Small. Please introduce the members of your team?

2.

Mr Small: With me today are Mr Gerry Lavery, the Director of Finance, responsible for propriety and audit matters; Mr Roy McClenaghan, the Chief Agricultural Officer whose particular interest today involves the Irish Sports Horse Genetic Testing Unit; and Mr Ronnie Jordan, the Assistant Secretary, who is responsible for grants and subsidies and whose main interest today concerns the question of fraud in relation to grants and subsidies.

3.

The Chairperson: There was a radio broadcast on BBC Radio Ulster this morning in which Seamus McKee suggested that the Public Accounts Committee in Westminster had previously dealt with this matter. That is not the case. Perhaps Mr McKee was confused inasmuch as this audit report was a House of Commons report and he therefore thought that the House of Commons had dealt with this matter. However, no one has dealt with it until now.

4.

Today, we will be dealing with two issues and to keep matters simple I suggest we deal with them separately.

5.

Mr Small: Yes. That would be preferable.

6.

The Chairperson: We will commence with the matter of the Irish Sport Horse Genetic Testing Unit Ltd.

7.

First, the Committee recognises and welcomes the involvement of public-spirited individuals who bring their valuable expertise to community projects. This has clearly been the case regarding the Irish Sport Horse Genetic Testing Unit. However, most people who volunteer for such posts are not fully aware of the issues involved with public money. They are unaware of public accounting issues and codes of conduct expected from those dealing with public money. However, we are not here to pillory the project. We are here to discuss what lessons can be learned that will benefit others involved in future projects.

8.

First, Mr Small, since your Department was instrumental in establishing the Irish Sport Horse Genetic Testing Unit, are you satisfied that your Department did enough to ensure that the board members were familiar with or given training in public sector requirements? That seems to be the nub of the issue before us.

9.

Mr Small: The facts set out in the Comptroller and Auditor General's (C&AG) report illustrate that more could have been done to prepare the board. People were appointed to the board because they had particular skills relevant to the project. One of the lessons for the Department to learn is that the relationship between a Department - or any part of the public service - and a body which is operating in the private sector requires special work to ensure that every one understands their roles and responsibilities. The Department could, and should, have done more, particularly in the early stages of the project, to ensure that all board members were aware of public sector standards and requirements.

10.

Having said that, there was a memorandum of agreement between the Department and the board, which specifically drew attention to the whole question of conflict of interest. We certainly drew the attention of board members to that issue. However, the board would have benefited from stronger departmental guidance on financial control and on the management of the role of the chief executive.

11.

The Chairperson: I would refer you to paragraphs 6 and 25 of the C&AG's report. I note that the report records that many issues were identified in the first instance by your own staff, including your internal audit unit. I would like to congratulate your staff, and that unit, for some of the very important points they covered, especially - and you mentioned it earlier - conflicts of interest.

12.

What led them to begin an investigation in that area?

13.

Mr Small: There are two issues here. The first is the way in which the Department selected the project. Our internal audit team identified that the procedures for selection - within the Department and before the board existed - were not sufficiently transparent.

14.

The audit team indicated that they could not give the accounting officer assurance because of deficiencies in the documentation concerning project selection. That has led to new instructions being issued to all people involved in any project of this kind. Clear criteria, objectives and documentation of decision-making must be established. That was a completely correct role for internal audit to play.

15.

In defence of those who were involved in selecting the project, they were working under very intense time pressures from Brussels to get projects under the Peace Programme up and running. They were constantly working against the clock. Having said that, good documentation should always be part of good practice.

16.

The second issue is on the question of conflict of interest, and there are two elements to that. One, that I have already referred to, is that in the memorandum of understanding between the Department, the company and the board, we had made it clear that any conflict of interest had to be shown on the face of reports to the Department.

17.

The 1996/97 reports and accounts contained no references to any conflict of interest. However, following further examination by the Department of company developments, we drew attention to certain issues that we believe should have been drawn to our attention in the accounts. On that basis, the accounts were sent back to be redone.

18.

That demonstrated that the Department's oversight of the project - one step removed from the board - was sufficiently rigorous to identify conflicts of interest not reported to us.

19.

The Chairperson: Paragraphs 14 to 19 of the C&AG's report identify a number of weaknesses similar to those identified in the rural development programme we discussed at an earlier stage. It gives the impression that the standard of appraisal work was not only poor in the rural development division but also in other divisions. What action has the Department taken to improve the standard of appraisals across its divisions?

20.

Mr Small: I do not agree with the comparison made with rural development appraisals.

21.

The Chairperson: They appear to be very alike.

22.

Mr Small: I will explain the situation to the Committee because I understand why the Chairperson is saying that. The Public Accounts Committee's criticism on rural development appraisal, which I accepted, was that the Department did not carry out appraisals until 1995/96, and that in the early stages of rural development the Department relied on business cases. That is a different situation to what exists here. In this case, a proper appraisal was undertaken; it was approved by the Department of Finance and Personnel; and it complied with the 'The Northern Ireland Preface to the Green Book - the Department of Finance and Personnel's Guide to Economic Appraisal and Evaluation, Project Approval and Management' - known as the "Green Book". In this instance the Audit Office has looked at two components of the appraisal and disagreed with some of the assumptions made in it. Of course, it is perfectly legitimate for the Audit Office to do that. However, appraisal is about opinion. On occasions, I get the impression that the "Green Book" and appraisals are seen as a rigid set of rules that have to be applied. That is not the case. The Green Book describes appraisal in the following terms:

"Good appraisal calls for flexibility and imagination. It is not a ritual in which rigid rules are applied to the letter".

23.

The "Green Book" sets out 10 key stages that should be pursued. In this case, the Audit Office said there were two main weaknesses. On both of those it has expressed an opinion with which I disagree. The Audit Office made no comment on the other eight key stages, therefore, the terminology used by the audit office is unnecessarily harsh.

24.

The Chairperson: Are you saying that I have got it wrong?

25.

Mr Small: No. It comes back to the point that I made earlier. Very often an appraisal is an opinion, and an opinion that an individual may have had in 1996 is not necessarily the same as he might have three or four years later. Appraisals are based on information available at a particular point in time, and that is why auditors may have a different perspective when they deal with information at a different point in time.

26.

Therefore, I accept that two aspects of the appraisal were not ideal - I do not want to give the impression that I thought the appraisal was perfect. I understand why the Audit Office has challenged it, but I am not sure that it is a simple matter of right and wrong. However, it is significantly different from anything that happened in rural development.

27.

The Chairperson: Dr McCormick, do you have any comment to make on what Mr Small said?

28.

Dr McCormick: I agree with Mr Small's quotations from the "Green Book." It is a matter of applying guidance in a case by case contest. It has to be done flexibly and with imagination. Those are indeed quotations from the "Green Book," and they imply that all Departments need to look at the issues on a case by case basis and apply those principles and guidance. That needs to be done carefully.

29.

The Chairperson: But, Dr McCormick, did your Department see no weaknesses?

30.

Dr McCormick: It is important to point out that the original appraisal of the proposal, which came through in autumn 1995, was not up to standard and we challenged it. That was part of the normal interaction between the Department of Finance and Personnel and any Department. It was our judgement that the revised appraisal made a serious and reasonable attempt to address the issues set out in the "Green Book."

31.

The Chairperson: I am trying to get the whole picture. Mr Dowdall, would you like to comment?

32.

Mr Dowdall: I accept what the accounting officer has said in making a distinction between the problems with the rural development investment appraisals we looked at and those in this particular appraisal. As he said, an appraisal was carried out and was approved by the Department of Finance and Personnel.

33.

I would have to register disagreement with the emphasis he puts on flexibility as provided by the "Green Book." I have had the advantage of being involved in the development of the "Green Book" at every stage of my career, so I know it well. It was never intended to imply that when a commercial project such as this was being considered you would have the flexibility not to assess the market situation properly. It seems to me that that is not just a use of flexibility; it is a fundamental flaw. If the Department of Agriculture was approaching appraisal in that way at that time it needed to address the issue, because it was dealing with a range of projects which were increasingly moving into areas of a commercial nature.

34.

The Chairperson: I had a question, but it touched on the appraisal situation so I will dispense with it at the minute. Mr Small, I will give you the chance to comment.

35.

Mr Small: I do not think that the Comptroller and Auditor General and I disagree on this. I accept completely that the flexibility does not carry through to ignoring key issues, and I do not believe that happened in this case. To use the words of Dr McCormick, the Department made 'a serious and reasonable attempt' to analyse all the issues which were part of this appraisal.

36.

Regarding market research, which was referred to in particular by the C&AG, the Committee has to remember that we were dealing in an area, which was at the leading edge of technology. There was practically no experience in embryo transplant anywhere in the world other than in Argentina.

37.

The report brings out the fact that this was a high-risk project. We were trying to assess how the industry - the owners of those high-merit mares - would respond to the project, and the time frame for the animals being out of competitive action. A judgement was made on the best information available at the time, which we thought was right and which was accepted by the Department of Finance and Personnel.

38.

Four years later, when technology has moved on, the Comptroller and Auditor General has identified that that assumption proved to be wrong. I accept that completely. Had we got it right at the time, we would have made different assumptions, which would have changed the course of the project. However, we could only judge the circumstances as they were in 1996. The auditors are able to judge the circumstances three or four years later. In principle, I do not disagree with the Comptroller and Auditor General's analysis of what flexibility means in the "Green Book."

39.

The Chairperson: Thank you. I have no further questions, but the Deputy Chairperson, Sue Ramsey, has one or two questions.

40.

Ms Ramsey: The talk of flexibility and imagination threw me. Whoever was involved in setting up the project had a good imagination. I refer to paragraphs 3 and 11 of the report, which states that a civil servant who was involved in setting up the project went on to be appointed as chief executive of the company.

41.

The report states that she was offered voluntary early retirement from the Department, which included an immediate compensation payment of over £86,000. Does the Department normally offer generous early retirement plans to people in their early 40s and, if so, how many staff in the 40 to 45 age group have been offered early retirement in the past five years?

42.

Mr Small: I do not accept the word "generous". It is not a generous package; it is the standard package offered under the Civil Service Pay and Conditions of Service Code. If the Department is in a position of having to reduce numbers, there is a clear process we have to go through. If this is in a particular professional or technical area, the process is limited to that area of the Department.

43.

Management takes the decision to reduce numbers from X to Y and people are then invited to apply. This is not unique to the civil service; it happens anywhere there is downsizing, be it in the private or public sector. Staff are invited to apply according to terms set out in the civil service code and those have not changed.

44.

In this particular instance, we had to downsize the part of the Department in which this individual worked. She, along with others, applied for early retirement and it was granted. No- one who applied for early retirement under the scheme was rejected. Everyone was treated the same way under the civil service code, although each person would not have received the same cash figure; that depends on age, length of service and grade. There is nothing unique about this.

45.

Ms Ramsey: It is generous in the sense that she then went on to become the chief executive of the project she was involved in setting up. That is what I am talking about. I would appreciate a list of people offered early retirement in the past five years from your Department.

46.

Paragraph 11 states that she was offered early retirement from November 1995, but her contract was extended to enable her to complete the appraisal of the project. If the Department knew that she was in the running to be the chief executive before she was given early retirement, why was she not seconded to the job?

47.

Mr Small: There are various answers to that. She was as entitled as anybody else to apply for the early retirement package. She had applied for it, had been accepted, and had accepted the offer before there ever was a project. That gave her rights in law that could not be removed, nor would it have been morally right to remove them.

48.

The fact is that having retired, she immediately took on the function of chief executive. I can understand why you are asking the question, but the alternative would have been either to disadvantage her in terms of the retirement package - and that would have been wrong - or to have written her out of the possibility of being chief executive of the company. On the basis of the professional advice, which we had been given, we believed that the company's only chance of success was with her as a leading player in it. We were trying to deal with a range of circumstances that were not ideal, but I think the judgements made were not unreasonable.

49.

Ms Ramsey: The Department extended her contract when she had accepted early retirement so that she could complete the appraisal of the project. She then became chief executive. That may not seem strange to you, but it does to me.

50.

Mr Small: You have to divorce the Department's role from that of the company. In any early retirement scheme at management's behest, we are trying to get people to leave the organisation because we can no longer afford them. Part of the process involves entering into a firm, legally-binding commitment with the individuals volunteering to leave. A precise retirement date is then negotiated, because if we offer early retirement to a dozen or 15 people who work in the same area it does not make sense to let them all go on the same day. You have to phase people out, so that they complete, as far as possible, the work in which they are engaged. Because this individual was working on this specific area, it was decided that she would stay until that piece of work was completed.

51.

Obviously I understand your point, but it was decided that if she left employment before the work was completed it would have made it more difficult to finish it in the time frame that was needed.

52.

Ms Ramsey: Paragraph 13 deals with a European Commission query about a possible conflict of interest. It was brought to Department's attention that an official resigned and then accepted the job as chief executive. The grade of the person is mentioned but that is not relevant because there is the perception that a member of the Department's staff, who was involved in setting up this project, went on to be chief executive. How senior do you need to be within a Department before it says "Hold on, there is something wrong here"?

53.

Mr Small: That guidance is clearly set down the civil service code. It has to be someone at under- secretary or deputy secretary level, or above. Had this individual been at that level of seniority she would not have been permitted to engage in any work linked with what she did in the Department. There are many examples of retiring senior civil servants who are precluded from working in a particular sector for a period of time. Those rules apply to the senior civil service, not to junior officers.

54.

Ms Ramsey: You mentioned the "Green Book" earlier. I want to quote something from one of Nolan's seven principles of public life: "Holders of public office should take decisions solely in terms of the public interest. They should not do so in order to gain financial or other material benefits for themselves."

55.

