Guidance

Due diligence for excise registered businesses

Find out about risks of excise duty evasion and other commercial risks if you're an excise warehousekeeper, registered owner, duty representative or registered consignor.

• From: HM Revenue & Customs
• Published: 23 October 2014

Due diligence is the appropriate reasonable care a company takes when entering into business relations or contracts with other companies, and how it responds to trading risks identified.

Without effective safeguards in place, there are considerable risks to all businesses along alcohol supply chains of becoming implicated in illicit trading.

As an excise registered business operating in the alcohol sector, you must consider the risk of excise duty evasion as well as any commercial and other risks when you are trading. This will help get rid of illicit trading from alcohol supply chains, and reduce the risk to businesses of financial liabilities associated with goods on which duty has been evaded.

It is a condition of your approval as an excise warehousekeeper, registered owner, duty representative or registered consignor that you must:

• assess the risks of alcohol duty fraud within the supply chains you operate in

• put reasonable and proportionate checks in place in your day to day trading to identify transactions that may lead to fraud or involve goods on which duty may have been evaded

• have procedures in place to take timely and effective mitigating action where a risk of fraud is identified

• document the checks you intend to carry out and have appropriate management governance in place to make sure that these are, and continue to be, carried out as intended

Assessing risks and checks to carry out

You will need to consider the full range of trading relationships you have established and the potential for fraud in each.

The main risks within the alcohol sector include:

• involvement in the supply of goods for fraud

• receiving goods that have been smuggled or diverted into the UK

• unintentionally facilitating fraud by providing import or warehousing services

A key feature of the smuggling or diversion of alcohol to the UK market is the ability to source products either where the excise duty has been suspended or it has been refunded under drawback provisions.

To assess your exposure to this risk you will need to assess if there is potential for duty evasion resulting from your trading activity. You will need to:

• know who you are selling to
• where the goods are destined for
• understand the market for these products

Without these, there is a risk of supplying goods directly or through a third party into illicit supply chains.

Import and warehousing procedures are often exploited to provide cover for the illicit movement of goods. Fraudsters will seek to distribute duty evaded goods as well as counterfeit alcohol into legitimate retail supply chains. To assess your exposure to this risk you will need to consider whether the supply chain and trading activity is credible which includes knowing who you source goods from and provide a service to.

High level indicators of risk include goods being received from unusually complex or apparently uneconomic supply routes, for example, regular supplies of UK produced goods that have been shipped out to an EU member state and then re-imported. If you are sourcing duty paid goods you will also need to consider the credibility of suppliers and the level of evidence you can obtain to demonstrate the origin and duty status of goods.

Once you have established the main risks of fraud you may be exposed to, your regular checks during trading should be of a type and level sufficient to establish the integrity of the excise transactions and supply chains you are trading in. This level needs to be reasonable and proportionate to the risk.

Depending on the nature of your business and complexity of your transactions, checks will need to be individually tailored. In particular, they must be sufficiently sensitive, yet robust enough, to pick up potential fraud risks. These checks should provide protection from the threat of fraud or you becoming inadvertently involved in fraudulent activity.

Responses to identified risks

Where checks you make indicate concerns, we would normally expect aspects of your supply chain to be changed to address this. For example your concern may be with the supplier or the destination of the goods. A decision of whether or not to trade with another party remains a commercial decision for your business to take.

If, during your checks, you suspect duty fraud you should report this to HMRC.

HMRC enforcement and audit

As part of our enforcement and general audit programmes, we will consider whether or not the steps you have taken to embed anti-fraud due diligence into your trading activity are sufficient and timely to address fraud risks in your supply chains.

We will aim to establish whether you have assessed the risks in your supply chain. You must be able to show that you have put reasonable and proportionate checks in place and set up procedures to respond to risks when they arise.

If we consider your due diligence procedures are insufficient, we will consider the facts of the case before taking further action. Where appropriate we will help you strengthen your procedures.

Serious cases

In more serious cases such as a failure to consider the risks, undertake due diligence checks or respond to clear indications of fraud, we will apply appropriate and proportionate sanctions. For serious non compliance, such as ignoring warnings or knowingly entering into high risk transactions, we may revoke excise approvals and licences.

Handling goods

Handling goods liable to excise duty held outside a duty suspension arrangement may also cause you to become liable for any excise duty due on those goods and an excise penalty. Any of those goods you currently hold could also be liable to forfeiture.

