Settlement goods – House of Commons debate, 27 January 2010

A debate in the House of Commons on EU-Israel trade on 27 January 2010 contains a detailed analysis by Phyllis Starkey of how EU-Israel regulations on trade in settlement goods are evaded, and a government response. The account below has been marginally edited to take out page breaks, interruptions and the like – see the full account in Hansard here.

EU-Israel Trade Agreement

Dr. Phyllis Starkey (Milton Keynes, South-West) (Lab): This debate relates to the information given to Her Majesty”s Revenue and Customs by those exporting goods from Israel and Israeli settlements to the United Kingdom and the effectiveness or, as I shall demonstrate, the ineffectiveness of HMRC checks in preventing fraud.

Under the EU-Israel trade agreement, produce from Israel enters the UK and other EU member states under a preferential agreement that exempts it from import duties. The agreement only applies to Israeli territory that is within its internationally recognised borders, and that has recently been reaffirmed in a legal ruling from the European Court of Justice.

The Israeli authorities have long had a cavalier attitude to compliance with the agreement. In 1997, for example, in another Adjournment debate, I drew attention to the then practice of Israeli authorities of importing Brazilian orange juice, re-labelling it “Made in Israel” and re-exporting it under preference to the European Union. Israel has also unilaterally interpreted the agreement as applying not just to Israel but to the numerous settlements in East Jerusalem and the west bank, even though they are illegal under international law. Settlement produce has been routinely labelled “Made in Israel” and thereby exemption has been claimed from import duty. Not only is that defrauding the EU taxpayer by avoiding legitimate import duty, but it sets a dangerous precedent that could allow other countries unilaterally to reinterpret their agreements with the EU.

As a result of the abuse, in February 2005 the EU introduced a technical arrangement requiring all goods from Israel to be marked with their place of origin and postcode, supposedly so that individual customs authorities could identify settlement goods and prevent the fraudulent obtaining of exemption from import duty. However, it is clear that these checks are not working and that goods from settlements are still being misrepresented as originating in Israel.

An indication of the likely scale of abuse can be estimated from the total duty raised on settlement goods in 2009, which was just under £22,000, compared with demands for duty in 2005-08 that averaged £110,000 per annum, which is five times the level raised in 2009 and suggests that at least 80 per cent. of settlement goods are imported without duty being paid on them. The information and powers available to HMRC are so weak that the controls are unenforceable and the European Commission oversight is ineffective.

I shall now deal with the mislabelling of goods and will talk first about agricultural produce… There is mixing of produce within one consignment. It is well known that the major exporter, Agrexco, which is responsible for 60 to 70 per cent. of settlement produce, mixes settlement and non-settlement produce in its depots and then labels the whole lot as originating in Israel, which means that all of it gets the import duty. It has been confirmed by EU diplomats that that happens in respect of oranges. The answers that I have received to written parliamentary questions give additional indirect proof of that, showing that in the 12 months to March 2009 HMRC identified six consignments as being from settlements although they were validated by the Israeli customs authorities as originating in Israel, and describing a particular consignment which contained two consignments of herbs that were identified because the packaging was properly labelled as coming from the Jordan valley, although they were included in a consignment purporting to be from Israel. Obviously, mixed consignments are hiding settlement goods. Although HMRC undertakes physical inspections, it cannot look at every consignment-there are tens of thousands a year-and it is presumably only detecting the tip of the iceberg.

The trade agreement sets out in detail the documentation that is required from exporters and importers: the original commercial documents accompanying the customs import declaration; the sales invoice and delivery/consignment note or packing list issued by the exporter and showing the UK importer; health documentation where required; and, where a preferential rate of duty is claimed, either a proof of preferential origin showing the place of production and zip code on the invoice or on form EUR1, which is issued by the exporter and stamped by the Israeli authorities. It is clearly stated on EUR1 that anyone signing the form will be committing an offence under section 167 of the Customs and Excise Management Act 1979 if the declaration is incorrect. The importer is also held responsible

The problem is either that documentation is insufficiently detailed to reveal all settlement goods” origin or there is deliberate falsification at the Israeli end. The first problem is that the EUR1 form does not travel with the goods, and as long as the form has a location and postcode and is stamped by the Israeli customs authorities it can be accepted by HMRC. That is a huge loophole. A report in 2006 in the Israeli business magazine “Globes” helpfully described how it is done:

“The method is easy: you invent an address within the Green Line and operate using this address. In this way you do not have to pay the customs fees that apply to products exported from across the Green Line. The method works, but not for those whose company carries a name that gives away the true location-such as Golan Height Wineries.”

