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Fraud (European Community)

11 am

Mr. Deputy Speaker (Mr. Frank Cook): We come now to the next issue for our consideration. I call David Michael Davis.

Mr. David Davis (Haltemprice and Howden): Thank you, Mr. Deputy Speaker, for giving my full title.

The fact that the European Commission suffers from fraud, corruption, incompetence and nepotism is a matter of public knowledge and public record a little more than a year after the pseudo-resignation of the Commission. I say "pseudo-resignation", because it was designed to protect rather than punish the guilty. The pay, perks, pensions and powers of all the Commissioners were maintained until their eventual replacement by the current Commission.

I raise the issue of fraud because of an event that took place before those resignations that makes me worry about the extent to which the European Union takes the issue seriously. A year before those dramatic events at the Commission, the Public Accounts Committee had for the second time raised the problem of fraud in the European Union. The European Court of Auditors had raised the matter more than once. I took part in a debate with Jacques Santer, the President of the Commission at that time, on the "Today" programme. His first response--admittedly, a year before the crisis, but after he had received at least two ECA reports on the matter--was to deny that there was any significant fraud, despite our criticisms and the fact that it had been raised at the Council of Ministers.

Secondly, when that argument failed, Mr. Santer said that fraud was the fault of the member states--that more than 80 per cent. of the fraud related to members states, not the Commission, so the member states should solve the problem. Thirdly, he said that the mechanisms available to deal with fraud were perfectly okay and that OCLAF--the office of the Commission that was supposed to co-ordinate anti-fraud efforts-- was doing its job and there was no need to make it more independent. All that was contrary to the eventual findings of the committee of wise men appointed by the European Parliament.

I mention that individual event, because historically the tendency of the Commission and all the institutions of the Union has been to sweep uncomfortable issues under the carpet. I am one of those--perhaps we are in the minority in this Room--who do not believe that we should leave the European Union. We must build a Union that can hold the faith of the public whom it serves. The current Union does not do anything like that. I do not want the Union to be allowed to forget about the problem, so that it returns in five or 10 years' time in an even more unpleasant and virulent form.

I have seen no reference--this may be my fault--in the intergovernmental conference preparations or in the agendas of Feira or for Nice in December to deal with the problems of fraud, incompetence and corruption in the European Union. What are the Government's plans? I, and many others, have no intention of letting the issue be forgotten.

I have several questions for the Minister: first, what immediate action has been taken on the frauds that we know about? Such action is a test of the resolve of this

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Government and of those throughout the European Union to deal with the issue, rather than being a conclusive answer to the problem. Secondly, what reforms will Vice-President Kinnock introduce to resolve the issue, and how speedily will they be made? Thirdly, what further actions will be taken to deal with the issue? Will they be on the IGC agenda in December?

I have my tongue in my cheek when I say "immediate action" because I am basing my comments on data from the 1998 European Court of Auditors report, the most recent one available. It is two years since the matters that we are discussing were aired and three years since the actions were committed. That is an aside, but it has implications for the European Union.

The ECA raised the matter of frauds and irregularities in individual countries; this country was not perfect as there was fraud totalling some £12 million. However, far and away the biggest irregularity was in Italy, where the total reached £106 million, mostly in four major olive oil scandals. As the United Kingdom is one of the few net contributors in the European Union, those scandals cost British taxpayers tens of millions of pounds. The Treasury should therefore take an interest on behalf of the British taxpayer. Was a penalty levied on Italy for the £106-million irregularity? If so, has it been paid?

The second issue raised in the ECA report was a substantial fraud relating to the export of meat to Jordan. A subsidy of £46 million was involved, but it was not really for export to Jordan--it was an embargo-busting operation for Iraq. European Union taxpayers' money was used in defiance of a United Nations resolution and western nations' actions to control the evil dictatorship in Iraq. I want to know whether a prosecution has been brought against those who defied almost every national policy in the European Union and used significant sums of British taxpayers' money to do so.

A third issue in the ECA report was the contract awarded for guarding the European Commission buildings. That is poignant because it was awarded by the security department, which is responsible for protecting the integrity--in every sense--of the European Commission. The contract was found to be fraudulent; it involved ghost workers and criminal false accounting. The ECA report stated that four members of the department would be disciplined and the case was handed to the Belgian police for prosecution. Has that prosecution been completed, and if so has anyone has been punished as a result? As I said, we should bear in mind the fact that the issues I have raised are three years old.

I raised those cases as symbols of how seriously we take the matter. The Chamber will note that one of them relates to a national failure, one to an individual contract, and one to something done by the Commission. I picked them because the way in which they will be dealt with is interesting.

I am also concerned about the strategic reforms that the European Union is undertaking. I should say up front that I approve of the fact that Vice-President Kinnock has been put in charge of the reforms. I might upset my Conservative colleagues by saying that, but he is a tough and honest politician; nobody would deny him that. He knows the European system. Some would

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consider that a vice rather than a virtue, but in this context it is a virtue. More importantly, he knows our system, which is one of the best for maintaining propriety in public life. We are not necessarily alone in that: one or two other systems in Europe are comparable. Vice-President Kinnock does not have to reinvent the wheel in what he is doing in the European Union. He has lived in a system that puts propriety at the top of the priority tree.

However, no matter how good, determined or tough he is, he cannot do the job alone. The Comptroller and Auditor General and the Public Accounts Committee have sought to help him. He will need UK Government support. Sometimes, support takes the form of pushing as well as helping. I will return to that point.

I will focus on the nature and speed of what Vice-President Kinnock intends to do. I disagree with him about the new anti-fraud office. The National Audit Office's staff are not civil servants. They are independently recruited; there might be secondment arrangements, but there is not an integrated career path by which a member of the NAO's staff could look forward to working in, for instance, the Department of Social Security or the Ministry of Defence. That is so for a good reason--it means that there is no social or career pressure on an individual to pull punches in criticising the body that he is investigating. That is not true of the new European Anti-Fraud Office--OLAF. I am not criticising any individual. I do not know the new head of OLAF, Franz-Hermann Bruener, but, as far as I can tell from studying his curriculum vitae, he is well qualified and independently minded, although he has previously been employed by the European Commission in other respects.

