Clause 33 - Offence of fraud

Tax Credits – in a Public Bill Committee at 9:45 am on 24 January 2002.

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Photo of James Clappison James Clappison Shadow Spokesperson (Treasury) 9:45, 24 January 2002

I beg to move amendment No. 22, in page 21, line 40, leave out 'seven' and insert 'ten'.

We now come to an important part of the Bill and an important amendment that would improve it significantly. The amendment would increase the maximum sentence for offences of fraud involving tax credits from seven years to 10 years following conviction on indictment. We regard it as a test of our determination to tackle tax credit fraud. Deterrence plays a part in that effort—it is not the whole story, but it is an important part of it. I hope that we will have a wider debate on what else needs to be done to tackle fraud during the clause stand part debate and consideration of amendment No. 23.

We need to let those who commit tax fraud know that they are committing a crime and they will be sentenced by a criminal court. Those who commit the most serious and determined fraud must be told that they run the risk of a substantial term of imprisonment. However, as matters stand, that is not

the case. Tax credit fraud is not being treated as seriously as it should be: in fact, in the first two years of the working families tax credit, to September 2001, there were only 22 prosecutions for false applications. Shortly, we will debate the extent of fraud in the tax credit system, but whatever estimate one makes and on whatever basis one makes it, 22 is an extremely low number of prosecutions compared with the relative scale of fraud.

It follows from those figures that there is a very low risk of being prosecuted for fraud. Perhaps we will be told, as we were in an earlier debate, that prosecution is reserved for the most serious cases; if so, the Government are being extremely selective. Given that, for all practical purposes, hardly any prosecutions are instigated, it is likely that some of the more serious cases are not prosecuted. Against that background, it would be interesting to know how the courts have dealt with those who are convicted. According to the most recent Government answer to a written question, only 13 of the 22 people with minor prosecutions outstanding have been convicted thus far. Can the Minister give a breakdown of the sentences received by those convicted of tax credit fraud, and state how many have received a sentence of imprisonment? We believe that tax credit fraud, which defrauds the taxpayer and harms the interests of honest claimants, should be treated more seriously.

Our comments about fraud should cast no reflection on honest claimants. As I hope we made sufficiently clear in earlier debates, we draw a distinction between those who commit fraud and those who make innocent mistakes or are negligent. We do not approve of the way in which, for the sake of convenience, fraud and negligence have been bracketed together in other clauses. I do not want to labour the point, but negligence and fraud are very different matters, and we need to draw a distinction between those who knowingly set out to defraud the system and those who are careless and fail to live up to a proper standard, but who do not intend fraud.

The amendment is important. As the Financial Secretary knows, increasing the maximum sentence is one way to make it clear that an offence should be regarded in a more serious light in future. The amendment is testimony to our determination to tackle fraud, and we hope that the right hon. Gentleman will show that he shares our determination.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

The best evidence of determination to tackle fraud is not ratcheting up the maximum sentence, but activity on the ground to bring to justice those who would defraud the public purse and undermine the integrity of the Revenue. The commissioners are possessed of such determination and they will not hesitate to prosecute in cases of serious or organised fraud. In decisions on whether to prosecute, the criteria include evidence of collusion or corruption, or of the use of forged documents. Those criteria are published by the Revenue and are in line with those used in cases relating to tax or national insurance contributions for many years, including the period in which the Revenue was under the stewardship of the Conservative Government. There is therefore nothing new about the provision, nor is

there evidence that the Revenue is not treating such matters seriously.

On the question of whether some people are more likely than others to be prosecuted for fraud, the Revenue applies the criteria equally to all people, but it is more likely to prosecute someone who works in the tax credit or judicial system—for example, Inland Revenue personnel who collude in fraud would be likely to face prosecution. The scale of the alleged fraud is not of itself a determining factor when considering prosecution, but the board's view is, quite properly, that the more extensive and substantial the alleged fraud, the more likely prosecution is.

