Select Committee on European Scrutiny Fifth Report



FIFTH REPORT

The European Scrutiny Committee has made further progress in the matter referred to it and has agreed to the following Report:—

POLITICALLY IMPORTANT: FOR DEBATE

COURT OF AUDITORS ANNUAL REPORT FOR 1999

(21885)


Report on the activities financed from the General Budget, together with the Institutions' replies.

Report on activities of the Sixth and Seventh European Development Funds, together with the Institutions' replies.

Legal base:
Deposited in Parliament: 11 December 2000
Department: HM Treasury
Basis of consideration: EM of 20 December 2000
Previous Committee Report: None
To be discussed in Council: March 2001
Committee's assessment: Politically important
Committee's decision: For debate in European Standing Committee B (together with the Commission's Annual Report for 1999 on protecting the Communities' financial interests)

Background

  1.1  The European Court of Auditors (ECA) is responsible for the external audit of the Community's public finances. It examines the legality, regularity and soundness of the management of all the Community's revenue and expenditure, and the revenue and expenditure of any body created by the Community.

  1.2  The ECA publishes Special Reports throughout the year on its audits of particular areas of revenue or expenditure. In its Annual Report, it provides an overview of its activities as a whole and also reviews action taken by the Commission and other relevant bodies in response to its Special Reports. The Annual Report includes the ECA's Statement of Assurance for the financial year in question. The Report also covers the Sixth, Seventh and Eighth European Development Funds and a Statement of Assurance in respect of them, as these funds are separate from the General Budget.

  1.3  The Annual Report and Statement of Assurance allow the Council and the European Parliament (the two arms of the Community's Budgetary authority) to consider how well the Community budget was implemented, and whether the budgetary processes for the year should be closed by the Parliament granting, on the recommendation of the Council, a "discharge" to the Commission. Article 276 EC requires the Commission to act on any comments made by the Council and the European Parliament in granting the discharge, and to report back on the actions it has taken in response, if requested.

  1.4  In considering the report, we have been assisted by the Explanatory Memorandum (EM) of 20 December 2000 from the Economic Secretary to the Treasury (Miss Melanie Johnson). As well as providing the Government's views on the report, it also contains a helpful summary of the report itself (which is over 500 pages long). We annex the EM to our Report (Annex A) and cross-refer to it where appropriate by paragraph number. The EM contains relevant paragraph references to the Report itself, and also has an annex listing references in the Report to the UK.

Report on the General Budget

  1.5  The document on which we report is provisional, but we expect that the final version when published in the Official Journal will simply correct any typographical errors.

  1.6  The report contains a chapter on own resources followed by chapters on each of the five main categories of expenditure (the CAP, structural measures, internal policies, external aid, and administrative expenditure). It concludes with chapters on financial investments and banking activities, and the Statement of Assurance. The Minister's EM provides a summary of each of the subject-specific chapters of the report (EM, paras 9-42). The EM also summarises the Commission's responses to the issues raised by the ECA.

  1.7  The report refers to a number of ECA Special Reports, published in 1999 and in other years. We reported on the ECA's Annual Report for 1998 on 26 January 2000.[1] Since that Report, we have reported on 19 Special Reports and these are listed in Annex B to this Report. In the case of the ECA Special Report No. 11/2000 (on the olive oil support scheme) we recommended a debate in European Standing Committee A, which should be held shortly.

  1.8  The ECA notes that 1999 was an important year for financial management in the Community. Following the crisis of confidence in the Commission's management, which led to the resignation of the Santer Commission, the new Commission began immediately on a new reform programme. The ECA notes that this involved three related themes: reform of the way political priorities are set and resources allocated, important changes to personnel policy, and a radical overhaul of financial management and control. We reported on the White Paper on reform of the Commission on 12 April 2000.[2] On 19 April 2000, we reported on the Commission's Action Plan for improving financial management and procedures.[3] On 29 November 2000, we reported on the Commission's proposal for a complete recasting of the Financial Regulation and referred it for an opinion to the Committee of Public Accounts.[4] This Regulation is the main instrument which lays down rules for all aspects of the establishment of the budget and the implementation of revenue and expenditure, the definition of the role and responsibilities of those involved in implementation; and the monitoring and control of implementation. A new Regulation is regarded as a key plank in reform of financial management within the Commission. Steps have already been taken, ahead of adoption of a new Regulation, to separate internal audit from financial control within the Commission and to decentralise control to Directorates. The ECA notes that most of the weaknesses which the reform programme is seeking to address are points which it has emphasised in its reports on many occasions. It welcomes the steps the Commission is taking to improve financial management and also the introduction of Activity Base Management (ABM), as proposed in the White Paper, which it says should assist the Commission to improve its setting up priorities in line with available financial and administrative resources.

  1.9  The ECA also notes that the Commission has announced reform programmes for specific budgetary areas, which also address concerns it has expressed earlier. These include proposals for management of the external aid programmes, based on an analysis of the weaknesses reflected in various earlier ECA reports. The ECA notes that Member States are responsible for the day-to-day management of the bulk of the Community budget, particularly in the areas of the Common Agricultural Policy and the Structural Funds. It notes that its Special Reports continue to draw attention to serious and persistent weaknesses in Member States' management and control systems. It recognises that important initiatives have been taken by the Commission to improve matters by strengthening the financial controls that the Member States themselves are required to maintain over Community-financed (or co-financed) operations.[5] It notes, however, that implementation of the new systems remains incomplete and that the Commission needs to increase its pressure on Member States to implement them fully.