Simply being a part of an organisation can make it difficult for an audit body or an anti-fraud body to be as impartial as it ought to be. That situation can render it open to corruption or to pressure. After all, one of the issues that I raised earlier concerned the security arm of the Commission. OLAF should properly have been a completely separate body, accountable either to the European Court of Auditors or to the European Court of Justice. I am concerned about the situation, especially because the pressure to prevent that from happening came from two sources. Surprisingly, it came not from the Commission in the first instance. Instead, it came from the European Parliament--I am afraid that there is no surprise in that, to put it bluntly--and from the Council of Ministers. What stance did the British Government take on the matter? If we did not support the British parliamentary model and the other best models, most of which come from northern Europe, why not, and what was the logic behind the position? That situation is a flaw in the system. There is supposed to be a superstructure to protect the system, but it will not prevent the pressures about which I am concerned.

Some of what I am about to say with regard to the European Parliament's role might be an important component of possible proposals for the next IGC. A Parliament--certainly our Parliament--is a fierce and largely independent scrutineer of Government, although there are obviously party pressures within it, which I shall discuss in a moment. The European Parliament has a peculiar problem, which is not entirely

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its fault. As a result of the relative power in Brussels, a dependency relationship has developed between the European Parliament and the Commission. The Commission has always been the source of most power. Therefore, if a European parliamentarian wanted to get something done, it was useful to have a contact at the Commission. In a sense, that is sensible politics, but it means that there is not the same separation between the Executive and Parliament as exists in our system--even though we have the Executive within the Parliament--when challenges are made over spending, corruption or whatever.

Moreover, no single party is in power, which is a natural outcome of the arrangements in Europe. What tends to happen is that natural alliances are formed between parts of the European Parliament and individual Commissioners, either on the basis of national origin or, more often these days--perhaps this is a fitting European ideal--on the basis of party. I am afraid that the Minister might find this uncomfortable, but we saw something of that in the affair of Madame Cresson, which led up to the great crisis that produced the change in the Commission. Madame Cresson is a socialist French Commissioner, and there is no doubt that socialist Members of the European Parliament attempted to protect her. I do not hold that against any one party. It is a structural element of the Parliament that right-wing or Christian Democrat parliamentarians will tend to form alliances with Christian Democrat Commissioners, and that socialist parliamentarians will tend to form alliances with socialist Commissioners. That means that the whole concept of having a separate, impartial Parliament is flawed.

Gladstone dealt with that issue by setting up the PAC. To my great benefit today, he ensured that the Chairman of the PAC--the principal scrutineer in Parliament--is a member of the Opposition, who is clearly not a member of the Executive. We might suggest to the European Parliament or to the IGC a series of reinforcements of the budgetary committee of the European Parliament, one of which would be a rotating chairmanship, so that whenever a Commissioner from any party was in front of the Commission, the chairmanship for that session or report would be held by a member of an opposing party; a Christian Democrat in the case of a socialist Commissioner or a socialist in the case of a Christian Democrat Commissioner.

Mr. Mark Oaten (Winchester): The right hon. Gentleman makes an interesting point, but would he extend that idea to require opposites in terms of the countries from which individuals come?

Mr. Davis : That is a fair point. I have considered that, but have to say that I ducked it because I was not at all sure how it would work with the oath sworn by Commissioners on taking office, in which they undertake to give up all their national affiliations. All of us who have worked in Europe know that the oath is a complete nonsense because Commissioners look to their national origins, but I was unsure whether such a proposal would be at odds with some fundamental part of the treaty. I have not had a chance to re-read the treaty to check that, having read it too many times. However, the hon. Gentleman makes a fair point and I would be inclined to agree that his suggestion would

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reinforce the independence of the budgetary committee. In addition, I strongly believe that we should give the budgetary committee of the European Parliament the right to summon persons and papers--the same right as we have in the House. Over the years, the Government have stressed that the first duty of the European Parliament should be financial scrutiny. We cannot ask it to perform that role unless we give it that power.

Mrs. Teresa Gorman (Billericay): My right hon. Friend's analysis fascinates me. I am sure that he would agree that the role of independent employees of the Commission should be taken into account, one of whom blew the whistle on the latest fraud. Will my right hon. Friend acknowledge the role of Brian Connolly, who worked in the European Commission treasury department and who wrote a marvellous book entitled "The Rotten Heart of Europe" in which he described those practices? Those who work inside the system should have the opportunity to declare their concerns.

Mr. Davis : I entirely take my hon. Friend's point. Like the hon. Member for Winchester (Mr. Oaten), she has caught me on something that I had decided not to mention, but I shall deal with the issue now. If my hon. Friend will forgive me, I shall focus more on Mr. van Buitenen, because although Mr. Connolly made some interesting points, he would have been in breach of British civil service rules as he was writing about policy matters outside his remit.

Mr. van Buitenen, the Dutchman who blew the whistle, was badly treated. Indeed, his treatment still seems shocking. It does not reflect well on the Commission, the EU or its member states. I believe that whistle blowers should be protected. Vice-President Kinnock's proposals include such a provision, but I would have made it retrospective. I believe that we should compensate Mr. van Buitenen for the way in which he was treated. I would even consider compensating Mr. Connolly, because, even though he was in breach of British civil service rules, the treatment that was accorded him was inappropriate.

The answer to my hon. Friend is yes--I would write that into the IGC. It is an area where the EU has, in my judgment, been in breach of its much-vaunted commitment to human rights. One of the fundamental human rights is not being asked to do something that is immoral or improper; that right was not provided.

My next proposal might shock some of my hon. Friends. I have tussled with the problem at length because I do not believe in giving more power to the EU. It has enough power for the moment, but, in this context, I would give it one more power relating to the budgetary committee. In cases of malpractice, such as those of the past year or two, I would allow it to dismiss a Commissioner. I would not allow dismissal for policy issues or other matters; but for malpractice it is implausible to ask a Parliament to oversee financial expenditure and not to allow it to penalise those who engage in malpractice. I agonised over the issue, but I concluded that if an action was justiciable as malpractice, removal should be available.