I doubt whether the hon. Member for Hertsmere, even at his most bullish, would suggest that the most cost-effective approach to dealing with fraud and non-compliance is anything other than the use of civil penalties, backed up by selective prosecutions to act as a deterrent against fraud. The hon. Gentleman shakes his head. This is somewhat surprising and constitutes a departure. Perhaps he has been influenced by the shadow Chief Secretary to the Treasury, the hon. Member for Buckingham (Mr. Bercow), who is calling for a different image for the Conservative party. I hope that the hon. Member for Hertsmere shares his hon. Friend's view that the Conservatives' approach to the criminal justice system should be rational, reasoned and evidence based.

The evidence suggests that running an effective revenue system requires the use of selective prosecution, rather than a scattergun approach. Civil penalties should be used where appropriate, but one should not take the view that everyone who falls foul of law should be prosecuted. Such an approach does not make sense. One should condemn fraud or negligence and ensure that appropriate powers exist to deal with such matters, and that they are used by the Revenue in an appropriate way. One should also ensure that the courts are armed with the sentencing powers necessary to do the job.

Experience shows that, in practice, it is unlikely that any court will pass a sentence for tax fraud or tax credit fraud that exceeds, or is even close to, seven years; therefore the amendment would have little material effect. However, in a case of tax credit fraud so exceptional or extreme that a sentence in excess of seven years seemed appropriate, the prosecuting authorities would be able to ensure that the perpetrator was charged with the common law offence of cheating the public revenue, rather than the specific offence of tax credit fraud. Therefore, if the accused were convicted, the court would be able to impose a sentence of whatever period of imprisonment it felt appropriate. As the hon. Gentleman knows well from his experience of the criminal justice system—on the right side of it, I hasten to add after hearing a snigger from the Liberal Democrats—the use of such common law offences is standard practice.

What is important is that the powers exist. Our argument is that they do exist, in the form of common law offences. The statutory powers are as outlined in

the Bill. We well understand the hon. Gentleman's intentions, but think that his zeal for yet higher maximum sentences is misplaced in this instance. I hope—forlornly, I fear—that he will reflect on my comments and withdraw the amendment.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury) 10:00, 24 January 2002

I have listened carefully to what the Minister has said, and he has deployed his powers of advocacy to the full. He has made the best fist of what I think is a bad case. In former incarnations, he will often have had the experience, entirely on instructions and quite properly, of painting a picture that bears only a thin relationship to the facts. He has done the same today. He has done it to the best of his ability, but notwithstanding his considerable ability, the position remains entirely unsatisfactory.

The Minister said that we should not simply be ratchetting up the maximum sentence and that that will do no good in itself. I have served on a number of Committees since his party has been in government, as he may have done himself, at which an entirely different view has been taken. When the Government have wanted to emphasise a particular offence and suggest that it be treated with greater seriousness, they have increased the maximum sentence. They have done that for a range of offences, where they have considered it important and proper for an offence to be taken more seriously.

We think that that applies here and that this offence should be taken more seriously than it has been in the past. In some of the Minister's wider comments, he moved away, failing to understand the wide-ranging consensus in society that people who cheat the system are cheating other people and should not be allowed to get away with it. It is on that basis that we have all the hotlines, helplines and means of uncovering fraud that different Governments have introduced. Ordinary people get so annoyed and hot under the collar when people cheat the system that they want to pass on the information and ensure that the offenders are brought to book. The tragedy is that far too few are brought to book.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

I understand what I hesitate to call the hon. Gentleman's convictions about the matter, and his desire to signal his party's perfectly legitimate concerns about fraud. However, does he really think that someone considering fraud of the order that might give rise to a seven-year sentence is going to sit down and think, ''I'd risk seven years in the slammer, but now it's 10 years, I certainly won't touch it''? Is that realistic?

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

The Government certainly seem to think so. Their series of television advertisements about benefit fraud feature a man sitting in a cell and ask whether it is worth getting away with benefit fraud. There are very few prosecutions for such fraud. The Minister referred to a selective policy, and it is a very selective policy that generates only 22 prosecutions. The chance of being prosecuted at all for tax credit fraud let alone receiving a substantial sentence is very low.