In my view there has to be a question mark over the objectivity of the official involved in developing the project and then becoming chief executive. Although you are saying it is a perception, I do not think it is proper. I am concerned that someone within the Department did not challenge this. Did anybody think it was wrong?

56.

Mr Small: Wrong is an absolute word. There are two ways in which this could have been challenged: we could have refused the person early retirement, which would have been fundamentally wrong and a breach of her rights; or the company could have decided that it needed her skills - and its professional expert said that the project would not succeed without her - but it could not employ her because she had worked on the project in the civil service. Those are the only two ways that the issue could have been addressed. I understand your point, but I do not think that either of those solutions would necessarily have been correct.

57.

Ms Ramsey: I will make two points for the record. First, the Department extended the period of employment until the person completed the appraisal of the project; that needs to be questioned. Secondly, would you identify the professional expert you mentioned?

58.

Mr Small: He is Prof Allen of Cambridge University. Could I also add that - again not to give the impression that only this one individual was somehow allowed to stay - of the 18 people who left the Department, five had their contracts extended. Management decided that it would not make sense for these people to leave in the middle of the job they were doing.

59.

Ms Ramsey: Can you provide the Committee with the names of the original people involved in the Department and the names of the project's original board members?

60.

Mr Small: When you say "People involved in the Department", do you mean the names of the people in the Department who developed the project?

61.

Ms Ramsey: Yes.

62.

Mr Small: Certainly. There is absolutely no difficulty in that.

63.

Ms Ramsey: I should like to turn to paragraphs 12 and 48 - I know I am jumping backwards and forwards. Paragraph 48 states it was clear that the project was a high risk, requiring management skills to make it work. However, paragraph 12 suggests that the Department made no attempt to identify the skills needed to run the business. The chief executive's post was not even advertised, and only one candidate, the departmental official, was considered. You mentioned earlier that this happened on the advice of an expert from the University of Cambridge.

64.

We are becoming aware that senior civil servants were on the company board. Did they not understand the importance of following proper appointment procedures? Alternatively, was it another case of a senior civil servant taking a calculated decision to break the rules you mentioned earlier concerning the memorandum of understanding and so on?

65.

Mr Small: First, let us first be clear about the rules. The company was not required in law or by the rules of the peace process to advertise the posts. In accordance with good practice, the public sector always encourages absolute transparency in appointments and in the purchase of goods and services. The company is, of course, in the private-sector and it would undoubtedly have been desirable to advertise the post of chief executive.

66.

However, the company had a difficult decision to make, since a key element in the project, given its short duration of five years, was capturing the 1996 breeding season. If that breeding season had been lost, the project simply could not have developed within the timeframe. The board therefore made a decision that that one individual - on whom, one should remember, they had received independent advice from a Cambridge professor - was crucial to the project's success. Against that background, and knowing they were acting within the law, they decided to appoint that person. To complete their staffing requirements, they also appointed two other people at the same time, also without competition, and for exactly the same reason. That management decision was crucial to getting the project up and running.

67.

I shall not express an opinion on whether they were right to take the decision. It was simply a judgement the board made at the time. Transparency would be have been better, but I am trying to explain to the Committee that the board took a clear decision having assessed the circumstances.

68.

Ms Ramsey: It might have been a private firm, but we are here to scrutinise its spending of public money. There are another few issues here. Paragraphs 39-43 of the report state that, prior to the chief executive's departure in 1998, the company's financial management was weak. You mentioned earlier that, according to the Cambridge University expert, the person appointed as chief executive was crucial to the job. However, she departed in 1998 after certain issues had been raised. Might the project have been more successful if the Department had given more thought at the outset to the skills necessary to the proper running of the project, probably by advertising the jobs, by which means it could have got better skills?

69.

Mr Small: I do not accept your final point about properly advertised jobs. That is a different issue. I accept that the project would have been enhanced had the Department focused more than it did on the skills the board needed to ensure it was successful. Secondly, I accept that the relationship between the board and the chief executive was difficult. The C&AG's report makes references to the board being unaware of something the chief executive did, or being dissatisfied with something she had done. The relationship between the board and the chief executive was pivotal. The Department could have done more than it did to stiffen the board's resolve in ascertaining how the chief executive should have been managed. I accept the premise that there were things the Department could have done better. If they had been done the project would have been enhanced.

70.

Ms Ramsey: It is strange to hear about someone who was crucial to the project in the first instance going on to become a source of dissatisfaction for the board.

71.

Mr Small: This is not necessarily the case. Prof Allen gave advice on the substantive part of embryology and the development of the project. Deficiencies that developed later were to do with matters of chief executive management. That does not mean that all the skills that were brought in the first place were lost.

72.

Ms Ramsey: I would like to refer to a point you made earlier. I want to raise the issue of grants because the Department needs to reply. We are all aware of community and voluntary organisations that get crucified, and rightly so, to meet deadlines for grants. Pages 15 and 16 of the report state that

"The Department paid out six instalments of grant in advance of any formal application by the Company for funds. A total of £613,000 was paid to the Company before terms and conditions of grants were finalised. Although the first instalment of grant was paid in April 1996 the Memorandum and Articles of Understanding between the Department and Company was not signed until 10 February 1997."

This is a fundamental flaw by the Department.

73.

Mr Small: There was a choice to be made on this issue. It would have been better if the legal documents had been in place at the outset. However, the appraisal had been completely approved by the Department of Agriculture and the Department of Finance and Personnel before any money was paid. The content of the legal agreements had been agreed before any money was paid. The formality of signing the documents was lacking for a range of reasons. It would clearly have been better if this had not been the case.

74.

The choice was either to wait for that formality, and miss the 1996 breeding season therefore putting the entire project in jeopardy, or to accept that there was sufficient understanding and agreement between the main players. The latter choice was seen as the only way of getting the project up and running in 1996.

75.

Ms Ramsey: Paragraph 25 of the report states that the Department discovered the conflict of interest in July 1997. Paragraph 43 states that the chief executive's contract expired in January 1998. What action did the Department take when the conflict of interest was first discovered?

76.

Mr Small: The Department returned the accounts to the Board and asked for a further analysis of the protections in place. The Board put new systems in place to ensure that contracts could only be let if there were two Board members without direct involvement signing for the contract.

77.

The Department took immediate action. The Board acted on most of the things the Department wanted. However, when we checked a year later we found that there was still one component, which had not been dealt with. That was immediately corrected and we believe the Board now behaves in a completely compliant way with all these procedures.

78.

Mr McClelland: I want to make two observations before I begin my line of questioning. First, you said that an £86,000 redundancy package to a 43-year-old is not really a generous package. I have been a university lecturer for 20 years, and if I had £86,000 as my pay off at 43 years of age, I would consider it a generous package. I am sure many tax payers would consider it a generous package. Secondly, we are at the - using your terminology - knife-edge of technology in that nowhere outside of Argentina is this type of work being set up. However, we are told that it is crucial that a 43-year-old takes charge of it. That is a most remarkable observation.

79.

Paragraph 26 states that the former chief executive directed contracts worth £14,000 to her husband's business. Did any tendering take place, or was that normal practice?

80.

Mr Small: On this issue let me say, at the outset, that this is a matter between a company and the people they deal with. It comes back to the very first point I made to the Chairperson, that one of the lessons to be learned from this process is the relationship between a Department and the setting up of a private sector company to do things on its behalf.

81.

There are two extremes. You can set up a company and walk away from it, or, you can set up the company and ring them every day asking how they are doing and if they are complying with all the rules. The reality lies somewhere in between. The Department would not have been, nor should have been, involved in these day-to-day transactions. That would be a completely wrong role for the Department to play. Therefore, the observations I make in response to your question reflect what we have been told on the information we have. In a sense, it is as set out in paragraph 26 by the Comptroller & Auditor General. Our understanding is that it is precisely what happened, and that was undoubtedly in breach of the memorandum of understanding between the Department and the company. The moment it became known to the Department we took action on it. I am not sure there is a lot more I can add.

82.

Mr McClelland: Let us turn to the relationship between the former Chief Agricultural Officer, who was deeply involved in the development of this project at the start. Surely the presence of the Chief Agricultural Officer on the Steering Group creates, at least, the perception of a conflict of interest. How could the Chief Agricultural Officer be objective? On one hand he was vetting projects by the Department, and at the same time he was making a decision on the Committee. How could he have been objective?

83.

Mr Small: He was objective in the sense that his part of the Department was developing this particular project at a time when other parts of the Department were drawing together projects which might also go forward to Brussels. A Steering Group of senior officers was established to look at the totality of this. It would not have made sense for the senior officer, who had the best knowledge of the project, not to be involved in this vetting process. Your question would be of a totally different nature if the same individual were on the Board for personal gain. The key point is that this individual believed in the importance of the rural sector. He believed there would be certain things that would help the rural sector. He argued that case within the Department machinery and then played - as is actually brought out in the report - a very valuable role in pursuing the project. All of this was done without any personal gain.

84.

Mr McClelland: I would not begin to reflect that the Chief Agricultural Officer in this instance was doing something for personal gain. I am concerned that the Department makes the decision on its own "pet projects". At the same time, it is vetting projects coming in from the community. I can see a conflict of interests there in that the Department would obviously be pushing its own "pet projects", at the cost of those that might arise from the community.

85.

Mr Small: I see the point you are making, and I understand it. The term "pet project" is a bit subjective. I would rather say that there are areas where the Department develops projects and where there is a belief that some real good can be done on the ground - be it in this sector, or across the entire range of industry. The Department should do that, and the people with expertise in those areas should be those leading the projects.

86.

All of those people were not taken away from the decision-making process. The entire senior team of the Department was involved in one way or another, and this is where the absence of documentation lets us down. Had the Steering Group had proper documentation, I would be able to say to you that the process had been gone through and that there was therefore no conflict between departmental projects and others.

87.

Unfortunately I cannot say that, because there is no documentation. However, members of the Steering Group assured me that it was an objective process and that external projects were given the same rigour as internal ones. However, I do not have the documentation to demonstrate that.

88.

Mr McClelland: Without proper Steering Group records, we are in not in a position to judge whether the Chief Agricultural Officer was totally independent in his decision making. Is it normal for the Department not to keep proper records of the meetings and decisions?

89.

Mr Small: No. That is not the norm at all. Our internal audit team identified this flaw. The Northern Ireland Audit Office did not pick up this flaw, it was picked up by the Department of Agriculture and Rural Development before the auditors arrived. That is one of the values of having a robust internal audit team.

90.

The internal auditors advised the accounting officer that he could not be assured that the processes were as they ought to be. Unfortunately, by the time that happened, this short window of opportunity for the Peace Programme had passed.

91.

The Department has put into place all the procedures you would expect to be in place, so that when looking at Peace II and other areas where there will be competition for resources, there will be a clearly documented process in place with clear criteria and objectives. It was a flaw last time round. The reason, which I have already given to the Chairperson, was the time pressure from Brussels to bring ideas forward. However, I do not put that forward as a particularly persuasive argument.

92.

Mr McClelland: Was the Chief Agricultural Officer the most senior civil servant in the steering group?

93.

Mr Small: He was of equal rank to the most senior officer. The Steering Group was chaired by the Principal Establishment and Finance Officer, who is a deputy secretary. The Chief Agricultural Officer is also of deputy secretary rank.

94.

Mr McClelland: So, in the absence of records, his seniority within the civil service might have had undue influence on the decision making process.

95.

Mr Small: No. He would not have had undue influence on that decision making process, because this was a group made up of 10 or 11 people. All of them were relatively senior. The Steering Group was chaired by the Principal Establishment and Finance Officer. The role of chairman carries with it responsibilities which go beyond membership.

96.

Mr Hilditch: Paragraph 27 states that a Board member was also a partner in Erne Veterinary Group, and payments of £73,000 were made to the Erne Group for goods and services. Those goods and services were not subject, at that time, to competitive tendering. When the Department discovered that matter in July 1997, the company agreed to introduce proper tendering arrangements as noted in paragraph 36. However, a year later, veterinary supplies were still not being put out to tender, and the Department warned that funding might be withheld if there was any further delay. Why was there a delay, and are veterinary supplies now subject to proper tendering arrangements?

97.

Mr Small: Yes they are. I do not know why there was a delay. The Department's role regarding the company has to be at arm's length. We took the action that we believed to be right, which involved drawing the company's attention to our dissatisfaction with these apparent conflicts of interest. We insisted on action being taken. We understood that the Board had taken action, and indeed they had in most of the areas, but the Department did not rest on that. We looked at it again, a year later, and found that in this one area, they still had not taken the necessary action. We intervened again, and they corrected the problem.

98.

It somehow gives the impression that the Board member involved was doing well out of this. It is worth putting on the record that the C&AG has not suggested that there was any fraud or personal gain. Indeed, by most analysis, the arrangement worked to the advantage of the company. Its flaw was that it was not transparent, and did not provide others with the opportunity to bid for the work. It is that transparency and equality of opportunity in bidding that was the flaw, not the actual financial transaction itself.

99.

Mr Hilditch: Paragraph 44, states that the auditor who failed to pick up on the conflicts of interests was subsequently commissioned in December 1997 without competition to look after the day-to-day affairs of the business. He was also appointed company secretary, and was asked to carry out accounting officer responsibilities on a consultancy basis. His job description included ensuring that appropriate advice was tendered to the Board on all matters of financial propriety. Did your Department have any views on this arrangement, and is it still in place?

100.

Mr Small: It is still in place, and we would only wish to express a view if we were dissatisfied. You said that the external auditor was given the new appointment without competition, but his original appointment had been after competition, so it is not as if he had been plucked off the street. There had been a competition, and he had a role which was altered somewhat. There was then a further competition to appoint a new external auditor.

101.