The third item of Mr. Kinnock's proposals is not greatly known; indeed, even as a Minister for Europe, I barely heard reference to it. I speak of European staff

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regulations. Hon. Members may not be aware of them, but they virtually have the force of law within EU institutions. They would make our labour laws of the 1970s look progressive. [Interruption.] I have struck a chord with the right hon. Member for Birkenhead (Mr. Field). They limit what can be done when a malpractice is found. The best example is one of the earlier frauds discovered in 1990 by Edward McMillan-Scott MEP, in the tourism directorate, which has yet to be brought to court. If my memory is correct, the sum of £5 million was involved and the people concerned--I cannot call them the guilty people, because we do not know about that, the case not having come to court--are still in receipt of pensions and full benefits from the Commission.

The staff regulations have been an impediment to resolving fraud and malpractice problems all along. The Kinnock reforms, the timetable for which I have before me, and which, incidentally, incorporate the whistle blower protection that we discussed earlier, do not even involve consultation on the question of proposed changes to staff regulations until the first quarter of next year. It is not proposed to bring those reforms of staff regulations before the Council until the end of next year. The earliest point at which we could conceivably obtain a change to one of the most fundamental impediments to proper management of the Commission would be four years after the crisis that led to debates such as today's. That is altogether too slow. Why is there such a delay? If the Government do not agree with it, will they do something to speed matters up? Given that there has not even been any consultation for a year, the problem is clearly not one of negotiation or proper practice. It is more a problem of failing to make the issue enough of a priority.

The European Court of Auditors pointed out that many of the problems that we are discussing arise because the European Union tries to do too much. The worst example of that--the Cresson failure--demonstrates that the lesson has been completely ignored by the current Commission. The European Commission Humanitarian Office--ECHO--was the site of the worst of the problems exposed a couple of years ago. Hundreds of millions of ecus or pounds were improperly accounted for. We do not know that they were fraudulently disposed of, but we do not know where they went, either. However, we know that at least one contract, for £2.4 million, was completely fictitious; there was no other contracting party. The money was being leached out of the system to be used at the discretion of various members of the Commission. That arose directly from the fact that the European Union was trying to do too much and had created a culture of going around the rules. Perhaps that might be done in the first instance to achieve worthwhile aims, but from then on the rules become irrelevant. The barrier against malpractice, fraud and criminal activity then vanishes.

What I have described happened a few years ago. What is happening now? Only six weeks ago, Chris Patten made some cogent comments about his directorate of the Commission. He showed that staff are trying to spend two, three or four times as much money as would be normal in an international development department. That led our Secretary of State for International Development to describe the European Union as the worst aid agency in the world. I do not

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often agree with her, but she has a point. As Mr. Patten said, it can take as long as nine years for it to fulfil a promise. To a Nicaraguan whose home has been swept away by a flood or an African peasant whose family is dying in a famine, nine years is eternity.

The issue is not simply one of fraud, but one of people dying because of our incompetent system. What Mr. Patten has talked about shows that we still have the same problems as we had two or three years ago. He has come up with 23-point plan to try to spend the money that he has. Having looked at that plan, I have no confidence that it will stop any fraud whatever. Mr. Patten talks about relocating decisions to EU posts around the world--which, invariably, will mean less control--and a series of things of that nature, none of which will resolve the problem of fraud. That is a serious weakness in the system.

I have no confidence that we have made any progress. The lesson of the Cresson behaviour was learned, namely that the European Union should do less and do it better. As long as the EU focuses more on politics and promises than on good management and delivery, two things will happen: on the one hand, British and other taxpayers' money will be wasted and, on the other, the reputation of the European union will go down. That cannot be a good thing, whatever one's view of the EU.

11.31 am

Mr. Edward Leigh (Gainsborough): It is a great honour to follow my right hon. Friend the Member for Haltemprice and Howden (Mr. Davis) both as a friend and as a member of the Public Accounts Committee, which he chairs and on which I am honoured to serve with him. As always, my right hon. Friend has done a great service to Parliament in the way in which he presented his speech.

I am happy to speak on the issue because agricultural fraud has had a major impact on my constituency. I shall return to that in a moment. Of course, no one really knows how much fraud there is in the EU as, by its very nature, it is impossible to quantify. Klaus Tiedmann of Freiburg university in Germany thought that it might be anything between 7 and 10 per cent. of the total EU budget. If it is, we are talking about very large figures indeed. Needless to say, the European Commission has a far lower figure and says that fraud could be as low as 2 per cent. However, even the Commission acknowledges that the cash figure is much higher than the EU's reported figure, which is based on auditing agricultural spending exclusively. By any measure, the problem is enormous and costs all of us who live in Europe a very large sum indeed, which is why our debate is important and timely.

My right hon. Friend dealt with some of the major scandals that have afflicted the EU over the past 10 years. He mentioned that our colleague, the Conservative MEP Edward McMillan-Scott, detected the tourism fraud which amounted to some £3 million. As my right hon. Friend said, we are still waiting for that to come to court. In November 1995, the Court of Auditors refused to certify the EU's annual accounts on discovering that nearly £3 billion was not properly accounted for. My right hon. Friend mentioned that, in

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early 1998, the Commission's anti-fraud unit revealed that some £600 million of its humanitarian aid budget between 1993 and 1995 could not be accounted for, of which £1.5 million had been intended for refugees from the genocide in Rwanda and Burundi. That £1.5 million had simply vanished into the ether. To make the episode worse, the incident only came to light years after the fact, allegedly because the Commission did not inform the Court of Auditors when irregularities in the aid programme were first noted in 1994.

Some explanations of why that money went astray are sublimely pathetic. Some reports, such as one in The Sunday Times in October 1998, maintained that money intended for field workers in areas of conflict was spent on hiring more bureaucrats in Brussels. Another reason, according to a report in The Daily Telegraph in October 1998, was that the money was not necessarily misspent or wasted, but that no one either knew or could trace where it went. Clearly, fraud can take place in many areas under many guises and we must find a system that will ensure that we try to reduce it.

In my few short remarks, I want to deal with agricultural fraud and the major problem of fraud in the common agricultural policy. Agra Europe, the European independent weekly, summed up that problem rather well. It said:

How can we deal with that? Last Friday, I got some insights when I visited Mr. James Walgate, who farms in Swallow in Lincolnshire. Turning from the rather esoteric arguments in which we talk about millions and billions of pounds, I shall take matters right down to the farm gate and give an example of how fraud affects farmers in our constituencies. I sat in Mr. Walgate's farmhouse and talked through some of the issues with him and his colleagues who, as a group of English farmers, are tearing their hair out at the amount of regulation and red tape with which they have to deal. They told me that they feel that they are not farming barley, wheat, cows or sheep, but brown envelopes, filled, not with cash--sadly for them--but with forms. Indeed, they showed me form after form after form.