Photo of Karen Buck Karen Buck Labour, Regent's Park and Kensington North

In responding to the hon. Member for

Northavon (Mr. Webb), the hon. Gentleman has made the Minister's case for him. Surely, the important element of the advertising campaign is the chance of being caught. Its point is that the calculation is not the length of the sentence, but the statistical chance of being caught out.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

That advertisement is, then, a work of fiction, and will be seen to be such in the case of tax credit fraud. There have been only 22 prosecutions during two years. There may be debate about how much fraud there is in the tax credit system, and how susceptible it is to fraud, but there is a history of fraud in other forms of benefit and credit. There was fraud in family credit, over which I do not intend to draw a veil, and a wealth of stories of fraud in the tax credit system, as we heard from both sides of the House on Second Reading. On any reasonable view, the number of prosecutions is low. It does not signal to people that the matter is being taken seriously.

We do not have the necessary deterrents for those tempted to commit fraud. They should receive a strong message that we are not prepared to put up with fraud and that if they commit it, they will not only be investigated but run the risk of prosecution and a prison sentence. As matters stand at the moment, given the evidence and facts about the number of prosecutions, that is simply not the case. We must improve that unsatisfactory situation, and the amendment is one way of doing that. I am not convinced by the Minister's arguments, although I shall reflect on them, as he invited me to. I shall be interested to receive the statistics, about which he promised to write to me, giving the breakdown of sentences for those convicted of tax credit fraud.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

In the interim, I can assist the hon. Gentleman on that. The statistics are that 5 per cent. received probation orders, 26 per cent. community sentences and 26 per cent. custodial sentences. That gives him some flavour. I shall ask for further breakdown so that we can assist on those whose disposals are not included in those figures.

I should say that I well understand the point that the hon. Gentleman makes. It is one thing to call for a more rigorous prosecution policy by the Revenue—getting the balance right is a matter for the Revenue and the commissioners, not for Ministers—if that is what he wants, but it is quite another to believe that that will be achieved by ratchetting up the maximum sentences. With respect, I suggest that that is not the way forward. However, I am grateful that the hon. Gentleman has said that he will reflect on the matter, and, no doubt, those responsible for prosecutions who have heard his call will reflect on the merits of what he has said.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

As I have already said, the argument on ratchetting up is not borne out by the steps taken by this and previous Governments, over certain offences, where they have increased maximum sentences to mark that the offences should be regarded more seriously in the future.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

This is an important debate, and the hon. Gentleman makes an interesting point. If my memory serves me well, I have in this Room accepted

amendments tabled by the hon. Gentleman and his colleagues on criminal justice matters to increase maximum sentences where pubic protection is an issue. It is entirely right to do that. Where public protection is involved, the basis for increasing maximum sentences has been not some vague desire to send a message, but a determination better to protect the public.

On this offence, we are putting in place powers of sentencing that, in our view, will protect the public, and ensuring that those responsible for prosecution policy get the balance right: bringing prosecution and civil penalties, and deterring fraud or negligence, but not deterring genuine claimants. That is important too, and the balance must be right. The hon. Gentleman made a point about the number of prosecutions and that point has been heard. However, we do not feel able to engage in what would amount to gesture legislation by simply upping the maximum sentence from seven to 10 years without any effect at all.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

The Minister makes a valid point about increasing maximum sentences. Without too much research, I could find many cases in which this Government have increased the maximum sentence to emphasis the seriousness of an offence. The Minister says that there is a difference between situations in which public protection is an issue and this one. We can also identify a public interest that needs protection: the taxpayer's interest in not being defrauded. That means that the large sums of money going into tax credits must be paid to those who should be in receipt of them, and that is also in the interests of honest recipients. The Minister is right to draw attention to the position of those who are honestly claiming in the system, and, as I hope I made clear in my opening statement, this does not relate to them because they need to be protected from this sort of thing as much as everybody else.