  1.10  Aside from its consideration of the Commission's reform proposals, the ECA comments that some progress has been made in some specific areas as a result of its previous audit observations. These include action to remedy specific weaknesses in some projects and programmes (for example, the programme of assistance to South Africa, reforms to the measures for the subsidised use of skimmed milk and skimmed milk powder for animal feed, action on some own resources matters).[6] In other areas, however, such as reform of the wine market organisation and the taking of corrective action following the detection of errors or irregularities in the management or the European Regional Development Fund, the ECA says that the Commission response has been slow, or partial.

  1.11  In its Statement of Assurance on the 1999 accounts, the ECA again draws attention to problems with the Community's financial statements similar to those found in previous years. Weaknesses in accounting systems and procedures mean that the information presented in some cases is incorrect or incomplete. The problems in management and control systems covering operational expenditure, both at the Commission and in Member States, continued to give rise to a significant incidence of errors, mainly at the level of final beneficiaries. In view of its findings, the ECA again declined to provide assurance that the transactions underlying the financial statements are legal and regular, except in the case of own resources and the institutions' internal staff expenditure. This is the sixth year running in which the ECA has declined to give a positive Statement of Assurance on the legality and regularity (as distinct from the reliability) of the transactions underlying Community expenditure. The ECA strongly encourages the Commission to continue with implementation of its reform proposals, but notes that changing the management culture of the organisation will also be a key part of effecting real improvements in financial management.

  1.12  The ECA again draws attention to the danger of misinterpreting or misrepresenting the errors found in its audits as indicating the level of fraud affecting the Community budget. It says that references in its reports to payments where the amounts are wrong because of error and irregularity primarily concern problems of inadequate financial management and control. The bulk of the errors occur in the main expenditure programmes managed by the public authorities in the Member States, and particularly concern such things as small overpayments to farmers and payments for expenditure by public authorities which is not eligible for EU co-financing. Only a small proportion of the breaches of the regulations found by the ECA have justified further investigation by the Commission's independent anti-fraud unit (OLAF) or the authorities with criminal jurisdictions in the Member States. It notes that the 1995 Convention on the protection of the Community's financial interests has still not been ratified by all the Member States (the UK has ratified) and that the parallel Convention dealing with corruption in connection with the EU budget has been ratified by only one Member State. It argues that this shows that Member States are not yet fully discharging their responsibilities under Article 280 of the Treaty for combatting fraud against the Community budget. It agrees with the Supervisory Committee of OLAF that much remains to be done to improve co-operation between OLAF and the Member States in the investigation and prosecution of fraud and corruption involving the EU budget. We have reported separately on the Commission's annual report for 1999 on the protection of the Community's financial interests and the fight against fraud.[7]

  1.13  The ECA report makes clear that the Statement of Assurance audit is based on a sample of transactions which does not permit estimation of error rates in relation to particular Member States. It provides no overall estimate of the scale of errors, either formal (an error which has no directly quantifiable effect on the amounts transacted) or substantive (where the error does affect the amounts of transactions).

Report on the activities of the Sixth, Seventh and Eighth European Development Funds (EDFs)

  1.14  The EDFs originate from the international agreements, known as the Lomé Conventions, which created an association between the Member States and 71 African, Caribbean and Pacific countries, and to Council Decisions relating to the association of 24 overseas countries and territories. The Community provides aid to these countries to finance development projects. Payments during 1999 totalled 1,275.4 million euros. The Minister summarises the main points made by the ECA regarding these funds in paragraphs 47 to 52 of her EM. The ECA find that on the whole the underlying transactions were legal and regular. However, it stresses that the audits carried out by the Commission in 1999 revealed evidence of ineligible expenditure and the ECA recommends that the Commission remedy this by recovering any funds paid unduly or reporting to OLAF any cases where fraud is suspected.

The Government's view

  1.15  The Minister sets out the Government's views in paragraphs 55-59 of her EM. She draws attention, in particular, to the role played by the Government in the creation of the new anti-fraud office (OLAF) and says that the Government will continue to press OLAF to recruit the agreed number of extra staff as quickly as possible and to make use of its new powers and independence from the Commission. She says that the Government is working with the Commission and other Member States to improve financial management and control, for example through its membership of the group of Personal Representatives of Finance Ministers which aims to improve co-ordination between the Commission and the Member States in general. The Government welcomes the Commission's reform programme and underlines the importance of ensuring that it is supported by all the parties involved, including the European Parliament and the Council. She notes that there are four criticisms of the UK in the report and these are listed in the Annex to her Explanatory Memorandum. She says that a full response will be made by the UK to the Commission as part of the normal follow-up procedure. Advance copies will be provided to the House. She expects that the ECA Annual Report will be discussed by ECOFIN in March and that the European Parliament should decide on discharge, on the recommendation of the Council, by the end of April.

Conclusion

  1.16  The European Court of Auditors' Annual Report for 1999 covers a period of transition. Whilst the findings in the report in respect of continuing weaknesses in financial management and, sometimes, associated policies reflect a pattern of consistent observations by the European Court of Auditors over a period of years, there is more this year of a more positive kind in terms of actions being taken by the Commission systematically to address these concerns. Most of these flow from the proposals in the White Paper for reform of the Commission, or from the conclusions of the Agenda 2000 programme about the expenditure and allocation of Community resources for 2000-2006. Those include reforms in respect of administration of the Common Agricultural Policy and also the structural funds. It is, however, too soon for any of these changes to be showing through in terms of their effects on financial management and performance.

  1.17  In relation to the Common Agricultural Policy, for example, we see that the European Court of Auditors notes that the financial year 1999 shows no significant improvement. It regards the joint financing by the Community of quota purchases for milk as not complying with the principle of sound financial management and notes that the Commission has yet to provide the analysis to justify the currently high level of aid for skimmed milk and skimmed milk powder. It regards the recovery of arrears in respect of imports of milk products at a preferential rate from New Zealand as unsatisfactory. It criticises the Commission as not sufficiently quick to act as regards measures to prevent re-occurrence of the problems.