No doubt, all those forms are considered necessary to combat fraud, the very issue discussed by my right hon. Friend. The farmers showed me page after page of the

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set-aside form, much of the information in it duplicated. They showed me a folder full of all the enforcement notices on health and safety at work with which they must deal. My right hon. Friend may tell me that all those issues show that the Ministry of Agriculture, Fisheries and Food is doing its best to ensure that the subsidies that are available to our farmers are not misspent fraudulently. However, one must ask oneself whether those farmers' competitors in other EU countries, especially Mediterranean countries, face the same degree of regulation and oversight. Our own farmers are convinced that they do not.

I do not want to get into that debate too much as that ground has been well ploughed in the past. Essentially, the argument is negative, as it is difficult to quantify exactly how much fraud is going on in Spain, Portugal, Italy or wherever. We have heard about olive oil scams and so on, and the Government argue that, in any event, such matters are not their responsibility. However, they are responsible for ensuring that the money is spent correctly with minimum regulation and bureaucracy being imposed on our farmers.

I shall offer a practical solution to finding a way out of the appalling level of fraud in the common agricultural policy. As the article in Agra Europe sets out, that fraud is the result of the very nature of the subsidy system in Europe which, essentially, is based on a long series of production costs and units, such as the suckler premium scheme, the beef special premium scheme, the veal calf premium scheme, and so on. Such a large number of complex support schemes, which are distributed to many individuals, small companies and farmers, means that fraud is inevitable.

The only suggestion that I can make is that we should change the whole subsidy mechanism so that we subsidise incomes rather than production. The Government have introduced the working families tax credit in this country, so why can we not have a working farms tax credit in Europe? That would shift subsidies from the series of complex support mechanisms into simple support for farmers' incomes, especially those that are relatively low.

I know that our Government have argued against such a scheme in the past because our farms tend to be larger than those on the continent, where there are many more part-time farmers. However, I should have thought that one could create a mechanism based on the farm's working population so that the subsidy would depend on whether the farm employed an individual, a family or farm labourers. It would then be far easier to track where the money was going and to deal with fraud. I can see no other way to solve the problem.

I am impressed by what my right hon. Friend has said, and I warmly support all his points about trying to support Vice-President Kinnock. I share his view that Mr. Kinnock is probably the right man for the job--anybody who could sort out the Labour party in the early 1990s is surely capable of having a good go at fraud in the EU. I am sure that my right hon. Friend is right to say that we can try to develop mechanisms within the European Parliament which mirror this country's effective mechanisms such as the National Audit Office.

We must ask, "Who guards the guards?" How can we have a genuinely independent office in the EU, with independent staff and oversight by independent

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politicians, which can delve into the inner recesses of the EU? These matters are detailed and complex, and we need a body as independent and professional as the National Audit Office to cope with them.

I have no argument with anything that my right hon. Friend said, but I would just point out that, in dealing with the CAP and an area as wide as the EU, in which farming stretches from Sicily up to the north of Scotland, simply tweaking the mechanisms in the European Parliament or the Commission will never enable us to get to the root of evil in the system. It is difficult to root out fraud when such complex, wide-ranging and different subsidies apply to the whole range of production. I end with a plea: will the Government argue for a complete change of the support mechanism which gets to the heart of fraud and moves the basis of subsidy from production to people?

11.43 am

Mr. Frank Field (Birkenhead): I apologise, Mr. Deputy Speaker, for being late to the debate; it is a discourtesy to the Chamber, but I did tell the Speaker that I would be delayed. It was a double blow because I missed half of the speech by the Chairman of the Public Accounts Committee.

I want, first, to centre on why this is such an important issue, whether one is for or against Europe or the euro, and, secondly, to make some suggestions to my hon. Friend the Economic Secretary, who is to reply to the debate. There is no reason why she should respond immediately, but I would be grateful if she corresponded with me and put her replies in the Library.

This issue is so important because there are large sums of British taxpayers' money at stake. Taxpayers are forming a view of Europe as a result of our ability or inability to satisfy them that we are safeguarding their hard-earned cash. In Birkenhead some time ago, we had a debate, not about Europe but about the euro, and very strong views were expressed. It is to the credit of those who were pro-euro that when they went out to try to get the Labour vote out in the European elections, they came back and reported honestly Labour voters' response to the idea of Europe and to voting in a European election: the voters summed up what they saw in Europe as a thieves' kitchen.

That is worrying for those who are serious about the long-term prosperity of Europe. It is more worrying for those who are madly in favour of all that Europe does than it is for those of us who may have some questions, particularly about the euro. It is therefore crucial that the Government respond properly and effectively to the issues that we are raising today.

I would like the Government to take certain steps. We should learn from our efforts in this country to counter fraud, which are admirable compared with those in Europe. It would be sensible for us to give up thinking that we can devise a grand strategy which will deal with fraud with a big bang. We need to learn from one another about the steps that we can see working in member countries and implement those measures across Europe to protect the taxpayers' money that feeds the European machine.

I shall make five brief suggestions. First, given that we do not know whose hand is in whose pocket over there, let alone whose hand is in our pocket over here, it is

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crucial that we have an independent system of auditing, separate from the main Departments because, clearly, some of the problems are in the Departments themselves. The one organisation that shines out among all others is the Court of Auditors, which is beginning to show the independence that one would expect from a body within the British political tradition. I suggest that the independent audit office that is to operate in Europe should not report to any of the Departments or even to Commissioner Kinnock, although I totally agree with the comments that have been made about him. The office needs to report to the body that has begun to show its independence, as it did in supporting Paul van Buitenen, who has already been mentioned.

Mr. Oaten: I agree in principle with what the right hon. Gentleman is saying, but will he expand on his remarks? If the body is not reporting to the Commission, but only to the Court of Auditors, where is the democratic accountability? How do we get the report and recommendations before elected politicians?

Mr. Field: I have problems about whether the institution is democratic anyway, but I shall deal in a moment with how we can make the EU more accountable to all of us, in Europe and here at home.