I suspect the reason for your question is that this individual who prepared, what are described as deficient 1996-97 accounts, was not the right man to continue to oversee propriety. It would be wrong to suggest that this individual, because those accounts did not satisfy the conflict of interest requirement, was not doing everything else properly. Again, I do not know, because that was a matter between the Board and this individual, and the Board decided that this was the right way to move forward. It comes back to one of the crucial issues, and that is the relationship between the Department and a private sector board, and the relationship between that Board, its employees and how rigorous it is regarding them.

102.

Mr Hilditch: Would you be in a position to tell the Committee how much this consultant has been paid in fees?

103.

Mr Small: I am afraid I do not know that off- hand.

104.

Mr Hilditch: Perhaps you could forward that information to the Committee at some time?

105.

Mr Small: Yes.

106.

Mr Hilditch: Paragraph 38 states that in August 1997, the Department eventually issued guidance to the company on conflicts of interest, tendering procedures, and appointments. This was obviously after the damage had been done.

107.

Will you explain why the guidance was not issued before any grant had been paid over to the company? I know you indicated earlier why you paid grant - necessity to meet deadlines etc. for the scheme to get up and running. Could you give us some indication why the guidance notes had not been passed?

108.

Mr Small: The memorandum of understanding was, in a sense, part of the legal documentation. Having said that, I accept the point you are making, that what we ought to have, when we were paying out the early grant in advance of the legal documentation, sent some informal management guidance on behaviours and procedures. I accept that point.

109.

Mr Hilditch: Paragraph 50 states that the Department wrote to the company in March 1999 making it clear that continued funding for the project would depend on evidence of industrial support for the project and, on the production of clear, comprehensive and robust investment appraisal and operational plan documents. However, a month later your Department paid a further £245,000 to the company despite the fact that these important documents had still not been provided. Could you explain why the Department changed its mind on the withdrawal of funding?

110.

Mr Small: We had a difficult decision to make in terms of reaching a crucial stage with the company. The odds are that if we had not made this further payment, the company simply would have stopped operating and we would have been left with significant investment, up to that point, without the outputs that the project is designed to achieve. Therefore, we made a resource management decision to pay out this money in order to keep the pressure on the company and at the same time to ensure that we got revised appraisals and revised business plans, which eventually we did.

111.

Mr Hilditch: Finally, paragraph 49 states that during 1998/99 the company clearly lacked the expertise to produce an operational plan to the required standard. Does it make sense to keep injecting large amounts of public money into a company that is clearly lacking in these business skills?

112.

Mr Small: I do not think it fair to say that the company lacked the business skills. What was lacking was the capacity to produce the appraisals to a public sector standard. That does not mean they lacked business skills. As much as anything else, it is the analysis of the appraisal, as much as the factual information that goes into it, which is critical. We took a view, again, that the project was still making progress and the absence, at that point, of a properly written appraisal was not a good reason to pull the plug and lose all that had gone before. Again it comes back to the important issues of, if we are establishing a company like this are there steps the Department needs to take to ensure that these necessary public sector related skills are in place? That is one of the points we have identified as a key lesson to be learned from this.

113.

Mr Close: Let us turn our minds back to the examination of appraisals. It is an issue that is certainly very close to my heart. If you recall, we asked a few questions about appraisals during the rural development enquiry, and at that time - you referred to this earlier - the problem with rural development was that there were not really any appraisals, and that was one of the largest criticisms.

114.

This time, you said in reply to the Chairperson, that appraisals were carried out and were agreed with by the Department of Finance and Personnel for this particular scheme. Paragraph 51 of the report states that the original investment appraisal indicated that the project would generate significant income from Year 5 (2000/01) and could survive without grant assistance from Year 7 (2002/03). In September 1999, a revised appraisal indicated that the continuation of the project in its present form would be totally unviable once Peace funding runs out in December 2000. How could they get it so wrong?

115.

Mr Small: I have already tried to explain that point to the Chairperson, and it goes back to what an appraisal is all about. An appraisal is not a simple matter of ticking boxes and taking facts into account. If it were, every appraisal would always turn out to be justified. Judgements need to be made; risks need to be analysed, and decisions need to be taken on the basis of that.

116.

In his report, the C&AG draws attention to one area where the assumption that was made turned out to be wrong. The assumption concerned the extent to which owners of high-quality, competitive mares would be prepared to let those mares be used as donors for embryos. That judgement was based on the information available at the time. As it happened, the technology turned out to be slightly different. Without going into all the details, the original assumption was that it would be sufficient for one of these high-quality mares to be out of competition for three months.

117.

Had the assumption proved correct, I believe that what is at the beginning of paragraph 51 would have come to pass. In practice, however, three months was not long enough, and as a result, owners of high-quality mares, for understandable reasons, were not prepared to let the project have those mares.

118.

To return to your question, a fundamental component of the original analysis, which seemed right at the time, later proved to be incorrect, and that affected the whole early viability of the project - and continues to carry through, of course.

119.

Mr Close: I am pleased you admit that a fundamental plank of this whole thing was flawed from day one.

120.

Mr Small: That is not what I said.

121.

Mr Close: You said that a fundamental component -

122.

Mr Small: A fundamental assumption.

123.

Mr Close: I stand corrected, I thought the word "component" was used. I will use the word "component" and I will argue that a fundamental component upon which the whole project was based - a project that involved all these experts that were referred to earlier - was fundamentally flawed. These experts - that were very important to the project and who had to be there without any advertising - fundamentally got it wrong, and the horse-breeding public were not prepared to buy into it. You talked earlier about interpretation of the "Green Book" and you said that one has got to use "imagination" - I think that was the word that was used. Would you change that word and say that a little bit of "fantasy" was used here, that it was wishful thinking?

124.

Mr Small: I would not change the word to "fantasy" or to "wishful thinking". In 1995 and 1996 the only knowledge available was that this could be achieved with mares out of action for three months.

125.

Forget for a moment that we are five years on, and know that that did not happen. At that stage, this was the only information that those undertaking the appraisal had before them. I accept that, given that assumption, it may have been wise to ask as part of the project, "What will happen if it is not three months, but four or five? Would it mean that we will not get the mare?"

126.

I accept that the assumption made about mares was a fundamental component of the whole project which turned out to be flawed. However, it was an assumption made on good grounds of current knowledge and it was made in good faith.

127.

Rather than use the words you suggested, I would say that it was an "optimistic" assumption. When doing appraisals, people have to strike a balance. If you are too pessimistic, you will not do anything, and if you are too optimistic, you run the risk that that optimism then leads to a bad project. The trick of a good appraisal is to analyse all of that and pitch it around the middle. It is self-evident from the facts, which have emerged since that the assumption involved was optimistic.

128.

Mr Close: I accept that, but let us continue on the subject of appraisals. We shall not try to move backwards or forwards five years. One of the basic components was not quite right. Let us look at another part of the project. If you are to have a horse-breeding establishment, you need a site. Did the original appraisal look at any site options?

129.

Mr Small: The appraisal records only one site option, and that was Necarne. Those who carried out the appraisal recall that other sites were looked at, but the fact that they do not appear in the finished appraisal means I must, in a sense, disregard them, since I cannot prove it happened. Therefore the only answer I can give you is that only one site was investigated.

130.

Mr Close: You would not describe that as being imaginative, would you? Would you say that was a fundamental component?

131.

Mr Small: It was, but if you go back and look at why that might have been the case -

132.

Mr Close: Back five years.

133.

Mr Small: Yes, back five years. Criteria in the Peace programme had to be met. In other words, the establishment had to be sited somewhere which had an opportunity for cross-border activity, which had suffered severe violence, and - in the terms of the measure under which we worked - was in a rural area where there could be real benefit to the economy. The project itself was centred on equine breeding and we already had certain expertise in Enniskillen College. Necarne was available, and provided the space, stabling, and the adjacent conacre opportunity. It was difficult to envisage a better site to meet all those criteria. What I cannot say is that a detailed objective analysis proved that.

134.

Mr Close: I am not a horse-breeding expert. However, is it not a basic criterion and a fundamental "component" - if I dare use the word - of horse breeding, that the environment and land be right? Am I correct in saying that the environment at Necarne was anything but right and that, in order to breed horses and give them the best opportunity, one needs a quiet, peaceful environment free from noise and disturbance?

135.

We have already dealt with other components. We know you wished to make a success of the project. We appreciate the difficulties with the timescale. In 1996, you needed to get that breeding right to let the new project take root and encourage the involvement of the whole horse-breeding community. Despite that, without any site appraisals being carried out, you jumped into a particular site, a site, which in my opinion lacked the basic amenity of tranquillity. As I understand it, the site had to be shared with car rallies, pop concerts and other free-roaming horses.

136.

Mr Small: I should like to deal with this point since, having read the report, I understand why you are saying that. Those events did indeed happen. At the time of the project's establishment and at the appraisal stage we were fully conscious of the need for tranquillity, since it is a key element in breeding. The agreement for the lease of Necarne included a very clear clause that exactly that would happen. The fact that the lessor was subsequently in breach of that requirement was not a flaw in the appraisal, which was completely right in that regard.

137.

The breach of the legal agreement led to those events; they had nothing to do with the appraisal. The written agreement was absolutely clear on the relationship between the company and the council from whom it leased Necarne.

138.

Mr Close: Has that been followed up?

139.

Mr Small: It has not been followed up in terms of retribution and cash, rather to make sure that it never happens again. It is now fully implemented. The point is, that is not a legitimate criticism of the appraisal.

140.

The Chairperson: Did you consider taking legal action against the council?

141.

Mr Small: We cannot, because the arrangement is between a private sector company and the council. As the report states, we have been pressing the company on its relationship with the council. However, this is a private company so it is not a matter on which we could take legal action.

142.

Mr Close: Have you advised them to look at it?

143.

Mr Small: Specifically about the breach?

144.

Mr Close: Yes.

145.

Mr McClenaghan: No, nothing was done. The company was fully aware of its relationship with the council. The council, I am led to believe, advised the company about what it was going to do. The company did not object and the events took place. Apologies were made after that and I believe that was the way the matter was left.

146.

Mr Close: If a clear breach of leasing terms occurs - and I will come to the figures involved later - surely it would have been prudent to have taken steps to remedy that breach? Perhaps the company should consider taking the legal route. I would ask the Department to advise the company to follow that particular course of action. We cannot stand back and say "Well, it has happened".

147.

Mr Small: We will look at that. The caveat is that if the circumstances are now compliant with what was in the agreement we will not enhance the project by doing that. Whether it is a legal issue or not, we will pursue it and let the Committee know the outcome.

148.

Mr Close: Thank you. We also have a breach on the site over the pop concerts and the car rallies. What about the state of the land? It was extremely fragmented, very wet in places and the soils were totally unsuitable for rearing horses. Do you agree?

149.

Mr Small: Not necessarily.

150.

Mr Close: Do you disagree?

151.

Mr Small: The Board has made clear that the land could be improved. Moreover, we cannot ignore that we are rearing horses successfully in the area.

152.

Mr Close: Did the land require any improvements? It is very wet in places; the soils are totally unsuited to the rearing of horses. Was any budget made available to try and improve the state of the land, or was it again accepted?

153.

Mr Small: That was land that the company had leased and it was responsible for getting the facilities right. That comes back to the point made at the beginning; that the relationship between the Department and the company has to remain at arm's length. If it is not to be in that way then we would be better off without it. We cannot oversee everything the company does; we cannot question its every action as it makes a nonsense out of having a company in the first place. The relationship between the Department and the company is key.

154.

Mr Close: Yes, but senior officials are on the Board. Surely they have a purpose?

155.

Mr Small: Yes, they have. A vet is on the Board to provide veterinary advice, and there is an observer who is not on the Board, but who is provides advice on education and training. They are the only two officials on the Board.

156.

Mr Close: Are you prepared to be at arm's length on the economics aspect?

157.

Mr Small: We do have a senior banker on the Board. The Board is made up of people with different business skills, which is very important. You must bring together that range of skills. A key issue to emerge from the whole episode is the relationship between the Department and a Board set up in this way. It begs debate on relationships and how they work.

158.

Mr Close: It seems to point to the need for some improvements.

159.

Mr Small: By definition, this has not worked perfectly. Therefore there is scope for improvement.

160.

Mr Close: Paragraph 11 states that the appraisal was completed by the civil servant, who was subsequently appointed as chief executive of the Irish Sport Horse Genetic Testing Unit Ltd. Did this official receive any formal training in project appraisal techniques? Has she any previous experience in economic appraisal work?

161.

Mr Small: We do not think so.

162.

Mr Close: Will I take that as "We do not think so", "We do not know", or, "No"?

163.

Mr Small: If I was able to say "No," or "I do not know," I would say that. We do not think so. In other words, we would need to check her career record precisely.

164.

Mr Close: Would you be prepared to do that? Would you come back to us and let us know exactly what it was?

165.

Mr Small: Although this individual was preparing the appraisal, it had to go through a process involving the Economics Unit in the Department, where people are trained in these skills. It went from there to the Department of Finance and Personnel where there are also skills in appraisal. As a result of that combined effort, the appraisal was corrected and changed. Therefore, it would be wrong to focus too strongly on the original appraisal as worked up by this officer. However, I take the point.

166.

Mr Close: Paragraphs 40 and 41 refer to an overspending in 1997/98 of £135,000. Moreover, the chief executive bought more horses than was originally planned. Undoubtedly, this contributed to this £135,000 overspending. Was the Board aware of this?

167.

Mr Small: This is one of the problems the Board was not aware of. One of the two key lessons coming out of this is that the relationship between the Board and the chief executive features in more than one place in this report. The extent to which the Board could be seen to be controlling the chief executive and the chief executive's working to the Board's instructions also feature in the report. There is a range of issues in here, which point to that relationship being less robust than it should have been.

168.

Mr Close: The Board did not assume that there was a departmental official on the Board. They were not aware of it either. I am coming back to the purpose of having an official on the Board. Being on the Board is obviously in order to be able to give advice in a number of areas and to be alert and to know what is going on.