  1.18  As regards the structural funds, it says that the Commission has not yet established comprehensive databases to provide an overview of the status of structural fund programming and to monitor progress on the ground. It complains of difficulty in obtaining general information on the nature and impact of projects which have been jointly financed and it complains about the delays in the closure of files relating to structural fund programming periods prior to 1994 which should have been tackled much earlier.

  1.19  As regards external aid, the Commission says that evaluation in the context of the PHARE and TACIS programmes has improved as a result of its reports but that progress remains to be made with regard to the independence of those doing the assessments, the aims of evaluation and the quality of the reports and follow-up to them[8]. In the context of the PHARE and TACIS programmes, the European Court of Auditors refers to projects being launched late and in a hurry, and with little significant progress being made. It notes that, despite the fact that regulations set a six-month deadline for the Commission to reach decisions on requests from non-governmental organisations (NGOs), it actually takes the Commission on average 12 months to do so. It notes that an agreement between the European Community and the United Nations concerning finance for humanitarian programmes and aid for development came into effect in August 1999. However this did not resolve the fundamental problem of the nature of the relationship between the United Nations and the Commission. The European Court of Auditors thinks it likely that relations will remain strained and difficulties in monitoring, eligibility and auditing will persist. It says that, if need be, the Community should be prepared to reduce, or even suspend, its aid to the United Nations agencies whose results do not reach an acceptable standard.

  1.20  We refer to these examples of shortcomings as evidence of the continuing need for improvements in financial management by the Member States and by the Commission. The Report rightly emphasises the responsibilities of the Member States as well as the Commission. In this regard, we drew attention in our report on the European Court of Auditors' Special Report No. 11/2000 on the support scheme for olive oil to what we called the "blind disregard shown by the Member States concerned for the basic principles of financial accountability, not to mention the interests of Community tax payers". In our view, that amounted to little short of a scandal. We regarded it as typifying both the shortcomings of the Common Agricultural Policy and the lack of proper financial controls within the Community. We have recommended it for debate.

  1.21  It has been customary for us to recommend the Annual Report of the European Court of Auditors for debate in Standing Committee, though last year this did not happen. We think it right to do so again this year, and we recommend that it be debated in European Standing Committee B, along with our report on the Commission's annual report for 1999 on the protection of the Communities' financial interests and the fight against fraud (see paragraph 2 of this Report). Such a debate will provide a good opportunity not only to debate the continuing shortcomings revealed by this report but also the progress being made in implementation of the main elements of the Commission's reform programme.



ANNEX A

Explanatory Memorandum from Miss Melanie Johnson, Economic Secretary, HM Treasury

Annual Report of the European Court of Auditors concerning the financial year 1999

1.  The European Court of Auditors (ECA) is the institution of the European Community responsible for external audit of the other Community institutions. In addition to powers to make special reports from time to time, the ECA is required by Article 248 of the Treaty of Amsterdam to provide the European Parliament and the Council with an Annual Report on the implementation of the Community's budget together with a Statement of Assurance as to the reliability of the Community's financial accounts and the legality and regularity of the transactions underlying them. This Explanatory Memorandum covers the Annual Report and Statement of Assurance on the Financial Year ending 31 December 1999, containing the observations of the ECA and the responses to them of the relevant institutions. The requirement for a Statement of Assurance to accompany the Annual Report was put into operation for the first time in respect of the 1994 financial year.

2.  The Annual Report also covers the sixth and seventh and eighth European Development Funds and the ECA has produced a separate Statement of Assurance on these Funds, which are separate from the general budget.

3.  The Annual Report and Statement of Assurance allow the Council and the European Parliament (the two arms of the Community's budgetary authority) to consider how well the budget was implemented and whether the budgetary process for the year should be closed by the Parliament granting, on the recommendation of the Council, a 'discharge' to the Commission. Article 276 of the Treaty requires the Commission to act upon any comments made by the Council and the Parliament in granting the discharge and to report back on the actions it has taken in response, if requested.

Annual report

4.  The structure of the annual report on the 1999 budget is as follows:

General introduction

Report on activities financed from the General Budget

(Each chapter is followed by the Institutions' replies)

Chapter 1 - Own resources

Chapter 2 - The Common Agricultural Policy

Chapter 3 - Structural measures

Chapter 4 - Internal policies

Chapter 5 - External aid

Chapter 6 - Administrative expenditure

Chapter 7 - Financial instruments and banking activities

Chapter 8 - The statement of assurance and supporting information

Report on the activities of the sixth, seventh and eighth European development funds

(Each chapter is followed by the Institutions' replies)

Chapter I - Implementation of the sixth, seventh and eighth EDFs as at 31 December 1999

Chapter II - Statement of Assurance concerning the European Development Funds

Chapter III - Follow up of previous observations

Chapter IV - Other observations

Annexes

Annex I - Financial information on the general budget of the European Union, and charts

Annex II - Reports and opinions adopted by the Court of Auditors during the last 5 years

5.  This year the ECA has continued its policy of placing more emphasis on publishing, in Special Reports, the more detailed results of audits which covered specific subjects. The following Special Reports have been published in 2000.

Special report 1/00 Classical swine fever

Special report 2/00 Aid given by the European Union to Bosnia-Herzegovina with a view to restoring peace and the rule of law

Special report 3/00 European Social Fund and the European Agricultural Guidance and the Guarantee fund-Measures to assist the employment of young persons

Special report 4/00 Rehabilitation actions for ACP countries as an instrument to prepare for normal development aid

Special report 5/00 The Court of Justice's expenditure on buildings

Special report 6/00 Granting by the Community of interest subsidies on by the European Investment Bank to small and medium-sized enterprises through its temporary lending facility.