My second suggestion is that we should draw attention to the Government's success on whistleblowing. The measures that this country has to protect whistleblowers should operate in Europe as well, where there is an appalling state of affairs. The guy who bravely and effectively drew our attention to what was going on in the thieves' kitchen was set upon by people, many of whom were the thieves themselves, who were trying to make sure that he did not continue to speak. Moreover, he is already back in the dock as a major suspect for leaking papers in another area of fraud. How much pain can one individual take if he is not protected properly by the safeguards for whistleblowers that we in this country think are important? [Interruption.] There is clearly a European fly trying to dive-bomb me. I hope that he does not have one of those sharp umbrellas with which to attack me, or I may keel over.

My third point is that we know that the Commission returns some of our money to us to spend in this country. There is now concern about whether the employment programme funds have all been spent as they should in this country. I ask my hon. Friend the Economic Secretary to look into that matter and report on whether we have followed up the complaints that the relevant Departments in Europe have made about the spending of money that went from this country to Europe and has been recycled back again.

Fourthly, may I suggest, as a method of increasing confidence in what goes on in Europe, that the Government regularly publish the names of those who are charged with fraud offences in Europe; when they were charged; what action is being taken and the final outcome, both internally and then, I hope, in the courts. That would boost morale in this country and show that we are attempting to get to grips with the problem of fraud, the size of which is unclear.

Fifthly--this touches on the point made by the hon. Member for Winchester (Mr. Oaten)--never mind what the European Commission comes up with, could the

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Government present an annual report to Parliament on what new moves are being undertaken to protect our funds and then find time for us to debate it?

I am pleased to have the privilege of speaking in the debate. I do not think that there is a grand strategy or that we can sit around for decades trying to work out how to deal with fraud, in Europe or elsewhere. The method must be to find out what works and then to build on that. I have made five suggestions, but I have not had a chance to warn my hon. Friend the Economic Secretary about them. I shall understand if she cannot respond to them at the moment. However, I should be grateful to her if any correspondence could be placed in the Library so that we could all draw on it.

11.51 am

Mr. Christopher Gill (Ludlow): I shall make but a brief contribution to the debate. I congratulate my right hon. Friend on obtaining this important debate. In previous years, I have been a regular contributor to the debate on the Court of Auditors report. I have concluded over the years that fraud is endemic in the European Union, and I do not have much hope that it can be eradicated. I shall ask a question that goes to the root of the matter: what is the EU doing with the funds that are available to it that could not be done by nation states?

My right hon. Friend has said that the EU does not have the means or the mechanisms with which to control its funds adequately to ensure that fraud is reduced to an acceptable level. I do not say that fraud can be non-existent, because we shall never live in that perfect world. He was right to say that there is a great difference between what goes on in the European Parliament and the Commission and what happens in the United Kingdom, where our system ensures that there is little dishonesty or fraud in the body politic.

The explanation for that is that we are all directly answerable to our electorates in a way that continental politicians simply are not. If we were caught up to mischief, the electorate would wreak their vengeance on us and we would no longer be Members of Parliament; indeed, the whole Government could suffer a similar fate. In contrast, from time to time on the continent, those whom the electorate have rejected reappear not only as members of their parliaments, but as members of their administrations. Of course that removes one of the important checks and balances of our system, which I believe to be absolutely invaluable.

Rather than Europe trying to drag us into its system of doing things, there would be great virtue in our persuading Europe not only that our system works and ensures that there is little fraud, dishonesty or corruption in our body politic, but that we have the blueprint that the rest of Europe would be well advised to follow.

What does the EU need the money for? I contend that the functions that it discharges that involve or require large sums can and should be carried out by individual nation states. The answer to that question is that the EU needs the money because it needs largesse, without which it could not persuade individuals and individual countries to do things the way it wants.

My hon. Friend the Member for Gainsborough (Mr. Leigh) has mentioned fraud in farming. In my experience, when we crack down on such fraud, the poor

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take the blame. I have a letter with me this morning about one of my constituents who has 42 cows. She is in desperate trouble because of a crackdown. She has made an error in her paperwork and will forfeit what to her is an important part of her income. That is not the source of the fraud; the source is in the big time. The Mr. Bigs of farming--more particularly, the Mr. Bigs of farming on the continent--get away with massive fraud, and that is the system there. It is probably more than an inspector's life is worth to take issue with the big-time fraudsters who prosper under the system.

My solution to the problem would be to repatriate the spending to the nation states. This country certainly has much tighter controls. If we did not, we as politicians would pay the price by losing our seats, or the whole Government would collapse. My contention is that such money is necessary not for the good that it does, but simply to ensure that the EU has a hold over those on whom it wishes to force its views. That is shown very much in this country's farming industry, where those who might otherwise comment on those matters in the context of agriculture in Britain are in receipt of large sums--some of the cheques are for more than £1 million. Clearly, they will not bite the hand that feeds them. They will not lead the industry in opposition to what I believe is a corrupt regime. That explains, in a roundabout way, why the EU needs that largesse; it buys off its opposition, so it can continue with the systems that many of us think are totally unsatisfactory.

11.58 am

Mr. Mark Oaten (Winchester): I begin by congratulating the right hon. Member for Haltemprice and Howden (Mr. Davis) on initiating the debate. I note that other hon. Members have avoided mentioning his constituency. I shall refer to him as the Chairman of the Public Accounts Committee, because that is easier. I agree entirely with the remarks that he made in his speech, which were powerful coming from the Chairman of that Committee. I hope that the Economic Secretary will deal with some of the points that have been made.

I agree with all the speeches that have been made, except the previous one. We have heard some thoughtful ideas, certainly from the right hon. Member for Birkenhead (Mr. Field), and the hon. Member for Gainsborough (Mr. Leigh) made some good points about the common agricultural policy, to which I shall refer later.

I welcome the opportunity to discuss fraud. The EU could deal with fraud in one of two ways: it could adapt and ensure that its public administration goes through the motions of reform, or it could tackle the problem and put in place genuine reforms so that it begins to revitalise the rather tarnished reputation that it has not only in this country but among the citizens of Europe.

As we have heard, it is now 15 months since the European Commission resigned en masse, so it is critical to find out what has happened in that period. We have heard this morning that the Neil Kinnock reforms are in place and bedding down. Whatever our views on Europe, we all hope that Kinnock can draw a permanent line in the sand by creating a much more transparent and accountable Commission.