The Israeli authorities clearly turn a blind eye to this practice, although it is interesting to see that, at the same time, they have set aside 30 million Israeli shekels through the Israel Export Institute to be used for compensation for manufacturers from across the green line, by paying the import duties for them. However, presumably that is only done for those whose names give away where they are, because only four exporters have applied.

Given the well-documented policy of deliberate falsification, the powers of HMRC are incredibly weak. If HMRC has doubts it can make a verification request, but that request just goes straight back to the same Israeli authorities who mislabelled the produce in the first place. I have received a written parliamentary answer that confirms that the issuing and verifying authorities are the same.

In 2007-09 HMRC asked Israel to verify 65 preference certificates that were doubtful, but even when it asks, the Israeli authorities do not necessarily respond. In the same period HMRC made 21 requests for information to Israel, but 12 were not answered within the 12 months stipulated in the agreement.

Strictly speaking, customs can only levy import duty if they can definitely tell that goods are from settlements. However, it is interesting that, in dealing with BRITA water-carbonating machines manufactured in Maale Adumim, even though the Israelis first said that those were made “under Israeli Customs administration”, and then refused to reply when asked to confirm that they came from a settlement, German customs levied import duty in the absence of definite proof from the Israelis that those were manufactured within Israel. HMRC could learn a few lessons from German customs and could perhaps be a bit more robust about levying duty when it has strong suspicions.

There are two other things that HMRC should be doing. First, more information on exactly where the products are from could come from the traceability system set up by retailers and importers, which is primarily to meet food safety requirements but is also there to give information to customers. That system is much more detailed. For example, my hon. Friend the Member for Birmingham, Northfield (Richard Burden) asked Tesco about some dubious-looking mangoes in one of its stores and was given the precise name of the farm that it came from, which turned out to be in Israel.

I accept that HMRC cannot demand the traceability information, but it could ask the retailers and importers if it could look at it where suspicions arose about the customs declaration, because that would give HMRC independent, extra information. It is in the interests of retailers that their audit trail is not compromised. They would not want goods in their stores to be labelled as coming from the west bank if that was not so, or to give a different description to HMRC and thereby avoid the import duty.

The second issue is the spot checks that HMRC does on consignments. It has not done any checks at all on sweet peppers, halva or tahini, although all those products are known to be produced in settlements. Halva and tahini, for example, are produced in the Barkan settlement by Achva and sold widely in the UK. It would be an obvious thing to target those products. HMRC does apparently target products and addresses that have misrepresented produce before and where there are known production facilities in settlements, but it does not seem to do that often. I would be grateful if my hon. Friend the Minister said how often imports are challenged. Why does HMRC not step up the spot checks and use the information that is widely available from, for example, the recent report by the School of Oriental and African Studies and the information available from a number of non-governmental organisations in Israel about which goods are most likely to be coming from settlements?

The third issue is that no action seems to be being taken against those who make false declarations, apart from charging the import duty. As I mentioned, however, the form that they all sign confirms that they would be committing an offence if the declaration was incorrect and, in a debate that I introduced before Christmas on consumer labelling of settlement goods, the Minister of State, Department for Environment, Food and Rural Affairs, my hon. Friend the Member for Poplar and Canning Town (Jim Fitzpatrick), clearly said that claiming preference on settlement goods was “an offence”.

Section 167 of the Customs and Excise Management Act 1979 is the provision that is used to take action against people who are thought to be smuggling cigarettes by pretending that they are for personal use when they are actually bringing them into the country for resale. Those individuals can be fined or detained and persistent offenders imprisoned for up to seven years. I do not understand why the same rigour is not used against those who are doing it, for purely commercial reasons, from settlements in Israel.