Special report 7/00 International Fund for Ireland and the Special Support Programme for Peace and Reconciliation in Northern Ireland and the Border Countries of Ireland 1995-1999

Special report 8/00 Community measures for the disposal of butterfat

Special report 9/00 Concerning trans-European-networks -telecommunications

Special report 10/00 Public contracts awarded by the Joint Research Centre

Special report 11/00 Support scheme for Olive oil

Special report 12/00 Management by the Commission of European Union support for the development of human rights and democracy in the third countries

Special report 13/00 Expenditure of the European Parliament's political groups

Special report 14/00 Greening the Cap

Special report 15/00 Cohesion Fund

Special report 16/00 Phare and Tacis programmes

Special report 17/00 Commission's control of the reliability and comparability of the Member State's GNP data

Special report 19/00 Assistance to Palestinian Society

Special report 20/00 Organisation of the sugar market

The ECA plans to publish several more Special Reports later in the year.

Statement of Assurance

6.  In interpreting the Statement of Assurance (SoA) it is important to note that:-

—   the SoA audit is restricted in scope to supporting the terms of the Statement of Assurance. Thus whilst it raises points bearing on value for money it is not expressly concerned with that subject. The focus of the SoA audit is on the reliability, legality and regularity of the Community's financial transactions and it is impossible to extrapolate from the calculations of 'error' rates to any particular figure for 'wastage' of Community money;

—   it does not identify 'fraud' as such. The ECA makes few observations about the motivation behind the 'errors' in legality and regularity which it identifies. Some may represent the effect of deliberate criminal fraud. At the other extreme, some will certainly represent genuine misunderstandings in good faith about, for instance, eligibility of expenditure for Community support perhaps because regulations have been drafted ambiguously;

—   the EC budget makes a distinction between financial commitments and payments. A commitment is a legal obligation to spend money, the payment covers actual expenditure. A commitment to make a payment to support expenditure by a farmer may in itself be legal and regular even if it emerges later that the expenditure claimed by the farmer was non-existent, or overstated, or wrongly described. In that case, the payment made to the farmer (if there were one before the irregularity in the claim was discovered) would be found to be subject to error;

—   although the Commission is accountable for implementation of the budget through the discharge procedure, only about a fifth of the budget is spent directly by the Commission. Member States, third countries or some other intermediary body administers the rest. In these cases, the Commission may be some way removed from the beneficiaries of EC intervention, and reliant on compliance with the relevant regulations by national and local administrations in Member States as well. However the Commission has a duty to set clear implementing rules for administrations to follow, to explain their application and to ensure that Member States' financial management is adequate;

—   the SoA audit is based on a sample of transactions selected by a methodology which, taking account of the structures and volumes of transactions comprising the overall budget, is intended to allow the ECA to extrapolate from the sample to conclusions about the total with reasonable confidence. It does not, however, permit estimation of error rates in relation to particular Member States;

—  the ECA distinguishes between 'substantive' errors and 'formal' errors. These terms have particular technical meanings in the SoA audit (which are defined in paragraphs 8.21 and 8.23 of the report). A substantive error is a specific quantifiable error directly affecting the amount of the transactions underlying Community funds disbursed. A formal error is an error which has no directly quantifiable effect on the amounts of the transactions underlying Community funds disbursed. It does not follow that formal errors are never significant;

—  this year, as last year each chapter of the report which deals with specific areas of revenue or expenditure includes a specific appraisal in the context of the Statement of Assurance.

7.  This Memorandum does not attempt to explain all the points raised. The following sections highlight the main themes emerging from the report, with references to the text. Summaries of the Commission's responses, which are included in the report, follow each section in italics. At Annex A to this Memorandum is a list of the main references by name to the UK in the report; these are not all criticisms, some of the references are purely descriptive.

From 1st January 1999, the EC budget is applied in euro by application of the Council regulation (EC) No 1103/97. In this Memorandum EURO amounts are converted to £ using the exchange rate on 30 December 1999 which was 1 EURO =£0.6217.

References in this Memorandum are to paragraphs of the Annual Report.

General Introduction

8.  The report notes that 1999 was marked by the resignation of Santer's Commission after the First Report of the Committee of Independent Experts. In September 1999, the new Commission began work on its reform programme. During 2000, the Commission has been developing the details of its proposal, including publication of its Reform White Paper and commencing the process of implementation.

The general introduction to the report stresses the following points:

With regard to the revision of the Financial Regulation, the Court has made recommendations on:

—   the authorising officer's responsibility;

—   the introduction of the independent internal auditor;

—   the requirement for accounts to be presented in accordance with international standards;

—   the introduction of borrowing for the purpose of investing in buildings for the use of the institutions;

—   simplification of the provisions concerning the definition of commitments and the carry-over of appropriations; and

—  a reduction in the exceptions to the basic principles of the financial regulation.

The Court notes that important initiatives have been taken to improve Member States' financial control systems but that implementation of the new systems continues to be incomplete. The Court states that the Commission needs to increase its pressure on the Member States to implement them fully.

The Court notes that the 1995 Convention on the protection of the Community's financial interests has still not been ratified by all Member States and thus feels it is necessary to explore all possible instruments, either within the existing Community legal framework or through appropriate amendments to the treaty, to protect the Community's financial interest.

Chapter 1 - Own resources

9.  Own resources finance the Community budget. These are divided into four categories. The first is Customs duties, including those on agricultural products. The second is sugar levies. The third is contributions based on VAT, and the fourth is GNP- based contributions.