Before I deal with the reforms and where they are going, it is worth reflecting on the scale of the problem. I speak as someone who is pro-European. I am

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passionate about our country's role in Europe, but, while researching my speech, I began to feel slightly Euro-sceptic, because the scale of fraud that is taking place brings out the worst in anyone.

This morning, we have heard that there are different debates about how much fraud there has been. The Court of Auditors, which I think is respected on the issue, has estimated that 5.5 per cent. of the EU budget is lost every year through what it describes as mismanagement, wastage or outright fraud. The amount is nearly the same as the UK's contribution to the EU in the first place. There are some who believe that that figure is somewhat conservative and that the real figure is nearer 10 per cent.

Frankly, whether it is 5 or 10 per cent., the figures are outrageous and totally unacceptable. How can any European citizen have faith in a system in which the budget is approved by a democratically elected Parliament, only to be squandered by bureaucratic, centralistic and unaccountable institutions, which is, sadly, what we have in the EU at the moment?

The Court of Auditors has had to deal with large amounts of EU money. I am concerned that there have been delays in the way in which it has been able to sign off accounts. We have heard that it does good work, but it cannot be right that it cannot sign off accounts even, sometimes, many years in arrears. It is not a good process and system to have in place. The Court of Auditors itself cannot work with the type of systems that we have in this country.

In March, I met Paul Van Buitenen, whom we have discussed and who is widely known as the whistleblower. He and I had an hour-long meeting. I was appalled at some of the stories that he told me about the intimidation and difficulties that he had had to face. I was shocked to learn that the Commission had in place what were effectively gagging order regulations against individuals such as him to prevent them from talking about the irregularities that he had discovered. It epitomised the culture of the Commission that an official was forced to put his position and career on the line and to breach confidentiality to expose the substantial mismanagement and fraud.

Although I admired Paul Van Buitenen's courage, I was astounded by the absence of checks and balances that should have been there in the first place. That raises the question: if he had not had the courage to intervene as he did, would the Commission not have resigned? Would it be shielding some of the things that had taken place? I suspect that that would still be the position.

We have had evidence not only from whistleblowers, but, in April, from Sir John Bourn, head of our National Audit Office, who reported to this Parliament, identifying "significant weaknesses" in the management of the Commission's budget. The NAO found that there may have been errors totalling £3 billion in European payouts in 1998 alone. Together with new clear accounting policies to improve the reliability of the Community's accounts, he called for a simplification of the CAP.

I was interested that the hon. Member for Gainsborough said that the system was complex, and then suggested that we consider a farm tax credit. I am all in favour of simplifying the system, but that sounded

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like a more complex system. I am not entirely convinced that it would crack down on fraud, but we know that the CAP is badly in need of reform.

What are the solutions? Last November, for example, Neil Kinnock launched the whistleblowers charter for the European Commission, which aims to put in place procedures to protect whistleblowers. I hope that that to some extent deals with the concerns that the right hon. Member for Birkenhead raised about putting the processes in place.

The charter mentions the European anti-fraud office, also known as OLAF, as an external channel through which officials can safely report their suspicions to a body that is independent of the Commission. The new OLAF office organises and conducts administrative investigations to detect fraud and irregularities connected with the financial interests of the Community.

Between 1 June 1999 and 31 May 2000, 68 administrative investigations were opened, 30 others were closed and 67 reports were filed. The Chairman of the Public Accounts Committee said that he wanted more of those issues to be aired and some of the details to be available to the public. I welcome the fact that much of OLAF's work is now available on the internet. That is an important step towards much greater transparency and accountability, but, picking up on the points that were made by the right hon. Gentleman, it is important that OLAF's work is monitored independently, so that we have proper accountability.

The Kinnock White Paper detailed a promising reform programme, which was started in March and is expected to continue until the second half of 2002. It focuses on three key areas: comprehensive reform of personnel policy; modernisation of financial management; and control of new systems. I support that programme and agree with the concerns that have been raised about the time scales, which need to be put in place--but progress is being made.

This morning, I had an opportunity to meet Mrs. Fontaine, the President of the European Parliament, and to discuss the Kinnock proposals with her. People sense an atmosphere of change, and that the proposals are beginning to bed down, but, when I discussed the reforms with Paul Van Buitenen, he expressed a concern that, although they may deal with the internal processes, there is a fundamental problem in terms of the culture in the EU, which is much harder to tackle.

The issue that Paul Van Buitenen put to me in cultural terms was that the EU lacks genuine transnational political parties. His argument was that everyone feels a stronger sense of affinity to his own nation, rather than to a pan-European group, and that that can make the imposition of standards difficult and disjointed. I hope that the EU tackles the cultural issue much more.

Of course, the debate about delivery and accountability in Europe is not about just what goes on in the EU. Eighty per cent. of EU spending is disbursed by member states. That is where most of the fraud takes place. An anti-fraud strategy must go beyond Brussels. It must be Europe-wide. That will be a major challenge for some of the EU member states that do not, if I can put it politely, have the same standard of probity in public affairs as we do.

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This touches slightly on the concern of the hon. Member for Gainsborough about the level playing field. If the EU is to embrace enlargement--I hope that it does so--to expand and include countries such as Albania, Poland and Hungary, we must be absolutely sure that the conditions of entry require those individual countries to raise their standards, too.

I am pro-European. I am pro-currency, pro-engagement and pro-Britain playing a full part in Europe, but I am disheartened by the fraud that is taking place. For those of us who believe that Europe is the way forward and is in our best interests, it is damaging our cause and our case. Bluntly, it is wrong that public money is mis-spent in that way. The Kinnock proposals represent a way forward, but, beyond that, there needs to be a cultural change in the EU. I hope that the British Government will take a lead on those issues when they argue for better probity at the conferences in the year ahead.

12.7 pm

Mr. Howard Flight (Arundel and South Downs): I, too, congratulate my right hon. Friend the Member for Haltemprice and Howden (Mr. Davis) on securing the debate. There is obviously a model of proper conduct and of ways of dealing with such problems in the UK. It is a pity that it does not and cannot operate more widely in the EU.

I remind hon. Members that as late as the mid-18th century, the Paymaster General's role was to milk public funds. Indeed, Fox's father made himself rich by so doing. We have not always had the standards that Gladstone established, and they do not seem to establish themselves satisfactorily across the channel.