In a previous debate we argued that negligence and fraudulence should not be lumped together, and we wish that the Minister had also taken that view. The Government have bracketed honest taxpayers—somebody who is negligent is still honest—with those who fraudulently attempt to deceive. We are not satisfied on that point, and we are not satisfied with his general remarks. There is an issue about public protection because defrauding public funds is regarded less seriously than defrauding the private sector. Where the private sector is subject to fraud through offences such as obtaining by deception from banks and building societies and the fraudulent use of credit cards, prosecution policy is more vigorous than that in the case of false applications and defrauded tax credits. There is a lack of vigour in that respect, and we must send a message throughout the system that this will be treated more seriously in future.

I was not over-impressed by the Minister's comments, but I shall reflect on these matters and the statistics that he has provided. My limited ability at maths leads me to believe that they indicate that three or four people have received custodial sentences for tax credit fraud. We may want return to this important issue at a later stage because we are

currently dissatisfied. In order to make progress, and to give myself time to reflect on these matters more fully than we have done so far—I want to come back to this at a later stage after that period of reflection—I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

I beg to move amendment No. 23, in page 21, line 40, at end add—

'(3) The Secretary of State shall within one year of this section coming into effect and every year thereafter make a report to Parliament on—

(a) the extent of fraud in claims for tax credits, and

(b) the measures he has taken to deal with fraudulent claims for tax credits.'.

Photo of Mr Nigel Beard Mr Nigel Beard Labour, Bexleyheath and Crayford

With this we may discuss clause 33 stand part.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

We now come to a slightly wider debate on fraud. Fraud within the tax credits system is an important issue, and many others share that concern. We must consider how much fraud there is within tax credits because some hon. Members feel that tax credits are particularly susceptible to fraud. It is unclear whether they are susceptible to fraud, but they are clearly not immune to it. Even if the incidence of fraud in working families tax credits and other tax credits is no greater than that in the rest of the benefits system, it will still amount to a considerable amount of fraud and a substantial loss of public money.

Estimates of fraud vary. In evidence to the Public Accounts Committee in July 2000, the former Department of Social Security gave its best estimate of the level of fraud throughout the social security system as around 3 per cent. of total benefit expenditure, which is equivalent to around £3 billion annually. The Government have provided various estimates of the level of fraud within the social security system, the lowest of which was £2 billion. A Government Minister estimated that it could be as much as £7 billion, but that figure was calculated on different levels of suspicion of fraud. Applying that proportionally to the figure likely to be involved in the new tax credits system, and bearing in mind that 1.3 million families will claim working tax credit, fraud is an important subject.

Fraud tends to be highest with means-tested benefits because they are more complicated, and the working tax credit is not a straightforward form of social security. There are also additional risks of fraud with means-tested benefits, which contrasts with universal benefits with simple age-related entitlements such as retirement pension and child benefit where fraud is relatively rare. Tax credits fall into the same category as means tested benefits. It has been suggested that tax credits are especially susceptible to fraud because there are too many ways in which people can work the system. That may or may not be the case, but we have heard it from Government and Opposition Members who cite authoritative sources with close connections to the decision-taking process on tax credits. The Minister looks puzzled, and I refer him to the speech on Second Reading by the right hon.

Member for Birkenhead (Mr. Field), which contains an interesting analysis. We must have a proper effort on the part of Government to measure the extent of fraud in tax credits, and not to sweep it under the carpet, or to give the impression of sweeping it under the carpet, in order to avoid embarrassment.

The Government have been neither timely nor transparent in assessing the level of fraud in tax credits in general and in the working families tax credit, which has been up and running for more than two years. I give as an example the debate that we held last year on the uprating order for working families tax credit in which I asked the Paymaster General about the extent of fraud in working families tax credit. She wrote to me on 11 April last year telling me:

''The Inland Revenue are carrying out a benchmarking exercise to establish the level of fraud in tax credit claims. This began in September 2000 and will run for twelve months. The results will be used to ensure tax credits compliance work is carried out in the most effective way''.

That naturally led me to expect that the results of this important benchmarking exercise would be available in September 2001.

In October, I again asked the Treasury for its assessment of the extent of fraud in the working families tax credit. On 18 December I was told that the results of the benchmarking exercise would be known ''early next year''. That raises the question of what has been happening since September 2001. It would have been timely for the results of that exercise to be made public in time for the debates on the Bill because we are, among other things, debating ways in which we can tackle fraud within the tax credits system. The Government have had the results on that exercise sitting on Minister's desks since September 2001, and we need to hear their assessment of how much fraud there is in respect of working families tax credit and other tax credits.