I now turn to a specific case relating to cosmetics in which it seems to me that even more blatant fraud is occurring. Cosmetics, particularly from Dead sea products, are very significant imports into the UK; there were 417 consignments of beauty and skincare products in 2009. I want to focus on Ahava, a firm that is part-owned by two co-operatives based at Mizpe Shalem and Kibbutz Kalia. Both are in the occupied Jordan valley and both are on the EU list of settlements. The products that Ahava produces are based on Dead sea mud, which is extracted at both those sites and processed at Mizpe Shalem. There is no evidence of any other production facilities and certainly none within Green Line Israel, although the head office is near Tel Aviv.

The Ahava website and product labels clearly give the postcode at Mizpe Shalem and then say “Israel”, which is an incorrect description. Its chief executive was totally open in a BBC interview a year or so ago about the fact that it uses the head office address, not the site of production, to justify the “Made in Israel” claim. That could not be more blatant. There is no argument about this one, and when… the firm was challenged about where its site of production was, it made no attempt to rebut its site in the occupied territories, but just waffled about how

“the Dead Sea treasures are international and do not belong to one nation”,

which was an interesting response to an HMRC request.

In answer to another written parliamentary question, HMRC confirmed that all such cosmetics- not just Ahava ones-are imported as “from Israel”. Many other companies working with Dead sea products and which are known to have their facilities in the west bank must also be using some other address to get the “Made in Israel” designation. It means that Ahava products, although labelled as “from the occupied territories”, must be designated as originating from Israel on the EUR1 form, which means that it is putting down the head office, not the site of production. Other companies that use products where the Dead sea mud and other minerals are processed or mixed with other ingredients from Israel should, on the EUR1 form, be setting out the proportions that originate from Israel and the proportion originating not from there, but from the west bank. However, they are obviously not doing that.

There is an additional issue that is beyond HMRC, which is whether Ahava and the others are violating article 55 of the Hague regulations on exporting non-renewable resources from an occupied territory. The Ahava case is so blatant that Dutch customs have now agreed to investigate after questions in Parliament from Socialist party MPs. Surprisingly, HMRC claims not to have shared any information with the Dutch authorities, which seems extraordinary. The HMRC claims to closely monitor imports, but has so far identified no cases where doubt existed over the place of production of imported cosmetics. However, it has asked the European Commission to check that the Israeli authorities are including the place of production and not the head office on the proof of origin.

aThat brings me to the role of the European Union. Apparently, UK Customs does not have the power to visit the occupied territories to check production facilities and so on, but the European Commission does. Any irregularities reported to the Commission are supposed to be disseminated to European Union member states, including information about the action taken. That does not seem to be happening in relation to Ahava or, in the German case, to BRITA.

Officials from the Commission origin unit visited Palestine and Israel in 2009, apparently to get a clearer picture of where the production sites were. However, the European Anti-Fraud Office, OLAF, which can enter the premises of Israeli exporters and examine their bookkeeping, has apparently not passed on any information about what came out of that visit. I should point out that because movements in the west bank are controlled by the Israeli army, OLAF cannot make unannounced inspections of premises in the settlements themselves. What information has the European Commission gathered? Has that information been communicated to member states, and will HMRC be acting on it? If not, will the Minister press for more effective action by the Commission?

To summarise, the Israeli authorities, the export companies and the producers all have a strong interest in misrepresenting the origin of settlement produce. First, they have a direct financial incentive, through the exemption from import duty if the goods are alleged to be from Israel. Secondly, there is the possibility of evading consumer boycotts aimed at settlement goods; that has become particularly important now that the Department for Environment, Food and Rural Affairs has insisted that guidance more clearly identifies settlement goods for the consumer. It has to be said that they have a track record of deliberate falsification. However, HMRC monitoring relies on inadequate documentation, and if there is doubt, it has to go back to the same authorities for confirmation; it can then be kept waiting for up to 10 months. Even in a blatant case such as that of Ahava, no action seems to have been taken.

The European Commission is also failing in its duty to collect the information needed by member states to deal with fraud and to disseminate information between the various customs authorities. It is absolutely unacceptable that such systematic and sustained fraud should be allowed to continue. I have five specific questions on that point.

First, in relation to agricultural produce, will HMRC discuss with retailers how they can share their traceability information? That should at least ensure consistency between consumer labelling on whether exemption from import duty applies. Secondly, will HMRC consider more rigorous verification procedures that do not rely on the same source of information as the original issuing authority? If necessary, that should be taken up urgently with the European Commission.