I echo the support for Commissioner Kinnock. I am sure that he has not been infected by the environment that he is operating in. As has been pointed out, the report seeks to address the processes at least--but I, too, doubt whether it will be effective, because of the cultural problems.

On specifics, I agree that the Court of Auditors must have a rotating chairmanship drawn from the opposition. It must have independent auditors; it is complete nonsense for it to be staffed with insiders, as it were. It must report to the European Parliament, and, potentially, to European Governments individually, on its findings about what has gone on in member states.

I cannot help feeling that it would be useful for the European anti-fraud office to visit Hong Kong, which has the most effective anti-corruption fraud office in the world, although admittedly it is a small country. Again, if the European anti-fraud office is not independently staffed, I cannot see that it can do a proper job. Clearly, it must be accountable to the Court of Auditors.

As others have said, it is clearly essential to have adequate protection for whistleblowers--and, I would argue, rather better protection in this country, given the background--and proper exposure and punishment of offenders. It is unacceptable that individuals can return to power when they have a track record of corruption. I suggest that the European Parliament could do with a Nolan, as it were. Its standards are certainly not the standards of this Parliament, but such a committee is probably the only body that has the power to dismiss a corrupt Commission. Having that ability would give it a powerful raison d'etre.

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The central problem of the common agricultural policy is that 80 per cent. of the money is dispensed by member states. The question is how they should be policed, because, to some extent, member states have a self-interest in obtaining as much as they can from the centre. It is a culture of "them", not "us". It will always be difficult for member states to police themselves, but it would be expensive to police them centrally. The common agricultural policy now costs £29 billion and the system clearly invites corruption. Ultimate reform can come only from the abolition of that system.

I wish to touch on a point that has not been raised. The CAP operates the exchange rate compensation scheme, which is drafted in a completely incomprehensible way. While sterling has strengthened by 50 per cent. against other currencies, and what is effectively one European currency, £1 billion or £2 billion a year in compensation has been paid out to Italy, Sweden, Germany and other member states. What is the logic of paying them compensation, because their currencies have weakened en bloc and they have enjoyed the advantages of that? On undertakings for collective investment in transferable securities, the German banks have blocked the development of money funds in Europe, and that is a different form of corruption.

The public in the United Kingdom have rumbled the situation. In a wonderful phrase, the right hon. Member for Birkenhead (Mr. Field) pointed out that they perceive the set-up as a thieves' kitchen. As people on both sides of the argument have said, until there is an improvement and proper standards of conduct, the credibility and standing of European Union organisations will decline further in the eyes of the British public.

When I was a meritocratic student at one of England's leading meritocratic universities, I studied mediaeval history. The wonderful Professor Walter Ullmann put his finger on the problem. Whereas the UK and other Anglo-Saxon nations have the deeply rooted concept of power ascending from the people and the tribe, and leaders being accountable to the people, the problem with continental Europe is that it still has the Roman empire and mediaeval tradition of power descending from God, or what have you. That creates a powerful obstacle in the way of properly exposing corruption, because the citizenry does not expect that to be done. They expect lower standards of conduct than we are used to in this country.

Commissioner Patten has been mentioned. I specifically recollect that £500 million of development support was allocated to South Africa, of which only £20 million of actual expenditure was ever discovered, and most of that was wasted. Some £480 million was completely unknown and unaccounted for. That is unbelievable.

I am nervous that, despite the good intentions of Commissioner Kinnock, there is still not the will to tackle the problem effectively. As was said, we do not know whether fraud is 7 per cent., 10 per cent., or the Court of Auditors' estimate of 5.5 per cent. The issue is not on the Nice agenda, and the view is that it has been buried for the time being.

The Treasury will no doubt refer to its report and to the five proposals of the European Court of Auditors concerning the elements of the structure that are

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missing. However, the problem goes a great deal deeper. Perhaps, only when member states look to devising methods of imposing their own sanctions against corruption will there be any real and dramatic change. In the meantime, I wish Commissioner Kinnock every success, and I commend him on his proper standards and his attempts to address a major problem.

12.15 pm

The Economic Secretary to the Treasury (Miss Melanie Johnson): In the 15 minutes allotted to me, I will struggle to respond to all the points that have been raised. However, I shall do my best. I apologise if my reply is a little bitty, but it is either that or answering fewer questions.

Like everyone else, I congratulate the right hon. Member for Haltemprice and Howden (Mr. Davis) on securing this debate. I know that the subject is dear to his heart and that he refers to it on many parliamentary occasions. I welcome the fact that he has raised the subject and I welcome the contributions that have been made. The Public Accounts Committee was so concerned about the issue that when its members visited Brussels last year, they interviewed key players and produced the important report on "Financial Management and Control in the European Union". It raised many pertinent questions about the state of European institutions and the Commission itself.

The right hon. Gentleman asked about the independence of OLAF and its relationship with the Commission. The arrangements that have been put in place are entirely right, because the Commission has the responsibility, under the treaty, for budget execution. That responsibility must include instituting effective fraud prevention procedures. The anti-fraud office needs to understand the organisation that it is investigating so, in that sense, it needs to be an insider with access to information about what is happening within the organisation. Past experience bears that out. The Commission's previous anti-fraud unit, UCLAF, investigated all the fraud allegations that featured in the wise men's report, but, under the previous arrangements, it had no responsibility for follow-up and there was no mechanism to ensure that the right course of action was taken.

The new arrangements under OLAF will make recommendations on follow-up, and the institutions will have to report on whether that has been carried out. In addition, the unit's director will report to the European Council and to the European Parliament. I take the point made by the hon. Member for Winchester (Mr. Oaten) that the important element of accountability in the reporting arrangements must be considered. It is important that we do not lose sight of that.

The question of whether we should replicate the arrangements used by the Public Accounts Committee was raised. The PAC works because officials have clear roles and responsibilities. The accounting officer in the National Audit Office knows that he is responsible for ensuring that Departments apply the rules and will have to answer if they do not. That is why we pressed the Commission, as a priority, to set out clear roles and responsibilities for all staff. Indeed, the White Paper on reform, which I shall refer to in more detail shortly,

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includes important measures in that regard. We know that the Commission intends all staff to have clear job descriptions and objectives by the autumn. We will keep up the pressure to ensure that there is real and meaningful reform. I agree with all the contributors to the debate who stressed the need continually to press for progress on that front.