169.

If there is £135,000 being spent in additional horses and they do not know that it is happening, you have to add a question mark. Moving back to the land issue again, over £300,000 was paid to Fermanagh District Council for the site under the lease, which was approximately six times more than its value.

170.

Did the Board officials know that? I have to ask the question that if they did not know it, what were they doing on the Board? I have to ask the ungenerous and perhaps unkind question: if they were on the Board and this was mentioned at meetings, were they asleep? No doubt the minutes could answer some of my questions. Nobody seemed to be aware of these amounts of money, i.e. £300,000 - six times the going rate for the leasing and renting of a site - and £135,000 for additional horses. Only one person seemed to know what was going on.

171.

Mr Small: I want to come back to the rental issue later on, because that figure includes other things.

172.

As regards your fundamental point, every member of the Board has a responsibility to oversee the project and activities of the full-time staff. I cannot tell you what actually happened in this case. Obviously, none of us were there when this was happening. There was a breakdown in the control the Board is entitled to hold over the chief executive. Those members of the Department who were on that Board carried the same responsibility as any other Board member.

173.

Mr Close: I would argue they carried a greater responsibility. I argue and hold quite strongly that they are there fulfilling another role. That role is a representative one for the Department. The Department has a duty and accountability for public money, so members of the Board who represent the Department have a particular role and responsibility. Where they do not know something - perhaps because it has not been disclosed - I believe that they have a duty to find out, so that they can inform the Department exactly what is happening, and that others, such as ourselves, can ascertain that.

174.

Mr Small: I agree with your fundamental premise. I am not sure about Board members informing the Department by the back door, because they have Board roles and responsibilities. I accept that those on the Board who represent the Department do carry extra responsibility. It comes back to my first point that one of the lessons learned from this is the relationship between the Department and the Board.

175.

Reporting arrangements can be addressed in a range of ways. However, regarding the role of Department officials on the Board - were they the right people? If you wished to make an argument, you could say that only those with a particular involvement and interest in the horse breeding and veterinary side were on the Board. We had no-one on the Board from the management and accounting side. Taking the theme you are pursuing at the moment, I would be inclined to say that a flaw in our role was that we should have had a manager or an accountant - one person with those skills - on the Board. If we ever engage in this type of relationship again, we need to have more clearly stated roles and responsibilities vis-à-vis the Department and the Board.

176.

Mr Close: I appreciate your response and the recognition that, where flaws may have existed in the past, the Department is learning, and I do not say that in any derogatory sense. Lessons are actually being learnt, and we can expect and anticipate changes in the future. For that I am thankful.

177.

The Chairperson: The object of this exercise is that lessons should be learnt.

178.

Mr McClelland: At the risk of sounding terribly naïve, did the chief executive write cheques for these additional horses without the Board being aware?

179.

Mr Small: At that stage, the chief executive had that power. That was later changed, so that several members of the Board would have to authorise payments. I understand your astonishment at that.

180.

The Chairperson: That was one of the lessons that was learnt.

181.

Mr Small: I would make the point that we were trying to learn lessons as we went through this. We were trying to move it along.

182.

The Chairperson: I appreciate that.

183.

Ms Morrice: I must declare an interest, because I was head of the European Commission Office from 1992 to 1997.

184.

The peace and reconciliation element is fundamental to this programme, and I would like to focus on that. A contribution of £3·2 million was made to peace and reconciliation in Northern Ireland. You talk about senior bankers, vets, and officials being on the Board. Would you explain precisely how this project has contributed to peace and reconciliation, particularly with regard to social disadvantage?

185.

Mr Small: One of the underpinning factors of achieving the objectives of the Peace programme was the development of sustainable economic activity in areas that had suffered from violence and where such economic activity was no longer in place. We can demonstrate that this project has achieved that. We are dealing with a remote part of Northern Ireland, which undoubtedly suffered from the troubles and from violence. There is cross-border membership of the Board, which is not insignificant in relation to -

186.

Ms Morrice: Now?

187.

Mr Small: There was a cross-border dimension in the Board throughout.

188.

Locally, over 150 people have been trained in the technology. We have 36 small farmers who are involved in the breeding process, and they are paid to take the mares after the transplant and breed them through to foaling. That money has gone into the small farming community. Therefore, as well as additional skills gained, they have had cash payments.

189.

It is worth noting that in the early days it was difficult to get people to get involved but we now have significantly more numbers applying for the breeder roles than has been the case in the past. We also have private sector use and people paying for the facilities. We have had a contribution from the project to equine studies in Enniskillen College. Up to now there has been that whole body of activity.

190.

We also anticipate - in a sense the final output - that the original objective of having 25 high genetic merit mares will be successful. We are not there yet, but once this year's foaling season is complete, we are confident that we will have those 25 mares. We have also produced 150 high quality foals through the project and they have now been dispersed.

191.

Ms Morrice: The contribution to peace and reconciliation relates to economic development.

192.

Mr Small: Yes, it relates to sustainable economic development and having people working towards single objectives. The project has met those objectives.

193.

Ms Morrice: One of the reasons for the project was to help the flagging horse breeding industry. How much public money has been spent on the project to date, what contribution has been made to the horse breeding industry and have any of these horses been exported?

194.

Mr Small: The total amount is £3·2 million. I will be corrected if I am wrong, but no animals have been exported, but that is not a surprise. Mr McClenaghan has reminded me that quite a few have gone to the Republic, but that is not export in the sense you mean. Animals have gone to the Irish Army for performance testing, which is strong on equestrian matters. Other animals have gone to previous owners in the Republic.

195.

However we are only now coming to the stage in the project where we would hope for the exports that you are describing. One does not produce a Grand National winner overnight. We are trying to produce the very best and things will flow from that. Until the Board gets the results of the performance testing we will not know how good these animals are. All the genetics are right; whether they deliver in competition we have still to find out. That is one of the objectives - to get this body in place, and we hope to do that soon.

196.

Ms Morrice: You mentioned exports to the Republic and in your letter of 16 January to the Committee you stated that eight horses were sold recently to the Irish Army. What price did these horses fetch? Did other breeders have an opportunity to bid for them, and was the Irish Army the highest bidder?

197.

Mr Small: The Irish Army was offered the opportunity to take these animals for one reason only - that it was able to do the performance testing. This is not selling the animals to the Irish Army forever; the Board has the right to take these animals back for further breeding. It was not, therefore, a sale in the normal sense.

198.

Ms Morrice: I am concerned that, in the absence of competitive bids, other organisations might possibly have this same sort of deal.

199.

Mr Small: I am not sure that any other organisation has the expertise that the Irish Army equine group has. I believe it to be unique on the island. Other animals are being put out to tender. Breeders are given a first go at bidding. That seems right, because they have spent the time and put the effort in. Small farmers have developed the foals, so they get the first go. There is then the Irish Army dimension. Others are advertised publicly, with the highest bid winning.

Top

200.

Ms Morrice: It is interesting that breeders have the first go. Are there safeguards in place to ensure that breeders have the opportunity to purchase the good quality stock, and to ensure that there is no risk of people cherry-picking the best stock?

201.

Mr Small: I take your point. As far as we can be sure, cherry-picking is not going on. You have rightly highlighted that we will need to be careful, and put fairly explicit arrangements with the company in place, as we come to the end of this. The relationship between the Department and the company in the final stages will be absolutely crucial.

202.

Ms Morrice: What happens in the future is crucial. Paragraph 51 of the report says that when Peace funding runs out in 2001 it is proposed that the company will transfer its high quality stock to the Irish Sport Horse Development Association

"and re-establish itself as an Equine Reproductive Technology Centre that would be self-financing."

203.

Given the track record of this project, how confident are you that the centre will be viable? How much public money has been, or will be, spent?

204.

Mr Small: Since the C&AG wrote the report, things have moved on. Whether the outcome envisaged in the report will actually be the way ahead is still a matter of debate. The full £3.2 million under the Peace programme has been paid. There will be no further public sector grant paid to the project. We are currently working out with the company how we can take it through to a stage where we, and the community in Fermanagh, can benefit from the output of the project.

205.

Ms Morrice: That was the intention in the first place, was it not?

206.

Mr Small: Absolutely. That is a detailed discussion and negotiation with the company to establish what is best. I cannot elaborate at the moment, but continuing community benefit is the objective.

207.

Ms Morrice: If you had to do this again - and you have the opportunity with Peace II money coming on stream - would you put this project forward for peace and reconciliation funding from Europe?

208.

Mr Small: That is a very leading question.

209.

Ms Morrice: It is vital because you are going to be in the position of giving money again.

210.

Mr Small: The project, in itself, is a good project. I have no doubt that there are lessons to be learned in how we managed the company, and how the company managed its full-time staff. I would want to put a question mark over whether we would want to do a project that consumed as much public resource at the outer levels of technology and understanding. We would need to have a debate as to whether bigger projects, if there are any, should be on less risky territory. I know that I have not really answered your question, but those are the types of factors I would want to look at if we were presented with something similar again.

211.

Ms Morrice: I want to move on to the procedures involved in project selection. Again, this area is vital. Going back to the Steering Group, I find it astonishing that it had no criteria for assessing projects.

212.

It did not even keep minutes of its meetings. The sum of £3.2 million had gone through this body and the details were not minuted. If a community group or one of the intermediary funding bodies did this, they would never receive European money again, and obviously the Department will be bidding for European money in the future.

213.

Mr Small: Proper documentation is essential, and that should have happened in this case. There were criteria in the sense that we knew what the objectives of the European Commission (EC) were, in terms of the Peace Programme. We knew what themes the EC was pursuing. Therefore, when looking at projects, the question being asked was, "Does this project meet the criteria as laid down by the Commission?" What we did not overtly have were the competing projects within our own system, in other words, how we scored one against the other. They all had to meet the criteria.

214.

In terms of the process needed for projects to meet these criteria, we drew up a series of projects, and then carried out detailed discussions with the Commission - not to get those individual projects approved, but to get each type of project approved. All projects that we brought forward were subject to that examination by the EC. The Commission agreed that this was the sort of project that they wanted.

215.

Ms Morrice: Throughout the negotiations for the general criteria, was there any understanding within the Department that certain projects would fit these criteria?

216.

Mr Small: Specific projects were taken to Brussels, not for approval, but to run past Commission officials and ask, "If we brought forward a project such as this, would it be approved?"

217.

Ms Morrice: Was the horse breeding project one of those projects?

218.

Mr Small: Yes. The other safety net was that all projects brought to the EC were to assess their reaction rather than receive their approval, and were then subjected to economic appraisal. Should any of them have failed economic appraisal, regardless of flaws, then we clearly should not have gone ahead with them. Similarly, if the Department of Finance and Personnel did not approve a project, then despite getting to that stage, the project would have disappeared immediately. This was clearly understood. So, the suggestion that somehow the appraisal was used to justify a decision already taken is far from the mark.

219.

Ms Morrice: Can I turn to the Department of Finance and Personnel and ask Dr McCormick if that Department had ever queried the contribution that this project would make towards peace and reconciliation, and it's success?

220.

Dr McCormick: The Department of Finance and Personnel were satisfied that this project met the criteria. It was consistent with the objectives of the Peace Programme in terms of economic and social development and was examined and accepted from the point of view of European policy held by the Department at that time.

221.

Ms Morrice: In terms of the rental costs for the site. The costs were calculated to be three times higher than the market rate, and Fermanagh District Council has refused to repay the money. Why was the Department of Agriculture content to pay the grant to cover such an excessive rent charge?

222.

Mr Small: The figures shown in the report are fully accurate in demonstrating the amount paid to Fermanagh District Council. The report explains that this sum was not only for rental, and therefore, to say that the figure for rent was £304,000 is inaccurate. The figure included costs that needed to be met by the Council in relocating. It also included other costs incurred by the company such as an offset of rate payment.

223.

The actual figures in our calculation are - if you assume that the £50,000 is right and that is subjective - the figure that we would put against that is £77,000, and not £150,000 as previously implied. Therefore, if the £50,000 is correct, then £77,000 is still too high, but it does not exceed it by the order that is implied in the report. The £50,000 is only someone's estimate. What the company had tried to do was to lease that land which was understood to be crucial to the project. In any leasing agreement a factor that comes into play over and above an objective valuation is the extent to which somebody wants a property. All of those factors come into play. Therefore, the company paid over the odds, but not to the extent that those figures imply. The company has tried to get money back from the council but has not been successful so far.

224.

Ms Morrice: You mentioned the intense time pressure coming from Brussels and the short window of opportunity. However, are you aware that even now, in 2001, not all the Peace I money has been spent. Therefore I cannot understand the time pressure your Department was under in 1995/96.

225.

Mr Small: In a sense, the money went to this project. All Peace money has been fed back and has been spent by now. If this project was going to work it needed a five-year window and that dictated the 1996 breeding season as crucial. As I think is clear, other projects could have slipped beyond 1996 because they did not have that restriction. That was one of the key points.

226.

Ms Morrice: I am assuming from this time problem that you did not advertise the first tranche of Peace funding. It looks as though the Department of Agriculture was picking its own pet projects and implementing them. Did the community get an opportunity to bid for that money?

227.

Mr Small: The Department of Agriculture ran over 3,500 Peace projects and the rural development community ran almost 500. Some projects had to be generated by the Department if they were going to work. However, it would be wrong to give the impression that that formed the bulk of the programme. There were thousands of projects.

228.

Ms Morrice: What other projects did the Department promote using the first tranche and how much of the funding was taken for projects of this nature?

229.

Mr Small: The Department promoted such projects as the incubation units at Loughry College, the Family Farm Developments Ltd and the FACES scheme that benefited over 2,000 farmers. I do not have details of the total funding so we will send you that.

230.

Ms Morrice: I assume that if you had to do it again your response would not be necessarily the same.

231.