Thirdly, given that the technical arrangements are unenforceable, what action will the Government take at EU level to make them enforceable? Fourthly, will HMRC do spot checks based on a proper risk assessment-that is, on known settlement producers, and information from external reports. Fifthly, will the Minister explain how Ahava cosmetics, which are known to be produced in the occupied territories at Mizpe Shalem, are permitted to be designated “Made in Israel” and escape import duty? Will the Minister instruct HMRC to investigate Ahava urgently, and to share that information with their Dutch colleagues in order to stop this fraud?

Her Majesty”s Revenue and Customs is sensitive of the need to ensure that settlements products do not receive preferential tariff treatment incorrectly. Over the past eight years, it has been monitoring UK imports under the agreement and taking steps to identify consignments that have been mis-declared. Of course, the Department is always happy to receive information to aid its targeting, and to listen to suggestions for ways in which controls and checks in this sensitive area may be improved. I am therefore grateful to my hon. Friend the Member for Milton Keynes, South-West (Dr. Starkey) for highlighting a number of areas that merit further consideration.

In 2009, UK importers made claims to Israeli preference on some 20,300 import declarations; the total value of the goods concerned was £419 million. That was equivalent to 63 per cent. of all imports from Israel. Within that overall figure, there were about 3,600 claims to preference on agricultural products, which again equated to 63 per cent. of all imports of agricultural products from Israel.

The high total volume of imports means that Revenue and Customs must undertake checks, which may be the physical examination of goods at the time of importation or post-importation documentary checks on the basis of risk. In the case of physical examinations, Revenue and Customs and the UK Border Agency, which undertakes the examinations at the frontier, must ensure that the right balance is struck between the levels of customs controls and the free movement of legitimate goods, and that is particularly important with regard to perishable fresh produce.

Revenue and Customs selects imports for check on the basis of information and intelligence received from the European Commission, interested parties, the media and other Government Departments, and on the basis of irregularities, which it has already identified.

On 1 February 2005, the technical arrangements, to which my hon. Friend referred, came into force. They require exporters in Israel to insert the place of production and accompanying postcode on all proofs of preferential origin issued. However, it does not constitute a requirement for all goods to be marked with the place of production.

Revenue and Customs welcomed the technical arrangement, because it enables the Department to check the place of production against the list of settlements locations, which have been circulated to member states” customs by the European Commission. The list was last updated in September 2009.

Under the terms of the arrangement, Revenue and Customs immediately refuses, without the need to return the certificate to Israel, a claim to preference made under the agreement where the place of production is in a settlement. Since 1 February 2005, the Department has rejected some 515 proofs of preferential origin under the arrangement, and has issued customs duty demands totalling £289,000. The figure of 515 represents about 56 per cent. of all Israeli proofs of preferential origin, which have, to date, been checked on the basis of risk.

However, since the introduction of the technical arrangement, Revenue and Customs has initiated some 27 verification inquiries with the authorities in Israel when it has had concerns about the accuracy of the place of production that has been inserted on the proof of preferential origin.

I mentioned earlier that Revenue and Customs is always prepared to consider and act, where possible, upon any new intelligence that will help it to improve its risk assessment and targeting. It will, therefore, undertake further checks in respect of known settlements producers, and pay particular attention to imports of cosmetic products from Ahava.

My hon. Friend may be interested to know that each year, Revenue and Customs checks around 3,000 import declarations on which a preferential rate of duty has been claimed. Those checks result in around 370 verification inquiries, covering some 2,400 proofs of preferential origin. The monitoring of Israeli imports is an important part of those overall checks.

In June 2008, Revenue and Customs received information that suggested that the fact that an Israeli place of production and postcode is included on the proof of preferential origin does not necessarily mean that the products concerned-notably fresh fruit, vegetables and herbs-originated in Israel. There were concerns that the location and code may simply refer to a company”s head office or distribution centre in the state, the produce concerned having actually been grown or produced on a farm in a settlement.