I remind the Minister that the Government postulated a link between knowing how much fraud is occurring and doing something about it. Shortly after they came to power, they told us in a 1998 Green Paper that

''our systems are not sufficiently secure to prevent fraud from occurring in the first place because of patchy information on what fraud is occurring where and how''.

We are now two years into the working families tax credit, and no nearer knowing how much fraud there is.

Moving on from the question of how much fraud exists in tax credit claims, we also need to hear from the Government what measures they propose to take to tackle fraud. What is their strategy? The 1998 Green Paper complained that the previous Government lacked a comprehensive strategy against fraud, and that the approach to fraud was too parochial, with insufficient co-ordination. That would be a good critique of the current Government's efforts to tackle fraud within the tax credits system because too often the effect of their reforms has been to bring about further fragmentation in fraud investigation. A large part of the work of existing agencies has been taken away from them by the advent of tax credits and

transferred to the Inland Revenue, which is now charged with investigating fraud in areas in which it has not previously ventured.

The fragmentation of the Government's fraud strategy has been made worse by their insistence on drawing a distinction between working families tax credit and benefits within the social security system. The result has been that their policies on fraud have been moving in different directions. A principal provision in the Social Security Fraud Act 2001 took away benefits from someone who was convicted of benefit offences twice in three years. I hasten to add that the measure had Opposition support and was one that the Government were proud to trumpet at the time. However, tax credits are not included in the regulations relating to the Social Security Fraud Act 2001, so what is considered to be a major element in the Government's strategy for tackling benefit fraud is not part of its strategy for dealing with tax credit fraud. There is no provision for repeated convictions for tax credit fraud to be dealt with in the same way as benefit fraud.

In relation to the investigation of fraud and not simply its punishment, how do the Government intend to bring together the different agencies involved in the investigation, detection and prosecution of fraud? What procedures are in place, for example, to give the Inland Revenue access to the National Intelligence Unit, which was brought into being by the Scampion report? That report also recommended that there should be a common prosecution policy between the Inland Revenue and the former Department of Social Security following the introduction of the working families tax credit. We can see differences between the prosecution policies. What is the Government's response to the recommendation in the Scampion report?

The Paymaster General was good enough to send me a document setting out the Inland Revenue board's prosecution policy. Indeed, the Financial Secretary adverted to it today in the previous debate. The document states the general principles on which the board operates. It begins by saying:

''The board operates a policy of selective prosecution intended to bolster their overall enforcement strategy. The focus is on cases where prosecution will do most to promote compliance with the law.''

The document then sets out the features that in its view made fraud more serious, some of which the Financial Secretary has adverted to today. The problem in practice has been that the board's prosecution policy has been so selective, with just the 22 prosecutions to which it refers, that it does not do justice to the problem of fraud in working families tax credit. Indeed, the prosecution policy that the Financial Secretary mentioned is meaningless, given the low number of prosecutions.

We also want to hear from the Minister about the Government's policy for investigating claims for tax credits. To take one example, what is their policy for investigating claims for child care costs for working families tax credit? In March last year, to give him credit, the hon. Member for Northavon (Mr. Webb), asked the Government what assessment they had

made of the level of fraud in the child care tax credit element of the working families tax credit. In a written answer, he was told by the Paymaster General:

''There is as yet no statistically valid data available from which a meaningful estimate of the level of fraud in the recently introduced Child Care Tax Credit element of the Working Families Tax Credit can be made.

Applicants are required to supply evidence of child care costs from their provider in order to receive Child Care Tax Credit. The Inland Revenue carry out risk assessments of applications based on their experience of fraudulent claims, and can impose financial penalties where fraud is found to have taken place. These checks and sanctions apply to the child care tax credit in the same way as other elements of the Working Families Tax Credit.''—[Official Report, 19 March 2001; Vol. 365, c. 32W.]

