Customs in £1bn 'sting' blunder over alcohol bootlegging

A "sting" operation by Customs and Excise has backfired, leaving dozens of people wrongly convicted and costing up to £1bn in lost tax revenue.

The scale of the blunder became apparent after judges quashed eight convictions for alcohol bootlegging because Customs failed fully to inform the courts about its covert operations, aimed at stopping tax evasion on whisky, gin and vodka. Dozens more people sentenced to prison or fined for defrauding the Exchequer are expected to return to court to clear their names and begin compensation claims against the Government.

The Court of Appeal was told how officers from Customs' National Investigation Service used informants at a duty-free warehouse in London to help investigate between 30 and 40 different alleged scams involving the illegal diversion of spirits. The drinks, bought from bonded warehouses and authorised for export, were instead illegally sold in Britain.

Customs investigators were aware of the trade but for four years they allowed it to continue in the hope of gathering evidence to support prosecutions. Although about 100 successful cases were brought to court, the cost in lost revenue was estimated by defence lawyers to be near £1bn.

Now the Court of Appeal has ruled that eight of these convictions cannot stand because of the failure of Customs to disclose evidence to the defence about their covert operation. Customs said it would not be opposing another 30 appeal cases connected with the investigation, expected to come before the courts this year.

Lord Justice Rose, sitting with two other lord justices of appeal, was told the offences would not have occurred if the informant "had not encouraged, provoked or facilitated the removal of the goods from the warehouse, in collusion with Customs and Excise officers working for the National Investigation Service".

He said that Alfred Allington, who helped run the London City Bond warehouse, was not merely a trade source but a "participating informant" who did not have a handler or controller nor were proper records kept of his contacts with Customs. Because of the "false evidence" presented to each of the crown court judges as to the role of Mr Allington and the relationship between London City Bond and Customs and Excise, the judge in each case "could not properly exercise his discretion", Lord Justice Rose said.

All eight of the appellants pleaded guilty on the assumption that full and proper disclosure had been made by the prosecution. But their lawyers argue that they were denied the right to argue that they had been the victims of an entrapment.

The Customs' investigation was part of a strategy to stem a steep rise in evasion of duty payable on alcohol in the 1990s. But this strategy has been shown to be seriously flawed.

The National Audit Office said in a report 18 months ago that Customs and Excise had been guilty of "serious failings" in allowing the illicit trade to continue, at a massive loss in revenue to the Exchequer.

The NAO estimated that half the losses could have been avoided if the illegal consignments had been intercepted by Customs rather than allowed to run.

A spokesman for the Customs and Excise said yesterday: "We made a mistake. We are now carefully considering the judgment. Procedures in the department are very different to when the investigations took place in the late 1990s."