Mr Small: Yes, I would settle for that.

232.

Mr Beggs: Site selection was a critical component. Was the Department satisfied that those involved in the design and appraisal of the project had sufficient knowledge of breeding stock, never mind highly strung breeding horses?

233.

Do you accept that no private horse breeder would have leased such a site where pop concerts, tree felling and car rallies would occur? As Mr Close said, the ground conditions were unsuitable to the rearing of horses. How long were those events allowed to disrupt the sensitive mares before they were brought to an end? Furthermore, do you accept that if a private company had clear leasing conditions they would have immediately brought it to an end by court action?

234.

Mr Small: There are a whole series of questions there.

235.

The Chairperson: Can you be brief?

236.

Mr Beggs: You can respond in writing if necessary because I would like detailed answers.

237.

Mr Small: I will be brief. I have covered quite a few of those issues already. The events had nothing to do with the appraisal. You have raised that point again, but it is nothing to do with the appraisal. The events should not have happened because such things were covered by the lease.

238.

You also questioned the relationship between the company and Fermanagh District Council. I cannot tell you what happened between the council and the company. Did the chief executive speak to the company? Did the council say, "We shall do this only once, and we will never do it again"? I honestly do not know what the position was. If you wish, we will pursue the matter with the company to find out whether there was any dialogue. That would make legal proceedings impossible.

239.

Mr Beggs: What about the period of time things went on before they were brought to an end?

240.

Mr McClenaghan: In one instance, somebody took out a chainsaw, cut down a tree and was stopped. That was what the tree-felling incident amounted to: we are talking about an hour. The rally event consisted of people going round the hard track for one afternoon. The pop concert was a weekend event, which did not pay for itself and was cut short. The concert due on the Sunday did not happen.

241.

Mr Beggs: What period of time elapsed between all three events? Everyone should have known the sensitivity of the situation.

242.

Mr McClenaghan: It was over the summer period.

243.

Mr Beggs: Did all three happen during one summer?

244.

Mr McClenaghan: Yes.

245.

Mr McClelland: There are phrases from Mr Small's introduction that keep ringing in my ear - "the cutting edge of technology" and "nowhere outside of Argentina". The horse livestock industry is one of the largest generators of income in Ireland. Yet, on page 18 of the report, I read that

"a nephew of this Board Member was selected, without competition, as the most suitable young veterinarian to receive tuition in embryo transfer technique"

That is an alarming statement.

246.

Ms Morrice: It is a cosy relationship.

247.

Mr McClelland: That phrase rang alarm bells - "the cutting edge of technology".

248.

Mr Small: We intervened in that matter. Leaving aside the issue of the way in which the person was selected, we made it clear that we thought that all those skills should not be restricted to one person. Restricting all of those skills to one person created the risk that he or she would just walk away. Therefore, we intervened, taking the line that the Argentinean expertise should be passed on to several people. That is exactly the point that has been raised.

249.

The Chairperson: That concludes this part of the session.

250.

The Chairperson: We are running behind schedule, so we will try to be as brief and accurate as we can. The second issue we are covering today is the Comptroller and Auditor General's report on the Northern Ireland Appropriation Accounts 1998-99. I intend to refer to that as the Vote 1 report. I will be referring to his 'National Agricultural Support: Fraud' report as the Blue report, so there will be no confusion.

251.

In those reports the Comptroller and Auditor General outlines three frauds involving European Union subsidies. Two of the cases involved weaknesses in the systems of control. In the third case, these systems appear to have been in operation, but somehow the fraud was perpetuated over a lengthy period of time.

252.

Some of our questions will be about these issues, but this session gives us the opportunity to ask general questions about fraud and fraud-related matters. I would like to refer to the announcement your Department made on 10 January this year that it was setting up an anti-fraud hotline. I am sure that that had nothing to do with the fact that you were appearing before this Committee today. You might want to comment on that at some other stage.

253.

The Committee welcomes that move. In a sense, the Department has launched a pre-emptive strike against the Committee. That is possibly not a bad thing. However, I would like to know why a similar scheme was not introduced earlier.

254.

Mr Small: When we were discussing that a few weeks ago, I was conscious that the timing seemed immaculate. I discussed with Mr Lavery - who was responsible for this - whether we should postpone the implementation of the hotline until after the PAC hearing because it looked too good to be true. We concluded that it would have been wrong. As long ago as April, our business plan stated that we intended to introduce a hotline. We did not do it earlier because hotlines need to have systems that allow you to handle whatever comes through.

255.

I decided that we should not postpone launching it, even though the timing appeared odd, because the objective was to minimise fraud. That is an important development, and the sooner we put it into operation the better. I can assure you that this was in our business plan as long ago as April. In itself, it is not a response to the report or the Committee hearing, but I can understand your suspicions.

256.

The Chairperson: "Wonder" might be a better word than "suspicion."

257.

My first question is in relation to paragraph 21, sub-paragraph (i) of the Blue report: "the Accounting Officer has twice issued an anti-fraud policy statement". Are you satisfied that the manner in which the three cases before us today have been handled is consistent with your anti-fraud policy? How do you check whether the fraud policy is, first, being observed by staff and, secondly, reflected by your Department's control systems?

258.

Mr Small: Generally, the anti-fraud policy statement is part of the development of an anti-fraud culture in the Department. It is inaccurate to call it an anti-fraud statement. It was included in a personal letter from me to all members of staff in 1997 and again in 1999. It is being worked on for reissue and updating in 2001. It is linked to an overall departmental fraud-fighting strategy, which has a range of components. Under this strategy every head of division in the Department is obliged to sign an annual stewardship statement. That allows individuals to report to me that they are satisfied with the business for which they are responsible.

259.

These individuals - quite rightly - take that duty very seriously. They know that any failing in control systems means that I, as accounting officer, am answerable to you, but they in turn will be answerable to me. It is part of trying to generate a culture of awareness. The hotline is one of the specifics emerging from that.

260.

More specifically, around 600 of our staff are involved, one way or another, in trying to avoid fraud. That number is made up of administrators, members of the veterinary service and the inspectorate. We also have a specific fraud investigation unit that pursues fraud once it has been identified. That investigation unit produces an annual report with information on all sorts of fraud which might have happened or been suspected by the Department, and that is a means of disseminating information.

261.

An important point to make about fraud is that you never have it beaten. Any organisation that says that it is on top of fraud is deluding itself. Whether we like it or not, in society there will always be those who attempt to cheat the system.

262.

The Chairperson: Do you set any specific targets?

263.

Mr Small: We have a zero tolerance to fraud. Our objective is deterrence of fraud. Where fraud occurs we want it detected, where we detect it we want to prosecute it, where we cannot prosecute we want to recover money.

264.

The Chairperson: What would be your estimate of the amount of money you have lost?

265.

Mr Small: It is difficult to put a figure on that. We are talking about a risk area between 0·1% and 0·2%. The danger of putting a figure on that is that we do not think that there is an area of fraud of which we are not aware. That is not to say that we know of every instance. The danger of giving an absolute guarantee is that at some point we will find something has been happening that we do not want to see. That would be our best estimate. That is because of the massive input we make to fighting fraud every year.

266.

The Chairperson: What proportion do you reckon you detect?

267.

Mr Small: I like to think that we have a high proportion of detection, however I cannot put a figure on it because we do not know what bits we are not getting. I will give you some figures that may answer your question. In the last full financial year we inspected 70,000 claims. We disallowed and rejected 550 of those and applied penalties to 2,500. There were over 3,000 where we did not apply a penalty but adjusted the claim because we were not satisfied with it. We referred 281 cases to our fraud investigation unit, of which 68 went to the Director of Public Prosecutions. Fifty-one led to conviction and the others are in various stages of handling. Those are significantly high figures that demonstrate that the combination of measures we have in place in the Department is not only discovering fraud but acting as a deterrent to those who might be tempted.

268.

The Chairperson: In the first two cases, A and B, you paid subsidies to claims in relation to Lady Dixon Park, Dunmurry Golf Club and Annadale Embankment. That beggars belief. How can that happen? If someone asked for a claim to be paid in relation to the grounds at Stormont, would you consider that as well? That seems so unusual and odd.

269.

Mr Small: I can answer the second question immediately: there is no chance that that would be paid as there are now systems in place that were not in place when that happened. Those two cases are very similar so I will deal with them together.

270.

The Chairperson: They were dealt with by your Lisburn office. It would be different if the cases had been dealt with by someone in Fermanagh.

271.

Mr Small: You have put your finger on one of the issues. As it turns out, one of the difficulties was that the individual officer involved in the matter was not familiar with the area. We rely on the system that is in place now. There is a 5% check of applications under the Integrated Administration and Control System (IACS), but they are all double-checked against the Field Management System (FMS). When that system throws up the possibility of duplicate claiming, it is then subject to a specific investigation. When those two cases arose, the FMS was not in place. The problem was that we were developing new systems to meet a European requirement that was itself put in place to prevent fraud. It was a practical impossibility for the Department to draw up all the maps that were needed and to link them to the parcels of land in the time frame involved, and there were not enough staff to do it.

272.

Therefore, the Department had no option but to permit farmers to log their own land - usually on maps that the Department provided. The Department did that in the hope that inspectors with local knowledge would identify potential flaws, but we also knew that once the FMS was in place any frauds would be picked up. As the Comptroller and Auditor General said, the Department's systems caught those frauds. They were not discovered by someone from outside the Department's systems.

273.

The Chairperson: I take that point.

274.

Mr Beggs: Briefly explain the three fraud cases before the Committee. How much was over-claimed? How much was overpaid? How much has been repaid to date? How much has been written off as irrecoverable and lost public money?

275.

Mr Small: This is going to take a long time.

276.

Mr Beggs: Just give a brief outline of the quantities of money involved and provide the rest of the information later.

277.

Mr Small: I do not have aggregate figures in my head. I will take you through what we have, but it is very detailed. I will refer to the families as A, B and C. Our final estimate for family A was approximately £81,000. Of that, £34,000 was paid to a member of that family who we have been unable to track down. We are still trying to find that individual.

278.

Mr Beggs: Do you have tracking arrangements in co-operation with the Republic of Ireland? It is easy to slip down there.

279.

Mr Small: Yes. We have tracking arrangements with the Republic of Ireland, the RUC and other Government bodies. The amount of money paid to that individual is still outstanding. Of the remaining £47,000 the Department has got back £45,000. There is approximately £2,000 still outstanding, but that will be picked up through deductions from future subsidy claims.

280.

Family B was initially assessed at approximately £42,000. It is in a different category. We tried to get prosecutions in all of these cases and, for the reasons set out in the report, the RUC decided that prosecution would not work. Therefore we opted for recovery. In the case of family B the Department's objective was to recover all the money which had been incorrectly paid. However, family B mounted a robust argument that they had acted in good faith, and although the Department had started to deduct money from them it received legal advice that as the family was acting in good faith there were no grounds to continue with the deductions. Therefore, on the basis of legal advice, there will not be a recovery of money from family B.

281.

Family C is the case described in the Blue report. The total debt for family C is just over £128,000. So far the Department has recovered about £50,000, and there is a clear agreement with family C to recover the remainder.

282.

Mr Beggs: It would be useful if you could provide up-to-date repayment figures, because the report is a little bit dated.

283.

Can you tell us who these people are? Have you had their names cross-checked with all public sector organisations in case they are carrying out fraudulent activities - social security, for instance?

284.

Mr Small: We have arrangements in place to check with other parts of the public sector, but those arrangements are more informal than formal. I do not think that we have specifically double-checked the names of those families with the Benefits Agency.

285.

Mr Beggs: Do you agree that it would be worthwhile to formalise those procedures?

286.

Mr Small: I agree 100%. As I said at the outset, we are constantly trying to improve our anti-fraud measures. There is scope for improving the exchange of information between all parts of the public sector. However, that may involve some rather difficult issues and legal constraints as regards data held by other bodies, and that is why it is not straightforward.

287.

Mr Beggs: I understand that there would be ways round it, given the public interest that would be involved in this matter of public finance.

288.

Mr Small: There might be ways round it. It is an area we are looking at, but I am just saying that it is not a case of lifting the phone and saying, "Have you ever heard of so-and-so? Is he up to anything?" We would all be in trouble if we did that.

289.

Mr Beggs: In case C, there is a record of many other actual and suspected frauds. Are we also dealing with repeat offenders in cases A and B?

290.

Mr Small: We need to be exceptionally careful about this. In both families A and B, cases over and above what has been reported by the C&AG are under investigation.

291.

Mr Beggs: Were you are aware of any other cases involving families A and B?

292.

Mr Small: Some cases which are currently being investigated were not underway when the C&AG was involved in this.

293.

Mr Beggs: Paragraph 16 of the Blue report states that the department undertakes a 100% inspection check of all beef special premium claims, including a physical inspection of animals as well as the required documentation. I would have thought that a physical inspection would detect and avoid fraud. Why, then, were these frauds not detected for a period of four years?

294.

Mr Small: The inspectors look at a range of things. First, whether the animals are there in the first place. Secondly, the documentation: herd registers, movement certificates and the like. In the case of family C all the animals were there and all the paperwork was in place. Prima facie there was no reason to suspect a problem. Over the period covered, three different inspectors actually looked at this. Part of our checking procedure involves a supervisor, who looks at the amounts of money and the purported source of imported animals. It was that supervisor who got suspicious and put double checks in place through the Animal and Public Health Information System (APHIS), and that is how we got to the bottom of it.

295.

Mr Beggs: You mentioned that imported animals were the cause of the problems. Do you have a system in place to detect frauds by the source farmers, so that the registration of high numbers of animals - beyond that which would be reasonable - is detected and carefully examined?

296.