That was a very ministerial answer, mightily impressive in the absence of other facts.

However, that needs to be set against what the Paymaster General told me about investigations, penalties and prosecutions involving child care tax credit in a written answer on 19 December last year. I was told that in the two-year period from 1 October 1999 to 30 November 2001 there were 418 investigations into the child care tax credit, out of which two penalties were imposed and there were no prosecutions. We wonder, therefore, whether, perhaps uniquely, child care tax credit is immune to fraud or whether it needs a more thorough-going investigation than it has thus far received?

Perhaps the Minister can tell us today whether the Government are any nearer having an answer to the question posed by the hon. Member for Northavon in his written question: how much fraud is there in the child care elements of working families tax credit? The child care element will continue to be paid to recipients of the new working tax credit.

Photo of Karen Buck Karen Buck Labour, Regent's Park and Kensington North 10:15, 24 January 2002

I have listened closely to the hon. Gentleman. I think that we all agree that fraud is a serious problem, because it takes money away from those who need it. Nevertheless, does the hon. Gentleman agree that it is also important to consider take-up? We talk about fraud far more than we talk about take-up, which varies extraordinarily. In constituencies like mine—complex inner-city areas with high population turnover—take-up of the children's tax credit and working families tax credit is way below what it should be. That is partly because it is so often associated with campaigning about fraud, not about take-up.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

I do not doubt the hon. Lady's knowledge of her own constituency. However, her comments conflict with what the Paymaster General has told us in previous debates about take-up of working families tax credit. If I addressed the question of what to do about take-up, Mr. Beard, I would be straying out of order. The hon. Lady asks, as Labour Members often do, what the Opposition would do. I am explaining how we would go about tackling fraud, given the need for a much more thoroughgoing approach than that of the Government.

I warn the hon. Lady and other Labour Members that it is no good simply to assume that fraud does not occur, so that it can go uninvestigated and not be taken into account in designing legislation. The example of individual learning accounts is a salutary

reminder of the dangers of complacency about fraud. That initiative was much trumpeted by the Government, including, on one memorable occasion, by the Deputy Prime Minister at Prime Minister's questions. We were told what a great thing they were, but what subsequently happened shows that we must guard against complacency about fraud, especially when payments are being made out of public funds for services provided by third parties. Among those who suffer most in such cases are the honest providers and purchasers of services, who were left in a parlous state after the dramatic and chaotic closure of individual learning accounts.

The effective investigation and uncovering of tax credit fraud calls for co-operation from the public, and the Government must facilitate that. Will the Minister tell us what steps they have taken in that regard? The hon. Member for Regent's Park and Kensington, North (Ms Buck) might welcome that, because it would draw attention to the existence of tax credits. I was not entirely reassured by the reply that I received from the Paymaster General when I asked her what was being done to enable and encourage members of the public to provide information about fraud in the tax credits system. I was told that members of the public could

''write or telephone the Tax Credit Office or a local office or telephone a helpline, including the Benefits Anti-Fraud Hotline''.

I was also told that the tax credit office has a child care tax credit hotline for child care providers to give information about suspected improper claims for child care costs. However, given the low number of penalties

and prosecutions that have arisen in that respect, I assume that the hotline has not exactly been overwhelmed with calls.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

Indeed. Can the Minister tell us how many times information has been received on the benefits anti-fraud hotline about tax credit fraud, how many cases of suspected improper claims for child care costs have been reported to the child care tax credit hotline, and what is being done to inform the public of the hotline's existence? I was unaware of it until I received the written answer from the Paymaster General, and not every member of the public pays the great attention to parliamentary written answers that we do.

Public co-operation is important, but so too is co-operation between central Government and other bodies involved with the problem of fraud. Will the Minister tell us about the Government's plans for sharing information with local government and with the private sector? That reflects recommendations in the Scampion report.

I appreciate that I have asked the Minister a series of detailed questions. If he does not have the answers at his fingertips, I should be grateful if he would write to me.

It being half-past Ten o'clock, The Chairman adjourned the Committee without Question put pursuant to the resolution of the Committee [22 January].

Adjourned till this day at Two o'clock.