Questions were raised by the right hon. Gentleman about Italy. Fraud cases tend to be enormously complex and can take an extremely long time--often years--to investigate. That is not unusual, if we compare it with fraud investigations in the UK on matters unrelated to the subject of the debate. That is frustrating for all of us, but it is not outside the bounds of our usual experience of the difficulties of detecting and investigating fraud. For that reason, it is difficult to comment on individual cases.

On the security contract fraud, the security firm was replaced and investigations by the Belgian police are still going on into the allegedly fraudulent contract arrangements mentioned by the right hon. Gentleman.

It may be helpful if I deal next with whistleblowing. It would have been wrong to intervene without knowing the full details of the case, as ill-considered intervention might have endangered ongoing investigations. However, I accept that there must be rules governing whistleblowing. Since the Government came to power, we have taken significant steps in the UK to establish such rules.

Van Buitenen was the subject of a disciplinary hearing, which reprimanded him for actions that were considered to compromise certain criminal investigations that were in progress; but the judgment was mitigated by the circumstances of his case, particularly the lack of proper procedures for reporting concerns about improper practice.

Mr. David Davis: I thank the Minister for giving way. I do not wish to delay her progress, but is it plausible for a whistleblower who has brought a matter to public attention for the first time to be reprimanded on the grounds that he is jeopardising a criminal prosecution, when no criminal prosecution has ever been brought to fruition in the European Commission?

Miss Johnson: The right hon. Gentleman makes a useful point, but it is fair to say that with regard to the way that van Buitenen behaved, there were issues on both sides. It was not an open and shut case. We accept that whistleblowing by employees is extremely important. If they suspect fraud, they should be encouraged to report it, and whistleblowers should be protected. That is an important principle. I agree with both the right hon. Member for Haltemprice and Howden and my right hon. Friend the Member for Birkenhead (Mr. Field), who made those points particularly strongly.

The Commission's decision in June 1999 on whistleblowers sets out clear procedures for reporting suspected fraud, corruption and other illegal activities. Those procedures will be formalised in the revision of the staff regulations which is in progress, as part of the Commission's reform programme. The aim is to ensure

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protection for a whistleblower acting in good faith and in the public interest. We respect and value that in this country, and have taken steps to put it in place in full-blown form in the UK. Until just a few years ago, we could not claim that everything in our country was right, and indeed, we still cannot be confident that it is all right.

On the subject of structural flaws in the Parliament which lead to protection for individuals by political parties, it is essentially up to the European Parliament to decide how it organises its sessions. The right hon. Member for Haltemprice and Howden proposed an interesting idea in that respect which is worth exploring further.

The right hon. Gentleman also referred to tourism fraud. I agree that the Commission's handling of the matter was not competent. That is why it was so necessary to implement the reforms. There must be greater co-operation between member states. There is scope for taking forward and implementing effectively the Eurojust proposal for an agency to assist co-operation and to allow the exchange of information--for example, about the evidence that needs to be gathered in one member state to be used in legal proceedings in another member state with a different judicial system.

I am sure that Commissioner Kinnock will be somewhat embarrassed by the support that he has received from all right hon. and hon. Members present, but no doubt he will also be delighted. Of course, the Government support reform and the work that he is heading in the Commission.

I agree that staff regulations are too inflexible. Lengthy consultations with staff are required. The last reform took place 10 years ago, so the situation has been left untouched for too long. There is a need to get it right this time. That will take time and negotiation, but we are not complacent. We are keen to make progress, as is Neil Kinnock, I am sure.

There is already a code of conduct for Commissioners, and there are proposals to protect whistleblowers. The White Paper on Commission reform incorporates proposals to modernise staff management, including an overhaul of recruitment procedures, improved training and career management, a proper system of staff appraisal based on job objectives that are directly linked to Commission objectives--a highly desirable feature--a merit-based system of promotion, which is important, and a more effective disciplinary system, which is also important. All the right sort of measures are being progressed.

The hon. Member for Gainsborough (Mr. Leigh) spoke about the way in which EU funds are being wasted. The level of error is clearly unacceptable, and we have been pressing the Commission and other member states to take action. However, we must not lose sight of the fact, pointed out by several speakers in the debate, that 80 per cent. of the expenditure goes through individual member states, and is therefore up to them. We need to address the matter through the EU and by putting pressure on member states through member-state to member-state channels.

Contrary to what the hon. Member for Ludlow (Mr. Gill) said, it is not simply a matter of tackling the Commission. Member states must be tackled. We are

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working with them to improve financial control, which includes work to simplify regulations and provide clarification of eligible expenditure. I agree wholeheartedly with my right hon. Friend the Member for Birkenhead that the mismanagement of public funds undermines the confidence of European taxpayers in the EU. We must work together to remedy an unacceptable situation.

With regard to humanitarian aid, one of the problems is a lack of resources to manage the aid programme. Most of the resources did not go astray, but were used to administer the aid programme. That relates to the point about how much is fraud and how much is money mismanaged in various ways, which is also a big issue. Much of what is described as fraud is not technically fraud, but mismanaged funds.

Mr. David Davis: One example is the 2.4 million ecu contract, which was fictitious. Some of the money, as the hon. Lady says, was used for other employees, but two thirds of a million ecu are still missing. The money cannot all have been used properly.

Miss Johnson: At no time did I suggest that all the money was used properly. I believe that the sum of £400,000 is unaccounted for, but I agree with the right hon. Gentleman that money unaccounted for is unacceptable. We must do more to tackle the problem. Activity-based budgeting will help us to identify the administrative resources needed for efficient management. That is an important part of ensuring that resources reach their destination and that no fraud takes place. The distribution of aid has been the subject not only of proposals by Commissioner Patten, as the right hon. Gentleman said, but of considerable ongoing discussions in various EU forums, including the Budget Council, with which I am involved.

The hon. Member for Gainsborough spoke about the CAP. It is worth while pointing out in relation to his East Anglian example--I know the hon. Gentleman's constituency a little, and I am not sure whether Gainsborough considers itself part of East Anglia, but it is not far short--the claimant literature is constantly being reviewed. We are trying to simplify the pilot scheme for arable area payments in East Anglia. Those may not apply to his area, but efforts are being made to lessen the bureaucratic burden on farmers. We all--

Mr. Deputy Speaker: Order.

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