Mr Small: Oh yes, absolutely. When this fraud happened, what was known as the animal health system was in place. It was a limited computer system that was nevertheless excellent, as its objectives were limited to animal health. The new APHIS system is much more sophisticated and, while it was initially established as an animal health system, we now use the information as an anti-fraud weapon as well.

297.

As part of that, we now have a system in place wherein all animals being moved are given a certificate that has to be signed by the vendor and the buyer. That information comes to the Department and is checked against the computer. That links in, not only to anti-fraud measures, but to our whole objective of getting beef exports moving again. We need to be able to demonstrate that we know what animals are on the farms, where they have come from, where they have been and what family background they have. That information, primarily established for beef export reasons, acts as a great weapon against fraud.

298.

Mr Beggs: Can you be more specific about what precise changes have occurred to give you confidence that in the future this sort of thing will be picked up at an earlier stage?

299.

Mr Small: There is more information now on the movement of animals than we have ever had, because both the buyer and seller have to sign a certificate. We also have information regarding the birth of animals. Now every animal's birth has to be notified, which was not the case before. We also have confirmation that the mother of every animal is still alive after six months. That body of information is new in the past couple of years.

300.

Mr Beggs: Do you accept that some of these animals that were apparently coming into the system or being imported, as you said, could have been affected with brucellosis and could have been causing other agricultural problems?

301.

Mr Small: Absolutely. That is why this is an animal health system as well as an anti-fraud system.

302.

Mr Beggs: Have you done anything to try and trace animals that may have been imported in this fashion?

303.

Mr Small: That is part of the problem. We are engaged, through the veterinary service, in a series of checks. Specifically, we check 1,800 herds every year. That is not just a random 1,800. We target the herds to be checked. We also have 100% checking through brucellosis testing. The veterinary service is out on the ground. That leads to a body of information as well. There is no single measure that gives confidence. It is a combination of measures that give us reasonable confidence.

304.

Mr Beggs: Do you think there is evidence of ear-tag fraud in this case? If so, how do you think it was being carried out and what improvements have been made to prevent it in the future?

305.

Mr Small: In a situation like this, where you have doubts about the source of animals, you must always suspect ear-tag fraud as well. Ear-tag fraud is attacked through the APHIS system, where all animals are tagged. By tracking that through, if you get an odd-looking number you would pursue it. The other classic fraud is, of course, that sometimes ear tags are tampered with. The 600 staff who are constantly looking at all of this are always on the lookout for any tampering with ear tags.

306.

Mr Beggs: Do you find the check letter at the end of the tag useful in making fraudulent activity more difficult?

307.

Mr Small: Yes, I think it is. What is most useful of all is the knowledge of people who are out looking at these animals and their experience, gleaned over a period of time, on what type of fraud people might be engaged in.

308.

Mr Beggs: I understand that problems with one of your inspectors contributed to this case. Can you outline what the problems were in the supervision of the inspector and his activities? How do you hope to prevent a repeat of that?

309.

Mr Small: I do not think that there was any problem with an inspector in this case. There was a problem with an inspector who was involved in this case, but the problem had nothing to do with the case. The problem was in relation to that individual's behaviour.

310.

Mr Beggs: Are you saying that he was involved in the case but he was not involved in the case?

311.

Mr Small: No. I am saying that the problem had nothing to do with his involvement in the case.

312.

Mr Beggs: Please elaborate.

313.

Mr Small: One of the inspectors in this case has since been dismissed, but his dismissal had absolutely nothing to do with his work on this case. It was because the inspector was also a part-time farmer; he was dismissed for failing to meet the standards that we demand from all farmers on ear tags and other things.

314.

Mr Beggs: Do you accept that if he was not carrying out the regulations correctly, there was a risk that he might not have been drawing your attention to other matters of concern?

315.

Mr Small: I can see why you might make that link, but I am not sure that you can necessarily make it in this case. Remember, we do not rely solely on inspectors: every inspector's work is verified by a supervisor. Every week the supervisor checks one case at the desk for each inspector; he checks three on field checks every year. It is worth repeating that the fraud in this case was discovered by our own systems and by the supervisor's checking role.

316.

Mr Beggs: What is your policy on prosecuting claimants who commit fraud?

317.

Mr Small: We prosecute wherever we can. We are absolutely clear that there is no greater deterrent than a conviction.

318.

Mr Beggs: In none of these cases did the Department prosecute, and in case C it did not even involve the police. How can you justify that?

319.

Mr Small: In two of the cases the decision to prosecute was not ours. We put the case in the hands of the police. The police took a very clear view that prosecution simply would not be deliverable. It was a police decision. In case C, our investigation unit - and three members of the investigation unit are ex-RUC officers, with all the associated prosecution skills - was convinced that the case simply did not meet the definition of criminal deception under the Theft Act 1968.

320.

That shows that the standards of proof required to secure a prosecution are, quite properly, exceptionally high. There is no point in pursing a prosecution just to be able to say that we have prosecuted. We have to be confident that such a prosecution will lead to a conviction. The people who take these decisions are very experienced in this area, and they were clear that in case C a prosecution would not have been successful.

321.

Mr Beggs: How many cases of major fraud have been successfully prosecuted in the past five years?

322.

Mr Small: I do not know offhand. We had 51 convictions in 2000. I do not know the figures for the previous years, although I suspect that they would be lower.

323.

Mr Beggs: It is important that a clear message be sent to fraudsters that they can be prosecuted.

324.

Mr Small: I wholeheartedly agree.

325.

Mr Beggs: The police were unable to pursue a prosecution in cases A and B because of action by your officials. That is a most unfortunate state of affairs. What was the problem?

326.

Mr Small: The phrase "action by your officials" is misleading. The Department, as an act of policy in trying to meet a time limit set by the European Commission, decided that the Field Management System could be established alongside IACS. Farmers could, in certain circumstances, indicate where their parcels of land lay. That could only be done with maps that we provided. The RUC says that, as we provided the maps with the outlines on them, we would never secure a conviction.

327.

That was not an individual's decision. It was done because it was clear to the Department that unless farmers were permitted to do that we would never meet the European requirements. We did it in the clear understanding that a combination of IACS and the Field Management System, once they were in place, would ensure that anyone abusing it would be caught.

328.

Mr Beggs: Are all those systems in place now?

329.

Mr Small: At the moment the match between the Field Management System and the Integrated Administration and Control System (IACS) is 98·4%, and it will go to 100%.

330.

Mr Beggs: As I understand it, the Northern Ireland Audit Office only discovered case A by chance in 1999, and that revealed that your Department was not notifying them of this type of grant-related fraud. How many other similar cases might there be, where fraud could not have been prosecuted because of mistakes made by your Department that were very conveniently hidden from public scrutiny?

331.

I would like you to provide us with a note setting out how many other suspected fraud cases you have had in the last five years where your Department was unable to prosecute because you were advised by your own investigators, or by the police, that actions on the Department's part weakened the case for prosecution, such as the old maps you referred to or things that your staff did. Also, what were the total amounts of suspected fraud in each case? I appreciate that we are going to have to wait for that, but it will be worthwhile information for our report.

332.

Mr Dallat: If you will pardon the pun, it seems that serial fraudsters have had a heyday. Recently we investigated social security fraud, and we know that somebody who did a day "on the double" could end up in jail, yet you did not even bother to tell the public auditor that this scandal was taking place in your Department. I will not condemn you totally, but you clearly did not get a lot of encouragement from the police regarding prosecutions, and I wonder when that will be made public.

333.

A small farmer up in the hills with a few ewes and cows cannot be too happy that these professional fraudsters have been able to rip off the Department for a fortune. Clearly, that has damaged the Department, and we need assurances that that kind of thing cannot happen again. That immediately begs the question as to where the penalties and sanctions are. In what way has your fraud unit been expanded? What reassurances can you give this Committee that this whole thing will be cleaned up?

334.

Mr Small: There are a whole series of points there. There is a misunderstanding on the part of the Committee that somehow we were not telling the Comptroller and Auditor General about this. Let me be very clear that we hid nothing from the Comptroller and Auditor General. We gave him the information that we believed we were required to give him under the "Dear Accounting Officer" letter. We were clear on that. We put our interpretation to the Department of Finance and Personnel, which agreed with it. Subsequently, the Comptroller and Auditor General said that that was not what he wanted; but he now gets what he has asked for. I refute any suggestion that we were hiding information.

335.

Mr Dallat: I assume that this document was agreed between yourself and the Comptroller and Auditor General before it came before this Committee, and in paragraph 55 of the Vote 1 report it states that the Comptroller and Auditor General was not informed about these frauds.

336.

Mr Small: There was a system in place that was set down by the Department of Finance and Personnel to accounting officers. We were complying with that instruction. That instruction meant that the Comptroller and Auditor General got information on a certain basis. When he subsequently said that that was not what he wanted, we changed our system completely. I am completely clear that we complied with the instructions, and that there is no ambiguity in that.

337.

Mr Dallat: This is a critical point, because the Comptroller and Auditor General's office is of no value whatsoever in scrutinising public spending unless there is total and absolute clarity between different Departments. I really have to ask the Comptroller and Auditor General for his opinion on what happened.

338.

Dr McCormick: As soon as the issue of the way in which the Department had been interpreting the guidance came to light, it was put right. It is now right; there is no difficulty or dispute about that. There is monthly reporting of this kind of case to the satisfaction of the Comptroller and Auditor General. That fulfils Department of Finance and Personnel guidance, so we are now in a clear position.

339.

Mr Dowdall: I hope we can square this, because it would be unfortunate if there were a perception of significant disagreement here. As stated in the report, and agreed by the Department, we were not informed of these frauds. It was our view that, under the terms of the letter that the Department of Finance and Personnel had issued, the Department of Agriculture and Rural Development should have informed us. I accept that the Department was not informing us in good faith. In other words they had, in my view, misunderstood it, and in their view, interpreted it correctly. That needed to be addressed, and it was addressed at the time and is now on a sound basis. I do not think that it need be taken by the Committee as evidence that the original sentence was incorrect or was not fully agreed by the Department.

340.

Mr Small: Absolutely. That clarifies it.

341.

Mr Dallat: Mr Beggs pre-empted many of the questions that I intended asking. Can you tell us how many staff you have in your anti-fraud unit?

342.

Mr Small: There are four full-time staff in the Fraud Investigation Unit - an increase on the three that were previously there, but you have to remember that this is the unit that investigates the fraud once it has been discovered. We have 600 people trying to detect fraud in the first place, and the totality of that effort, linked to an anti-fraud culture right through the Department, is how we try to tackle fraud. It would be wrong to focus too much on the fact that there are four investigators. It is the entirety of the Department that is the issue.

343.

Mr Dallat: I welcome that reassurance. Do you think that it is adequate to have only four people dealing with the scale and complexity of external fraud which your Department, unfortunately, has had to face?

344.

Mr Small: It is a judgement that has to be made. The anti-fraud effort, which obviously has to have a high priority, means using resources that have to be deflected from other places. If we felt that fraud was increasing to an extent that the four could not cope, there would be a high priority attached to increasing that group further.

345.

Mr Carrick: I cannot help but get the impression from the three cases we have heard about that the Department of Agriculture and Rural Development is a soft touch when it comes to fraud. As Mr Dallat and Mr Beggs have already said, this is a time when honest farmers are going to the wall for lack of support, and there seems to be little to discourage dishonest applicants from attempting to misappropriate taxpayers' money. The chances of these dishonest applicants being caught seem to be fairly remote, despite the facts you have given to us today, and the chances of their suffering any significant penalty, other than repayment on easy terms, seems to be even more remote. It is against that background - and I will come back to that later - that I want to pose some further questions.

346.

With reference to paragraph 58 of the Vote 1 report, your Department has identified, under normal checking mechanisms, some 3,000 duplicate field queries. Is that the routine practice? Was that a one-off exercise, an ad hoc exercise? Is this check performed as each application is processed?

347.

Mr Small: A whole range of checks are in place. IACS inspections are carried out on the basis of 5% of applications. Considering the period for which it has been in place, and allowing for a bit of duplication, over 20% of applications have been inspected. Running alongside that is the check against the Field Management System to ensure that land is not being double-claimed. That now matches 98·4%. That is fairly rigorous.

348.

The other point is that that represents the position in 1996. We are constantly improving our anti-fraud measures. One cannot stand still; the fraudster is always trying to get a step ahead, and therefore we must always try to keep ahead of the fraudster. The systems that are in place now are more sophisticated than they were in 1996.

349.

Mr Carrick: Is the sample check currently running at 5%, and, in the light of your experience, do you consider that to be adequate?

350.

Mr Small: The important point is that it is not a random 5%. There is a 2% random check plus a 3% check that is targeted - for want of a better word - on the basis of a body of information. Five percent sounds low, but when you consider the targeted dimension, it means that over a period of time we are looking at a wide range. Of course, every application is 100% checked for duplication.

351.

Mr Carrick: In cases A and B, discussed in the Vote 1 report, your Department supplied maps to applicants. The surprising thing is that those maps were either 35 or 60 years old. Could that not have been identified as a weakness - an unacceptable position - before you first set out with the IACS scheme? Why were you using such old maps? You told the audit office that these were the only maps available. Why was that the case?

352.

Mr Small: They were the only maps available. The detail that was required had not been updated. It is not as if there were new maps lying around that people decided not to use. These were the only maps people could get. The significant point is that now, with all the digital technology that is in place, we are moving very quickly towards a much more sophisticated mapping system than would have been possible then. The people on the ground were using the only maps that were there.

353.

Mr Carrick: What is the age and status of the maps that are currently used?

354.

Mr Jordan: The maps vary in age, reflecting availability from Ordnance Survey. We are content that they meet our current requirements, and wherever anyone seeks to register new land there is a physical inspection. That is an arrangement that we did not have at the time of this problem, but we do now have it in place.

355.

Mr Carrick: So some of the older maps are still being used?

356.

Mr Jordan: Providing they have the necessary detail. We make the necessary checks.