Resources

Revenue (million euro)

Revenue (£ million)

Traditional own resources

13, 857.6 million

8, 615.3 million

VAT

31, 332.3

19, 479.3

GNP

37, 512.0

23, 321.2

Miscellaneous Revenue

1, 353. 2

 841.3

Budgetary imbalances

- 169. 2

-105.2

Other adjustments and contributions

3, 022.2

1, 878.9

Total

86, 908.1

54, 030.9

The total represents an increase overall of 2,8 % over revenue for 1998.

10.  The Court is generally satisfied with the results of its checks on resources as regards the reliability of the accounts and the legality and regularity of the transactions entered in the accounts of the Member States (para 1.17). However, the Court states that in some cases traditional own resources were not made available or made available late and thus the Commission and national authorities should take appropriate action (para 1.17). With regard to VAT and GNP resources, the Court obtained reasonable assurance on the reliability system for collating the resources (para 1.22).

11.  With regard to the comparison of data to combat fraud in the Own Resources field, the Court highlights a methodology based on a comparison of intermediate consumption, using fiscal and statistical sources which has proved useful in two Member States. It recommends all Member States use this methodology, once improvements have been made (para 1.72).

The Commission reports that it acts on all cases where resources are made available late (1.11).

The Commission welcomes the Court's recommendation of the methodology mentioned in the report and will proceed in discussions with Member States (1.72.)

Chapter 2 — The Common Agricultural Policy

12.  In 1999, expenditure of the Guarantee Section of the European Agricultural Guidance and Guarantee Fund amounted to 39, 541 million euros, which is 49% of the European Union budget. The ECA states that there were substantive errors affecting the legality and regularity of the underlying transactions. However, the majority of cases involve minor over-declarations by individual beneficiaries in regards to surface -areas or the number of animals (para 2.26). The Court points out, nevertheless, that despite the fact that formal errors do not affect the value of the examined transactions, the frequency is considerable. 80% of these errors involve Member States' implementation of checks by local or central management (para 2.34) or failure to keep compulsory records (para 2.35). The Court notes that the Commission authorised payment orders outside the deadline laid down in the regulation (para 2.33). The Court states that there is no significant improvement as regards the legality and regularity of the underlying transactions for the financial year 1999. The Court recommends that the Member States and the Commission heighten the impact of their controls (para 2.41).

13.  Corrections made in the clearance decisions for 1995 are much higher than those made in 1994. This is due to a time lag, as the 1995 figures include amendments for the financial year 1994. Also, the Court notes that the amendments would have been at least 147. 5 million euros greater if the Commission had applied appropriate flat rate corrections for key control failures, and that a penalty should have been imposed on Member States whose management quotas were unsatisfactory. It took four and a half years to clear the accounts, which is detrimental to the Community's financial interest (para 2.43-2.60).

14.  The Court comments on the actions taken in the light of previous observations made in its reports on: wine products, milk quotas, skimmed-milk powder for animal feed. In the case of reduced-rate imports and disposal on the market of milk products from New Zealand and of Swiss cheese (para 2.77), despite some measures that were taken to stop the reoccurrence of problems with preferential imports, the Court considers that the Commission was not quick enough to act and has not initiated any specific investigations into the imports of other agricultural products at the preferential rates of duty (Special report No 4/98, para 2.113- 2.123).

15.  The Commission points out that neither they nor the Member States had very much time to research the substantive errors found by the Court; in some cases the Members States' comments had not yet been received (2.26). However, the Commission does accept the Court's view that errors have been made and thus will take steps to recover the amounts involved.

16.   With regard to the New Zealand butter case, the Commission states that it will "contact the UK authorities to obtain the legal advice on which they have decided not to pursue the NZDB (New Zealand Dairy Board) for a contribution to the security". It will notify the Court of subsequent developments (para 2.122).

17.  With regard to the clearance of accounts procedure the Commission argues it is lengthy because the Member States' rights of defence must be respected. (para2.45). On individual corrections, the Commission does not agree with the Court's finding that it should have been greater than EUR 147.5 million. The EAGGF's proposed decisions are based on compliance with the established criteria, the information and evidence transmitted by the Member States during the accounts clearance procedure and the principle of equal treatment between Member States (para 2.60).

Chapter 3 - Structural measures

18.   The Structural Funds consist of: the European Regional Development Fund (ERDF), the European Social Fund (ESF), the Financial Instrument for Fisheries Guidance (FIFG), and the Guidance Section of the European Agriculture Guidance and Guarantee Fund. The 1999 budget for commitments and payments totalled 39,167 million euros and 30, 658 million euros respectively.

19.  For commitments, the budget implementation rate was 94% and 87% for payments. Payment requests by the Member states totalling 6,498 euros had still not been examined and settled at the end of the year (para 3.3-3.22).

20.   The Court argues that the number of anomalies found in the declarations of expenditure co-financed by the Community continues to be high and that the most significant errors were ones that had been pointed out in previous financial years (para 3.44).

21.  With regard to outstanding commitments; the Court says that the outstanding amounts were not justified in a third of the transactions audited in the ESF and in the 28% of the transactions audited in the EAGGF-Guidance budgetary areas (para 3.53).

22.   The Court emphasised that it found weaknesses in the security database, which allow unauthorised users within the DG to make amendments to the database. The Court has therefore forwarded its recommendation to the Commission (para 3.57).

Follow-up of previous observations

23.   The Court believes that in relation to the final adjustments of the 48 cases examined, the Commission only took satisfactory corrective measures in 16 cases (para 3. 83- 84). Moreover, the Commission rarely applies Article 24 of Regulation (EEC) No 4253/88 in respect to reducing, suspending or cancelling Community assistance in cases where the Commission disagrees with the Member States' corrections.