Examples of due diligence checks

Where you identify one or more of the following indicators in both suppliers and customers, you should be concerned. You may need to make further inquiries. This is not a full list, but indicators can include the:

• financial health of the company you intend trading with
• identity of the business
• terms of contract, payment and credit agreements
• transport
• existence or provenance of goods
• deal

Once you have established the most appropriate due diligence tests for your business, they should be used to test both new and existing transactions and supply chains linked to your business. Some checks may be more appropriate to your business than others.

Financial health of the company you intend trading with

You need to:

• carry out credit checks or other background checks

• establish how the transactions will be funded - what security can be offered that you will be paid where you find a poor credit rating

• find out who is providing the credit facility, if credit is offered by the business

• find out what payment terms are offered and whether they are commercially viable

Identity of the business

You need to:

• check company details provided to you against other sources such as website, letterheads, telephone directories

• ask whether your customer or supplier is a member of a relevant trade association

• get copies of certificates of incorporation, VAT registration certificates and excise registration certificates where appropriate and where a trade class is quoted, check that it relates to the type of trade you are engaging in

• verify VAT and excise registration details with HMRC - we recommend you carry out these checks regularly for new trading arrangements and longer for trusted ones

• be satisfied that the owner of the goods is registered under Warehousekeepers and Owners of Warehoused Goods Regulations where required, if you are a warehousekeeper receiving duty suspended goods into your warehouse

• get signed letters of introduction on headed letter paper and references from other customers or suppliers

• insist on personal contact with a senior official of the prospective supplier and where necessary, make an initial visit to their premises to meet them - keep a record of your meeting

• establish what your customer’s or supplier’s history in the trade is

• get the prospective customer’s or supplier’s bank details - in the case of an import or export, does the supplier or recipient share the same country of residence as their bank

• establish who you will be paying - is it the same company as the one you are dealing with

• find out who will be paying if you are providing a service

Terms of any contracts, payments and credit agreements

You need to check:

• the terms of any contracts and credit agreements before entering into these and challenge anything that appear unusual

• what recourse is there if the goods are not as described

• if payment is to be made to or from a third party - is there a sound commercial reason for this

• if payment is to be made to or from a third party - is it to or from an off shore account

• that there are normal commercial arrangements in place for the financing of the goods

• where payment is made from an overseas business, how is that to be made

• if your supplier referred you to a customer who is willing to buy goods of the same quantity and brand as being offered by the supplier

• if your supplier offers deals that carry no commercial risk for you, for example, no requirement to pay for goods until the payment is received

• that the goods are adequately insured

• there are no high value deals offered with no formal contractual arrangements

Where you are buying from a broker you need to check:

• what overall value does this link in the supply chain add

• is it possible to source directly

• how competitive is the broker’s pricing to those from a more direct route

• how are the savings made in a longer supply chain to make it viable

• where transactions are being financed by a third party - is this person a regulated financial body such as a bank

Transport

Checks can include:

• finding out where the goods will be sourced from - if this is the country of production, then why the goods are being routed in this way

• determining who is responsible for the transport

• working out if the potential logistical costs make the unit price unrealistic, if the cost of the goods are inclusive of transport

• details of delivery vehicles, which should be kept and if necessary any variations to expected transport arrangements recorded

Existence of provenance

Checks can include:

• how the trader contacted you

• confirmation the goods exist

• inspection of the goods before purchasing them

• that the goods are in good condition and not damaged

• the quantities on offer should be credible for the type of business you intend trading with

Where goods are said to be duty paid, find enough information to be satisfied that they are. This will be easier the closer you are in the supply chain to production. This is also important where you intend holding goods on behalf of a third party.

The deal

Check whether the deal includes the nature of the transaction and:

• whether it looks too good to be true

• that the demand for the type of alcohol is credible and If the demand is said to be from abroad, what is the real market (consumption) for them in that country

• if the alcohol has come from abroad but is of UK origin, find how this occurred and why

• where incentives are offered, does this make the overall deal seem too good to be true

• why it is being offered

• have normal commercial practices been adopted in negotiating prices

• does the price compete with offers from competitors

• check the age of the goods - if the stock is old, ask for an explanation

• does the price seem realistic - be aware of unit cost when duty and VAT values are removed

If you are already established in a trading agreement we would also recommend that you continue to monitor correspondence and business paperwork to identify changes in those arrangements and take any follow up action as necessary.

Published 23 October 2014