357.

Mr Carrick: In paragraph 62 of the Vote 1 report - case A - you say that the land does not have to be used for forage, but it must be available. That seems to be quite a loose interpretation of the rules and regulations. Did you seek any clarification or confirmation of the regulations from the European Union? Why would land be available for forage and never be used?

358.

Mr Small: There was no need for clarification. This part of the European rules is very clear. It links into the rules on stocking density. It allows a farmer to have more animals than he could have on, for want of a better term, his home farm. He can take land elsewhere - not even necessarily in the same county - which, even if he does not use it at all, can be added to the total land against which his stocking density is calculated. That is completely legitimate. The only caveat - and this is where this case does not read very well - is that it has to be land that is available for forage for a certain period. If it meets that criterion, there is absolutely nothing wrong with it. The problem in this case is that we are talking about car parks and rose beds and so on. That is part of the flaw.

359.

Mr Carrick: You seem to have encouraged the fraudster to go down that line with that particular regulation.

360.

Mr Small: Yes. I suppose that it provides an opportunity for someone who wants to commit fraud. However, there are clear European agriculture policy reasons for having that in place which are designed to benefit the honest farmer.

361.

Mr Carrick: In paragraph 65 of the Vote 1 report, you say that a person with fraudulent intent could claim on the basis of a larger landholding than was in fact the case. Knowing that such a possibility exists, what action does the Department take to minimise the risk of fraud? That is prevention of fraud, rather than detection.

362.

Mr Small: That was recognised, given the circumstances in which we had to have this new system put in place. We were confident at that time that once the system was in place, anyone who had committed a fraud of that nature would be caught - as indeed happened. As Ronnie Jordan has already said, we now have 100% duplication checks in place, and if anybody wants to bring new land into the system, that is verified by a site visit. We are now fairly confident that nothing like this could recur.

363.

Mr Carrick: Had any of the people in the reports come to the attention of the Department for fraudulent activity before these cases were discovered?

364.

Mr Small: Yes.

365.

Mr Carrick: Is there a case history?

366.

Mr Small: Yes, particularly case C. I want to make it clear - because this is dangerous territory - that not all of the family members in case C had a record of convictions. However, some did.

367.

Mr Carrick: Is it safe to conclude that the Department was paying special attention to all of their claims? Is there a system in place to allow that to happen?

368.

Mr Small: Yes. I was describing earlier how there are random checks. There are then targeted checks, which are designed to pick up this type of situation, together with situations where you might get a particular claimant whose behaviour over a certain period seemed odd, if not fraudulent. Those circumstances would be specifically targeted.

369.

Mr Carrick: Are any of the people involved in these investigations involved in any other fraudulent activity that you are aware of?

370.

Mr Small: Yes. In all three families, there are either investigations or court proceedings underway.

371.

Mr Carrick: I turn now to paragraph 4 of the Blue report - the Animal and Public Health Information System (APHIS). It is obviously vitally important to record the health of all the animals. However, the system appears to hold details of animals that were not born in Northern Ireland and were not imported legally into Northern Ireland. If this is the case, the previous history and age of these animals is not known. Do you agree that that is very worrying? How many of these animals do you estimate are on the APHIS system? Is it possible that some of these animals could have ended up in the food chain?

372.

Mr Small: There are a series of answers on that. The APHIS system clearly identifies animals by source, so there is no risk of a non-Northern Ireland animal appearing on APHIS without that being clear. As for the food chain, remember that within Northern Ireland - and the UK as a whole- no animal over 30 months of age can possibly get into the food chain. The history of animals from outside Northern Ireland would have to be recorded as they came on to the system.

373.

Mr Carrick: Could any changes be made to the APHIS system to make it even more accurate and reliable?

374.

Mr Small: We are constantly updating APHIS and adding various things to it. At the moment I am not sure that I could identify an anti-fraud measure that would be particularly useful. However, as things happen we may identify a change that we need to make.

375.

Mr Carrick: You have probably overlooked my previous question. How many animals do you estimate are on the APHIS system?

376.

Mr Small: The number that have come from outside Northern Ireland?

377.

Mr Carrick: Yes.

378.

Mr Small: I could not give you an estimate offhand, but I will write to you.

379.

Mr Carrick: You have already referred to your anti-fraud policies. You have referred to an anti-fraud culture and zero tolerance, of which I am glad to hear. Just as I do not subscribe to an acceptable level of violence, I do not subscribe to an acceptable level of fraud either. However, being a realist, I accept that we do not live in a perfect world. Nevertheless you also talk about your Fraud Investigation Unit, your four members of staff and the combination of all these measures. I would like to see a summary from your Department of all the actions that you are taking to reduce fraud - in other words, your action plan. You have told us about various elements and various component parts, but do you have an action plan for combating fraud, and if so can we see it?

380.

Mr Small: Yes. I could try to go over that now, but it would take too long. We have a clear approach to the different types of fraud because, of course, there is a wide range of fraud opportunities, and we have different deterrent procedures in place for each of those. It probably is best if we write to you. I could go over it now, but it would take a long time.

381.

The Chairperson: Perhaps it would be better if you were to write to us on that issue.

382.

Mr McClelland: Is there any indication of paramilitary involvement in this fraud, or are these just your ordinary decent criminals?

383.

Mr Small: We have absolutely no evidence of paramilitary involvement.

384.

Mr Beggs: With regard to case C, can you explain the linkage of five family members in one case? Does the linkage reflect that the farmers are operating separate herd numbers in close liaison? Following on from that, under the penalties that you can inflict on fraudulent claims, you can exclude people from the same aid scheme in the subsequent calendar year. If they are operating some sort of complex, multiple herd number scheme, the family unit may be able to beat the system by using multiple herd numbers. Is that happening in this case?

385.

Mr Small: There were different specific businesses and different herd numbers in this case. The reason why we were not able to penalise by rejecting any claims in the subsequent year goes back to the fact that we did not catch it on soon enough. You cannot do that retrospectively. What we can do under European rules -

386.

Mr Beggs: Can you not go back and claim the money that they got?

387.

Mr Small: Oh yes, we can do that. Having caught them now, having broken those rules, we can claim that money back. What we cannot do is to refuse them for next year.

388.

Mr Beggs: Can you claim back the subsequent year after the offence occurred?

389.

Mr Small: Yes, absolutely. In this case we are claiming back every penny.

390.

Mr Close: Looking at the overall treatment, I am trying to get a picture of how the Department sees itself in dealing with fraud and how the general public see the Department in how it deals with fraud. Would you describe the Department as being sympathetic towards those who commit fraud, or would you see it as being very firm and efficient in sending out a message to all that it will not tolerate fraud? Having read through the reports and listened, I still have the impression that we are dealing, on this particular exercise, with a sympathetic Department.

391.

If I look at convictions of a family in January 1998, March 1998, November 1998, September 1999 (twice), December 1999 and another undetected one in April 2000, I see that the Department accepts instalments that suit that particular family. In other cases, they accept instalments that suit the individual and his or her accountant. That is not giving the message that the Department is saying, "If you commit a fraud we are going to be down on your back like a ton of bricks. We do not and will not tolerate it". It strikes me that people might be laughing at the Department and saying, "We have a soft touch. They are sympathetic. They will bend over backwards. They have their policies, but they are really wee softies. They do not come down with the iron rod".

392.

Mr Small: That is one of the most difficult questions to answer. First, I meant it when I said that we have zero tolerance. Our objective is always to prosecute and get money back, and that is the signal that we try to give to the community. Another side of the coin is the question of what would be deemed reasonable behaviour by the courts and what would be deemed reasonable and fair behaviour by the ombudsman.

393.

Today we are debating this issue from a taxpayers' protection perspective, but we are also held to account by other groups. Let us take the ombudsman as an example. We must be exceptionally careful that in pursuing someone for suspected fraud - as opposed to proven fraud, which is clear - we do not leave ourselves open to an accusation, either from the ombudsman or in the courts, that we have behaved unreasonably. That goes to pursuit of individuals and seeking information from them. The line between investigation and harassment or victimisation can sometimes be quite a fine line. It also comes into play in the area of repayment.

394.

Let us take one of the cases before us as an example. As a protector of public money, my preferred decision in case C would have been, "We will take everything now, and if that means putting you out of business, that is tough - you committed the act". But that is not the way the world works. In any area of activity there is the question of proportionality and reasonableness. In this case a judgement was taken that if we did go down that line this family would go out of business. A judgement was reached that that would be a disproportionate reaction to what they had done. So, it is an incredibly difficult area.

395.

Mr Close: I respect that, but the message must go out. May I use the term "serial fraudsters"? Cases of fraud become "serial" because the people recognise that the penalties are not going to be enforced. Difficult decisions must be taken.

396.

For example, we are now approaching 31 January 2001. If people have not returned their Inland Revenue self-assessment forms by then, they will be penalised immediately and interest will be due for every day or week that it is not paid. The message is going out, "Get your form in, or else." I am not saying that I approve - I am not holding a brief for the Inland Revenue - but I am saying that the public sector has got to take a clear line. It must say, "This is how things operate." I feel that the balance is slightly wrong.

397.

Mr Small: I value that question, because it focuses on one of the most difficult issues facing us. Getting the message out, primarily to the farming public, is crucial. Perhaps we are not making enough of the fact that over 6,000 people in one year have had their claims rejected or reduced, or that penalties and convictions have been imposed.

398.

When it comes to the crucial balance on how we treat an individual family you suggest that we are tilting slightly in favour of the potential fraudster rather than the taxpayer. I could not say that that never happens. In a couple of instances in which we have tilted towards the fraudster on the basis of a reasoned judgement, the reaction of the staff in the department, who have put so much effort into tracking the fraudster down, becomes a difficult management issue. Individual members of staff tell us that they have gone to great lengths to gather the evidence necessary to get the case to this position, only for senior management to decide not to pursue it on legal advice.

399.

Your point is one that is constantly under debate within the Department. We recognise the need to send out a clear signal about fraud and to achieve zero tolerance. However, we are always looking over our shoulders at human rights, the rights of the individual, and how we work with those. I take your point that it is an area that is worth looking at.

400.

Mr Beggs: Particularly in the case of serial offenders.

401.

Mr Small: I agree.

402.

Ms Morrice: At a time when cross-community and cross-border groups doing valuable peace and reconciliation work are crying out for money just to survive, it is deeply disturbing that the Department of Agriculture and Rural Development was allowed to get away with what it did in the horse-breeding project. I am talking about the mishandling of public money and the sheer scale of the matter. The fraud you are talking about is relatively small fry compared with the £3 million of European funding that was given to the project. First, as the protector of public money, what do you believe should be the proportionate reaction to what was done? Secondly, how much money are you going to apply for from Peace II funding? Thirdly, what guarantee do we have that this will never happen again?

403.

Mr Small: First, I cannot accept that the Irish Sport Horse Genetic Testing Unit involved a mishandling of public money. I still believe that we will get -

404.

Ms Morrice: The report says

"A substantial amount of Peace and Reconciliation grant money going to parties in which board members had an interest."

405.

Mr Small: Yes, but equally the Comptroller and Auditor General has not for one moment - and perhaps he will confirm this - suggested that there was fraud or bad value for money. Therefore, your opening question gives the wrong impression completely, and could be misleading if picked up by the public.

406.

Ms Morrice: There is no penalty for the use of this money in any way?

407.

Mr Small: Why should there be? Those people acted in good faith and gave their time generously. There is no hint of fraud or personal benefit, so the question of penalty would not arise.

408.

Ms Morrice: What is the future for Peace II?

409.

Mr Small: When we move into Peace II the Department will want to ensure that it has learnt lessons from this. The Department will seek to improve its handling in the areas that were not handled as well as they might have been.

410.

Mr Dowdall: I agree with the accounting officer that there was no suggestion of fraud in that case. The audit office did not investigate it, but there was nothing to suggest fraud. However, I disagree with him on the subject of value for money. One of the reasons for drawing this case to the Committee's attention was that a substantial amount of public money was committed up front against expectations for the project which have not been realised. That raises questions about value for money.

411.

Mr Small: I do not disagree with that. I must have misunderstood the question. I was referring to the cases of conflict of interest. I agree with Mr Dowdall's overall assessment that the Department did not maximise value for money on the totality of the case.

412.

Mr Dowdall: There is always a question of value for money where proper procedures are not followed. In the conflict of interest case I do not agree with Mr Small, but he has made a useful clarification.

413.

Ms Morrice: For the record, through the comparison of the two I was not accusing anyone of fraud in this case.

414.

The Chairperson: I said at the beginning that we did not want to pillory this project and that we were here to learn lessons. Mr Small, with relation to the Irish Sport Horse Genetic Testing Unit, did you say that all of the staff working with the chief executive in your Department were getting early retirement?

415.

Mr Small: No. All those staff who applied for early retirement from that group were granted it. Many people did not apply for it, but we got 18 volunteers - a sufficient amount.

416.

The Chairperson: Did that close the unit down?

417.

Mr Small: Those members of staff were from the totality of that part of the Department. There are about 500 people in that part of the Department, and we needed to reduce by about 18.

418.

Mr McClelland: Were they from senior or middle management level?

419.

Mr McClenaghan: They were from deputy principal and principal officer grades.

420.

Mr Small: That is middle management level.

421.

Mr Close: Were they all around the same age?

422.

Mr McClenaghan: Their ages varied.

423.

Mr Close: Within what range?

424.

Mr McClenaghan: There were some aged within five years of retirement, and there was the age group of the chief executive. However, it was open to anybody of any age.

425.

The Chairperson: That exhausts the questions at this stage. In our two sessions today we have had the opportunity to touch on the important matters of propriety and public standards and fraud. With regard to propriety, I recognise that the public sector in Northern Ireland generally operates to a very high standard. It is a key part of the remit of the Public Accounts Committee to ensure that those standards are maintained, and some lessons will have emerged today that will help us to do that.