24.  The Commission emphasises that the level of errors found by the Court is indicative of the "deficiencies that exist in the Member States' financial control of the funds which are typical of the management of any complex programme" rather than a significant proportion of Community funds being misspent. In response to the Court's criticism of substantive errors in payments, the Commission states that it will investigate the cases mentioned by the Court and will make necessary financial corrections ( para 3.44).

25.  Furthermore, the Commission takes on board the views of the Court's findings in relation to the information systems in place for managing the ESF. With regard to the unsatisfactory follow up of the 32 cases remaining, the Commission accepts that there was total or partial lack of a follow up for 9 of them and states that the amount to be repaid is estimated to be EUR 5 million (para 3.91-92).

Internal Polices — Chapter 4.

26.  The internal polices of the European Union consist of measures relating to vocational training, education, youth, culture, audiovisual media, information measures regarding energy policy, the environment, trans-European networks, transport, controls of nuclear safety, consumer protection and research and technological development (para 4.2).

27.  The Court's audit concluded that the legality and regularity of the underlying transaction for commitments and payments recorded continues to reveal a significant incidence of errors in payments in addition to a lower incidence of errors of commitments. The errors were both substantive and formal. The Court considers that more effort should be made in the selection of projects to establish the proposed costs and significantly, monitoring of the projects to verify the costs claimed (para 4.22). The Commission's control of claims submitted by beneficiaries must be improved (para 4.23).

28.  With respect to the follow up of previous observations i.e. the nine contracts managed by at the Transport and Energy DG and eight contracts by the Research DG, the Commission must make efforts to carry out the outstanding action agreed in the light of the audit's findings (para 4.26).

29.  In response to the Court's findings regarding the substantive errors on payments, the Commission argues that the act of making the payments themselves was not in error; they state that under the present cost statement system, unless an error can be detected when checking the cost statement, it has to be paid in full. Only an on-the-spot audit can detect the type of over charging which was found by the Court (para 4.16). As regards the Court's remarks on the Commission's follow up, the Commission states that it is aware of the importance of recovering entitlements in the interests of sound financial management and will act on the Court's recommendation (para 4.25).

Chapter 5 — External aid

30.  External aid comprises external measures, food aid expenditure, humanitarian or emergency aid and the external aspects of certain Community polices (fisheries and the environment). It should be noted that this chapter includes observations on the PHARE public administration programmes, the refugee return programme in Bosnia, sound financial management issues relating to the non-governmental organisations and the agreement between the European Community and the United Nations.

31.  The final budget was 6,477 million euro. As in the previous year most of the commitments were made in the fourth quarter of the year, in December. In relation to the PHARE programme, the PHARE and TACIS Special Funds, the co-financing activities managed by Non-Governmental Organisations in developing countries and expenditure for aid to Bosnia, the Court notes that because their audit covered only selected areas, its objective was not to draw general conclusions, but to determine if there were any significant problems regarding the legality and regularity of the transactions verified and the quality of the internal control systems (para 5. 14- 15). The Court concludes that these did not reveal significant legality and regularity errors. However, the Court points out that improvements are needed in internal control (para 5.32).

32.  As regards follow-up of previous observations, the Court states that in respect of Annual and Special Reports, there are inadequate procedures for evaluation of PHARE and TACIS programmes. However, they do point out that the introduction of an evaluation unit in DG SCR (Common Service for External Relations) has improved the situation (para 5.50-5.55).

33.  With regard to the legality and regularity of errors, the Commission explains that the systems have been already reinforced and improved.

Chapter 6 — Administrative expenditure

34.  This consists of expenditure on staff, accommodation and other miscellaneous costs. The available appropriations amounted to 4,504 million euro. The audit of the legality and regularity of the main administrative expenditure was satisfactory.

35.   The European Parliament, the Council, the Commission, the European Court of Justice, the Court of Auditors, the Economic and Social Committee and the Committee of the Regions have produced detailed comments.

Chapter 7 — Financial Instruments and banking activities

36.  This comprises operations in the form of loans and borrowings, guarantees, investments or expenses incidental to these operations.

Guarantee Fund for external actions

37.  The Edinburgh European Council of December 1992 decided to implement the Guarantee Fund for external Actions. The Fund was then established on 31 October 1994 and is drawn on if the beneficiary of a loan granted or guaranteed by the Community to or in a third country defaults. As from 31 December 1999, the Guarantee Fund has received funds from the budget amounting to 1, 638. 4 million euro (para 7.3). In 1999, the Guarantee Fund activities generated 41. 1 million euro in net interest revenue, while the 0.05 % annual commission payable to the EIB (European Investment Bank) for its financial management of the Fund amounted to 0.06 million euro (para 7.8). The Court points out that the rate of remuneration has not changed since 1995 while the Fund's total resources have increased. Therefore the Court urges that this annual fee should be reviewed.

38.  The Commission explains that at the end of each budgetary exercise the EU and the EIB under the convention regarding the management of assets of the Guarantee Fund may decide to review the level of the management fee. As a result of the considerable increase in the EIB's remuneration over the last 3 years the Commission will therefore ask the EIB at the end of the budgetary exercise 2000 to present an indication of the costs incurred. If necessary the Commission will negotiate a revision of the remuneration structure.

European Investment Fund (EIF)

39.  The EIF manages three projects financed by the Community Budget: "Growth and Environment European" pilot project, the "European technological facility — start up" and the "small medium- sized enterprise" (SME). With regard to the follow up of previous observations, the Court states that the implementation rate of the Growth and Environment" pilot project has improved (para 7.13). With regard to the other programmes, the Court states that the time delay between budgetary implementation and actual implementation of these programmes casts doubt on the principles of transparency and annuality. Therefore the Court recommends that the Commission provide an explanation on this matter in its balance sheet (para 7.15).