Such concerns were repeated in various press articles and television news stories, which also raised concerns about the labelling by UK supermarkets of fresh produce, such as herbs and avocado pears, which some had admitted to purchasing from Israeli-managed farms in the settlements. While the correct labelling of products after importation is not the responsibility of Revenue and Customs, it recognised that it is not possible to establish from documentary checks alone whether produce is labelled as originating in a place other than an Israeli location.

Since the end of July 2008, officials in the UK Border Agency have, at the request of Revenue and Customs, undertaken 51 targeted physical examinations of dates, frozen sweetcorn, fresh herbs, avocado pears, grapes and tomatoes imported under the EU-lsrael agreement. We now understand that in the case of avocados, the intelligence received may have been flawed.

Only two labelling irregularities have been identified so far, and they concerned imports of fresh herbs. The packaging showed that the produce originated in the Jordan valley, while the accompanying proof of preferential origin showed that the herbs were produced in a location in the state of Israel.

There is no blanket legal requirement for the place of production to be inserted on all produce or its packaging. In the absence of such a marking, as was the case in a number of the examinations undertaken to date, there is little that customs can do when the accompanying proof of preferential origin shows that the produce was produced in an Israeli location. Similarly, the Department does not have sufficient evidence to the effect that the goods were not produced in Israel where “produce of Israel” has been inserted on the product or its packaging. Most of the products that have been examined to date bore such an origin marking.

With the voluntary labelling guidelines that Revenue and Customs contributed to DEFRA”s issuance of its guidelines, we are hopeful that those UK supermarkets that decide to implement the voluntary arrangement will persuade their suppliers to display clearly the place of production on their products or their packaging. That could have a useful knock-on effect in helping Revenue and Customs with its series of targeted physical examinations. In the meantime, we will extend our series of targeted examinations to include peppers, halva and tahini.

We are aware that certain supermarkets may be able to identify the origin of their products from their tracking systems and we would be very happy to utilise those systems, where possible, to refuse claims to preference immediately at the time of importation into the UK. However, when we look at our import declaration database, supermarkets are rarely shown as the importers on the customs declaration. In effect, it would be possible only to utilise a tracking system post-importation of the goods and the checks would have to start at the supermarket end of the chain.

We are prepared to explore with supermarkets the feasibility of using their tracking systems to link particular products that the systems show as originating in the settlements with particular customs import declarations and any claims to preference made on them.

The Revenue and Customs delegate to the European Union”s origin committee has advised the European Commission and other member states in the committee”s meetings of the UK”s actions in respect of monitoring of the EU-Israel agreement, particularly in relation to the series of targeted physical examinations.

Outside of those meetings, Revenue and Customs has asked the Commission to ensure that the Israelis are correctly complying with the requirements of the 2005 technical arrangement by inserting the precise place of production rather than a head office or distribution centre on the proof of preferential origin. We will continue to press this point with the Commission.

We are aware of the Commission”s fact-finding missions to Israel and Palestine in 2009 and we have asked the Commission to provide us with reports of those missions as soon as they are available.

My hon. Friend referred to provisions in section 167 of the Customs and Excise Management Act 1979, which enable Revenue and Customs to take action against traders who commit an offence. Under those provisions, we can only take criminal action against the UK importer where there is firm evidence to the effect that they knew that the goods originated in a settlement but nevertheless claimed Israeli preference. The provisions do not enable the Department to take action against the exporter in Israel who has drawn up a proof of preferential origin containing an incorrect place of production or an incorrect origin declaration.

However, new civil penalty provisions came into force on 24 December 2009, as a result of which Revenue and Customs can issue a financial penalty where an importer persistently claims preference on products that are not entitled to such treatment, which will be in addition to the liability to pay the full rate of customs duty.

Although legal constraints mean that the Department has no alternative other than to initiate verification inquiries with the Israeli customs authorities, it is happy to make improvements to its risk assessment and to include further fresh produce in its series of targeted physical examinations. We will also pay further attention to imports of particular products, such as cosmetics, which were mentioned by my hon. Friend. We will explore with supermarkets the possibility and feasibility of using their tracking systems post-importation to identify imports of goods that were not entitled to the preference claimed.

We will continue to work closely with the European Commission and other Government Departments with the objective of ensuring compliance with the rules in this complex and sensitive area. That will include pressing the Commission to monitor the operation of the 2005 technical arrangement even more closely.

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