426.

One of the most worrying issues to emerge in the course of the Public Accounts Committee's work has been the scale on which fraud and suspected fraud exists in the public sector, as highlighted by Ms Morrice. That is a massive waste of our scarce resources, and that point has been made elsewhere. Fraud exists throughout many Departments, and it seems to be tackled in different ways by those different Departments. The public sector must rise to the challenge to combat fraud.

427.

Dr McCormick, I hope that the Department of Finance and Personnel will leave today's meeting with a clear message. We look to that Department to set a clear lead in ensuring that this issue is given priority across the Departments, and that best practice is shared. Helpful lessons will be learned from today's meeting.

428.

We need to receive certain pieces of information from Mr Small. These include a list of people aged between 40 and 45 who accepted an offer to take early retirement in the last five years, and a list of the departmental staff who were developing this project and the original members of the board. We also need to know what fee was paid to the company secretary as a consultant and, as I requested earlier, information on the possibility of taking legal action in relation to the lease. In addition, will you carry out a check of the appraisal training of the chief executive, and indicate the total amount of funding received by other projects, as requested by Ms Morrice. We also need detailed figures on the three fraud cases, as requested by Mr Beggs, and information on other suspected fraud cases over the last five years, in relation to which we were unable to prosecute. Mr Carrick requested an estimate of the number of animals which were not imported legally and which may be part of the APHIS system. Finally, can you provide us with a summary of the action plan to reduce fraud? That information will suffice for now.

429.

That concludes the session. I thank Mr Small and his team for coming along. You have answered questions for over three hours, and I congratulate you on your endurance.

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You will recall that at the conclusion of the above evidence session, the Chairman asked me for further information. I enclose a set of notes which are intended to give the information required in the order set out by the Chairman.

Copies of this letter and enclosures go to the Comptroller and Auditor General and the Treasury Officer of Accounts.

1. Early retirement
2. DARD staff involved in the development of the Irish Sport Horse project.
3. Initial Board members of the Irish Sport Horse Genetic Testing Unit Ltd.
4. Fees paid to the Company Secretary
5. Possibility of legal action in connection with lease.
6. Project Appraisal training.
7. Projects funded under Peace I.
8. Note on three suspected fraud cases. 9. Prosecutions not pursued. 10. Illegally imported animals. 11. DARD action plan to reduce levels of fraud

DARD has been asked to provide a list of people offered early retirement and the number of staff in the 40 to 45 age group, in the past five years.

Annex A attached lists 18 staff, including the person who became Chief Executive of the Irish Sport Horse Development, who applied and were granted early retirement under the AfDS scheme. Of these individuals, only the first two fall into the 40-45 age band.13 officers were over 45 years of age and 3 under 40 years of age at their date of leaving. Only one officer in the 40-45 age band was granted early retirement under the AfDS scheme in the last five years.

Annex B lists 4 other individuals in the 40-45 age band who were retired on compulsory/redundancy terms in the last five years.

* This officer subsequently became Chief Executive of Irish Sport Horse Development.

The Department's PEACE Steering Group, which agreed that a full Economic Appraisal on the project should be prepared, comprised:-

• Mr D McNeill (Chairman)
• Dr C McMurray
• Mr H Kirkpatrick
• Mr K Brady
• Mr G McWhinney
• Mr G Lavery
• Mr D O'Neill
• Mr G McCracken
• Mr B O'Hara
• Mr W Shannon (Secretary)

The initial membership of the Irish Sport Horse Development Board, as elected at a meeting on 12 March 1996, was:-

• Mr W Armstrong (Chairman)*
• Mr J Beecher
• Col. N Campion
• Mr L Cunningham*
• Mr R Connor
• Dr K Dunbar
• Mr H Kirkpatrick*
• Mr P Leeman
• Mr R McClenaghan

Prior to that meeting, those marked * had served as Board members for 2 months in a temporary capacity.

The ISHD Company Secretary has been paid £74,680.98 for his consultancy services. As well as his work as accountant for the company, which includes preparation of the Annual Reports, the payments include auditing of the accounts in the first 2 years and his contribution to the preparation of the Appraisals and Operational Plan in 1999 and 2000.

As recommended by Mr Close, the Department has written to Mr Armstrong, the ISHD Board Chairman, to suggest that the company should consider taking legal action against Fermanagh District Council with regard to the alleged breach of the leasing terms in respect of the land at Necarne. A response is awaited and the Committee will be advised in due course. [See Appendix 2].

DARD does not retain records of in-service training for staff prior to 1992. The computerised training record for the civil servant who subsequently became Chief Executive of the Irish Sport Horse Development indicates that from 1992 until her retirement she attended four courses. None related to Investment Appraisal. The Department did provide courses in Investment Appraisal before 1992 but, in the absence of records, it cannot be confirmed whether or not the Chief Executive attended.

DARD has been asked to provide details, for each of the three fraud cases, of how much was overclaimed, overpaid, repaid to date and how much has been written off as irrecoverable. This information, as at 16 January 2001 and in respect of each family, is contained in the three tables attached.

* No debt recorded on GAS - applicant under investigation by RUC

DARD has been asked the number of cases over the last 5 years when the RUC has advised, or its own Investigation Unit has advised or it has not been possible to pursue prosecution because of the actions of DARD staff. There are only two, i.e. Case 1 and Case 2 as reported in the Northern Ireland Appropriation Accounts, 1998-99.

DARD has been asked to estimate the number of animals which are recorded on the Animal and Public Health Information System (APHIS) and which have not been imported legally into Northern Ireland.

The very fact that animals are illegally imported precludes the possibility of their identification on APHIS and thus it is not possible, by any central analysis of the data, to analyse the extent (if any) of this problem. All animals on APHIS purport to be legitimately in Northern Ireland and have either a Northern Ireland tag or an officially imported tag.

Cattle over which there is some query may be identified on the APHIS system with "indicators statuses" such as BMT (bad movement trace), IDQ (identity query) or LNO (late notification) etc. However it is not possible to dis-aggregate from these categories which animals, if any, are suspected of being illegally imported from the Republic of Ireland (ROI) or elsewhere.

While it is likely that there are illegal importations, they will be done in such as way as to be indistinguishable on APHIS. Their detection is therefore dependent on surveillance and enforcement on the ground. The cattle identification inspections which are carried out on farms each year assists in the identification of those holdings where movement fraud is being perpetrated. Additionally, Veterinary Service enforcement officers liaise closely with their counterparts in the ROI to identify those involved in this illegal trade and, where possible, enforce the movement legislation by prosecution or destruction of unidentified animals.

The Veterinary Service also works closely with Grants & Subsidies Division to ensure, as far as possible, that fraud is not perpetuated and provides APHIS data and system access for the delivery and audit of a number of Schemes i.e. Extensification Premium, Special Slaughter Premium, Beef Special Premium & Suckler Cow Premium.

The Department's first priority is to prevent fraud. This is done by maintaining a strong anti-fraud culture, careful design and review of schemes, the application of rigorous administrative checks and the deployment of field staff to conduct on-the-ground physical checks.

All DARD schemes contain provision for inspection, offences and administrative and criminal penalties. All claims for grants and subsidies are subject to initial validation checks, followed up by checks on the IT system. In addition, in a number of schemes all applicants are visited and all claims are checked on the ground by physical inspection, while in other schemes a risk assessment is made and a sample check is carried out. In turn, these arrangements are the subject of testing by the Department's Internal Audit which advises local management on the robustness of the controls in place and the diligence with which they are being applied. In total, over 600 staff within the Department have a role in the prevention of fraud, and the detection of irregularities.

Every case of suspected fraud is referred to a specialist Investigation Unit within the Department. All members of the Unit are fully familiar with the conduct of investigations, the gathering of evidence including the questioning of witnesses under PACE [Police and Criminal Evidence] procedures, and the preparation of prosecution files to the standard required for criminal proceedings, and have a personal experience of all types of agricultural fraud and frauds which may be attempted against the Department's other areas of activity.

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An Anti-Fraud policy statement was issued on a personal basis by the Accounting Officer to all staff twice in recent years (December 97 and August 99). It is to be reviewed and revised again this year. The guidance sets out the definition of fraud and provides guidance for staff and management in relation to both internal and external fraud.

This policy is set in the context of the development of risk management as part of corporate governance in the Department. All senior officers assess risks - including the risk of fraud - in their areas of responsibility and make annual stewardship reports to the Accounting Officer informing him of the key risks and how they are being managed.

In relation to grants and subsidies, DARD has 103 administrative staff in Orchard House and 60 staff in the Livestock Inspection Team (LIT) whose role it is to examine and inspect all claims for grants and subsidies. The extent to which individual claims are examined is based on a risk assessment.

The Veterinary Service has a total of 250 officers visiting farms in connection with TB/Brucellosis inspections and animal welfare. Additionally the Service has 160 staff employed at meat plants. These staff all have an anti-fraud role.

Any suspected cases of fraud are referred to the DARD Investigation Unit which comprises 4 Investigation Officers - 3 of whom are former senior police officers. Where the evidence justifies referral to the DPP for prosecution this action is taken. If in the opinion of the Investigation Officers, drawing on their expert knowledge from a previous occupation, evidence to a standard to enable the DPP to direct charges is not available, the Unit may nevertheless recommend through the Department's Accountant to the line management withholding the grant or subsidy.

• Veterinary Service has a written enforcement and prosecution policy.
• A recent innovation within the past two years is the development of an Enforcement team, comprising a Divisional Veterinary Officer and a Staff Officer who have promoted an enforcement culture within Veterinary Service.
• It has also developed a considerable cadre of well trained enforcement staff in local offices who are very active in pursuit of breaches of animal health and welfare legislation.
• As many breaches of animal health and welfare legislation are associated with pecuniary gain, veterinary staff are very aware of fraud implications and liaise through the VS Enforcement team with the DIU.
• This core of enforcement staff supplements the enforcement ethos throughout VS and promotes an awareness of fraud in the local offices.
• Part of the innovations brought about by this team is the development of an enforcement database, which details all cases under investigation and records the outcome of these.

• 60 staff inspect claims for grants and subsidies.
• Inspections for all schemes are selected by means of a quartile Risk Analysis. This is based on a scoring system which reflects different factors such as results of last inspection or administrative checks, changes in farming practice, new applicants, changes in area from previous year. These factors carry different weightings and the claims concerned are split into quartiles based on different sizes of land/animals held. A ratio is applied to each quartile produced with applications at the top of each quartile being selected for inspection. Cases with premia related convictions would be covered by virtue of having a penalty applied.
• On top of this quartile selection there is provision to add particular claims which may warrant inspection for particular reasons, for example, suspected previous fraudulent history, anonymous report of irregularity etc. These are termed "Specifically Targeted Risk" referrals and must be strictly controlled in order to avoid allegations of victimisation.

The DARD Investigation Unit comprises 3 former senior police officers, one administrative SO Investigation Officer plus 1 AO and 1AA. The Unit investigates cases referred to it by Divisions throughout DARD and the Veterinary Medicines Directorate DHSS and MAFF. On receipt of a referral each case is prioritised on the basis of laid down criteria which are :-

• Potential risk to the agricultural industry
• Potential risk to animal health and welfare
• Amount of money involved
• Quality of evidence
• Antecedence of suspected offenders
• Time limit for summary proceedings
• Likelihood of successful prosecution
• Political implications

Following the collation of witness statements, and other documentary evidence, tape recorded interviews of suspected offenders are conducted in accordance with the Codes of Practice, made under the Police and Criminal Evidence (Northern Ireland) Order 1989. If in the opinion of the Investigation Officer there is clear evidence of the commission of an offence the relevant papers will be forwarded to the DPP for directions. Where the evidence is not sufficiently strong but yet there are grounds for penalising the miscreant then the recommendation from the Unit to the initiating Division is to withhold grant or subsidy under scheme rules.

In complex cases where there is evidence of serious criminal offences the papers are forwarded to the RUC for investigation.

The Unit maintains a central database of all referrals, including those on the VS enforcement database, so that a record of all cases of suspected frauds/breaches of legislation is held in respect of each individual.

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The Department will shortly be reviewing its anti-fraud measures. This review is likely to recommend that the Unit adopts a more pro-active role, including taking a strategic overview of agricultural fraud, identifying trends, enhancing targeting etc. There will also be enhanced co-ordination within the Department through the formation of a Fraud Group which will act as a think tank, information exchange and co-ordination group. The Department aims to publish by October 2001 a counter fraud strategy which will include targets for reductions in the levels of fraud against agricultural grants and subsidies.

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I refer to my letter of 14 February 2001 and in particular to the accompanying Note 5 [Appendix 1] which dealt with the possibility of legal action in connection with the alleged breach of the leasing terms in respect of the land at Necarne. As I had indicated in the Note, the Department had written to Mr Armstrong, the ISHD Board Chairman, suggesting the company should consider taking legal action against Fermanagh District Council.

A response has now been received from Mr Armstrong indicating that the Board considers that the alleged impact of the 3 events was greatly exaggerated. Generally Fermanagh District Council has been highly supportive of the project. Only part of the land and buildings on the estate were leased from the Council by ISHD and it was always known that there were going to be other activities held on the estate.

Mr Armstrong states that in the case of the rally and concert, the lease does recognise that the Council will hold other events; the company was consulted and, in advance, moved the horses away from the possible disturbance. The tree felling was a single unfortunate incident, for which the Council apologised. There has been no repetition. The company considered the issues at the time and concluded that since it would be virtually impossible to prove cause and effect from any of these incidents, it would be very unlikely to benefit from taking legal action. The company still remains of that view and in any event does not have the financial resources to sustain a legal challenge.

Copies of this letter go to the Comptroller and Auditor General and the Treasury Officer of Accounts.

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