40.  The Commission notes the time delay and will find ways of improving the matter. The Commission will also provide an explanatory note in the balance sheet, so that the amounts corresponding to funds held by the EIF can be identified.

Financial mechanisms of the European Economic Area (FM-EEA)

41.  The objective is to reduce the economic and social disparities between the regions of the EEA. This is carried out by providing non-reimbursable grants as well as interest rebates on loan from the EIB. The Court notes that the EIB refused to give access to the documentation on four projects which the Court considers fall within its mandate (para 7.24).

42.  The Commission explains that it made available all the information at its disposal for the four projects noted in para 7.24. The EIB's comment on this lack of access is that the projects in question fell under the previous financing regime, namely EEA (European Economic Area) funds alone, and were paid out in 1994 before these countries' accession.

Chapter 8 — The Statement of Assurance and supporting information

43.  For the financial year ended 31 December 1999, the European Court of Auditors examined the consolidated accounts of the European Communities. The accounts for which the Commission are responsible are the consolidated revenue and expenditure account and balance sheet and explanatory notes. The Court continues to express serious criticisms of the legality and regularity of the payments and the transactions underlying them. The President of the Court of Auditors, Jan O. Karlsson, states that with regard to revenue, the audit did not show incidence of error in own resources. With regard to commitments, the audit showed that legal obligations entered into were 390 million euro in excess of available appropriations for international fishery agreements, Structural Operations and External Action (para 8.18). With regard to payments, the Court criticised a number of matters which included the failure to comply with regulations (para 8.23- 8.24) and systems weaknesses (para 8.25-8.30). In view of the Court's findings, the Court declined to provide an assurance that "the transactions underlying the financial statements are legal and regular except in respect of own resources, other commitments and the Institutions' staff expenditure".

44.  The Court explains that a medium term improvement requires a combination of general and specific measures including the clarification and simplification of Community financial regulations and improvement of control procedures, particularly at the level of Member States.

45.  The Court argues that the Commission needs to improve accounting framework, which is integral to the basic standards that could serve to homogenise the institutions' account (para 8.35-8.38). Nonetheless, the Court welcomes the Commission's important step of presenting to the budgetary authority an action plan of procedures to improve financial management (para 8.58).

46.  In response to the Court's criticism of the Commission's accounting framework, the Commission has commenced a methodological analysis of the accounting process with the aim of completing statements satisfying the accounting standards. In order to achieve this the Commission will be contracting high-level external assistance. The ECA report includes replies from the European Parliaments and the Economic and Social Committee (ESC).

Report on the Activities of the Sixth, Seventh and Eighth European Development Funds.

47.   The European Development Funds (EDF) are the product of international agreements between Member States and 71 African, Caribbean and Pacific (ACP) States and of the Council decisions concerning the association of 24 overseas countries and territories. These funds are for financing development projects and programmes. The Commission is responsible for their management. Payment for the sixth, seventh, and eighth EDF in 1999 amounted to 1, 275.4 million euro, as at 31 December, compared with 1, 439.6 million euro in 1998 (para 3).

48.  The Court highlights the fact that the system for managing the Stabex bank account (for the system for stabilising export revenue) leads, for short term economic results, to considerable funds remaining unused. This is contrary to the principles otherwise adopted for the management of the Lomé Conventions' other resources (para 13-15). The Court states that there have been delays in implementing programmable aid in relation to the sixth and seventh EDFs. The Court comments that this can in some cases jeopardise the sums initially earmarked by the Commission for the States concerned (para 16-17).

49.  In response to the comments on the Eighth EDF Stabex, the Commission states that the surplus consists of the remaining cash balance from the 7th EDF and Stabex payments made under the 8th EDF (para 14.) Moreover, the Commission states that ACP - EC Committee of Ambassadors agreed on 26 September 2000 to transfer the remaining Stabex funds to the special EDF account which will be used to finance development operations.

50.  In response to the Court's criticism of the delay in implementing programmable aid, the Commission points out that for the most part this is a result of internal conflict, endemic weakness or corruption in the partner country's public administration system (para 16).

The EDF statement of assurance

51.  The Court is satisfied that the accounts for the financial year 1999 reflect an accurate picture of revenue and expenditure for the sixth, seventh and eighth EDFs for the year.

52.  As regards the legality and regularity of the underlying transactions, the Court states that for the sixth, seventh and eighth EDFs for the financial year ended 31 December 1999 these are, on the whole, legal and regular. However, the Court stresses that the audits carried out by the Commission in the financial year of 1999 revealed evidence of ineligible expenditure and the Court thus recommends that they remedy this by recovering any funds paid unduly or reporting to OLAF any cases where fraud is suspected (para 52-53).

MINISTERIAL RESPONSIBILITY

53.  Treasury Ministers are responsible for the Community budget and matters concerning financial control generally. Other Ministers are concerned with those parts of the budget relating to their own Departmental interests.

(i)  Legal basis: Under Article 248 of the Treaty the ECA draws up an annual report on implementation of the Community budget to inform the procedure under Article 276 for discharging the Commission from its responsibility for implementing the budget for the year in question. The discharge is granted by the European Parliament on the recommendation of the Council. In granting a discharge, there may be obligations laid upon the Commission to report back upon actions taken to address matters of concern.

(ii)  European Parliament procedure: See (i) above.

(iii)  Voting procedure: The Council votes by qualified majority on whether to recommend discharge. The European Parliament decides whether to grant discharge by a majority of its Members and three fifths of the votes cast.

(iv)  Impact on UK law: None.

SUBSIDIARITY

54.  The Community budget is a matter of exclusive Community competence. The ECA is acting fully within its powers in producing the annual report on budget implementation in 1997, and the budget discharge procedure of which it forms part is entirely within the powers conferred by the Treaty on the Institutions involved.

POLICY IMPLICATIONS

55.  The European Court of Auditors' report on budget implementation in 1999 again repeats criticisms of financial weaknesses made in previous years. While the Court of Auditors declines to specify an average rate of error, the level of errors found is clearly unacceptable. But it is wrong to say that it is all fraud and waste. The Court emphasises that these errors do not represent the level of fraud against the Community budget. The report says that the bulk of errors represent such things as small overpayments to farmers and payments for expenditure which does not meet strict EU eligibility rules. Thus there are two aspects to the action needed to reduce errors: anti-fraud measures, and improvements in financial management and control.

56.  With regard to anti-fraud measures, the Court is concerned that the 1995 Convention on the protection of the Community's financial interests, and its protocols, has still not been ratified by all Member States. The UK was one of the first to ratify the Convention in autumn 1999. The government agrees that it is important for the remaining Member States which have not ratified the convention to do so as soon as possible.

57.  The Government strongly encourages and supports measures to reduce fraud against the EC budget. The Chancellor played a significant role in the creation of the new anti-fraud office, OLAF, and the Government is ready to cooperate fully with it to fight crime against the EC budget. During the year the Council agreed to substantially increase the staff complement of OLAF, bringing it to double that of its predecessor, UCLAF. The Government will continue to press the office to recruit the necessary staff as quickly as possible and to make full use of its new powers and independence from the Commission.

58.  The Government is working with the Commission and other Member States to improve financial management and control. This includes working to simplify regulations and provide clarification of what expenditure is eligible. The Commission is only directly responsible for around 20 per cent of Community expenditure, the remainder being administered by the Member States. The Government fully supports, through its membership of a group of Personal Representatives of Finance Ministers, the work of the Commission in developing measures which aim to improve co-ordination between the Commission and the Member States in general.

59.  The report welcomes the work which is being done as part of the Commission reform programme to address the weaknesses criticised by the ECA. The reform programme includes measures to improve internal control, strengthen contractual arrangements, and focus more strongly on results and performance measurement. It also includes a wholesale revision of the Financial Regulation in order to provide an appropriate regulatory framework for the reform of financial management, on which the Commission has recently produced a proposal (and on which I submitted an EM on 18 November). The Government has strongly backed Commission reform and expects the new Commission to act decisively. These reforms are far reaching and aimed at producing a cultural change within the Commission. They cannot be implemented overnight, and it is important that they are given support from all parties involved — the Commission, its staff, the European Parliament, and the Council.

60.  There are four criticisms of the UK in the report; these are listed in the attached Annex. A full response will be made by the UK to the Commission as part of the normal follow-up procedure and I will ensure that both Houses receive an advance copy.

FINANCIAL IMPLICATIONS

61.  The report itself does not have direct financial implications. To the extent that the audit has identified irregularities these may be followed up by the Commission, with implications for the final settlement of revenues or recovery of payments. To the extent that the Community's financial resources have been wasted in some areas they could have been employed on other spending within the limits of Financial Perspective ceilings and of available Own Resources; or could, in principle, have allowed the Community budget to be set at a lower level.

COMPLIANCE COSTS

62.  The report does not raise compliance costs on businesses.

TIMETABLE

63.  The report will be discussed by the Council's Budget Committee before consideration by ECOFIN in March 2001. The European Parliament should decide on discharge, on the recommendation of the Council, by 30 April 2001.



ANNEX A

REFERENCES TO THE UK

Para 2.26    Errors in over- declaration of surface area and in the number of head of livestock

Para 2.64    Late submission for clearance of accounts

Para 2.69    Correction made regarding the Over-Thirty-Months Scheme in relation to BSE

Para 2.113- 129  Dairy products imported at preferential rates, detailing action by UK authorities and collection of underpaid duties.

December 2000



ANNEX B

  Reports of the European Court of Auditors on which the European Scrutiny

  Committee has reported since 26 January 2000

  ESC No.

  ECA No.

  Subject

  European Scrutiny Committee Report

20970

5/1999

Phare Cross-Border Co-operation Programme (1994-98)

HC 23-xiii (1999-2000), 6 April 2000

21019

6/1999

The principle of additionality

HC 23-xiv (1999-2000), 12 April 2000

21023

9/1999

FAIR programme (Fisheries, Agriculture and Agro-Industrial Research)

HC 23-xvi (1999-2000), 10 May 2000

21444

1/2000

Classical Swine Fever

HC 23-xvi (1999-2000), 10 May 2000

21084

2/2000

Aid to Bosnia and Herzegovina

HC 23-xiv (1999-2000), 12 April 2000

21147

3/2000

European Social Fund and EAGGF — measures to assist employment of young people

HC 23-xviii (1999-2000), 17 May 2000

21163

4/2000

Rehabilitation actions for ACP countries as an instrument to prepare for normal development aid

HC 23-xviii (1999-2000), 17 May 2000

21131

5/2000

Court of Justices expenditure on buildings

HC 23-xvi (1999-2000), 10 May 2000

21250

6/2000

Interest subsidies on loans from the European Investment Bank

HC 23-xxi (1999-2000), 14 June 2000

21194

7/2000

International Fund for Ireland and Special Support Programme for Peace and Reconciliation in Ireland

HC 23-xx (1999-2000), 7 June 2000

19921

8/2000

Community measures for disposal of butter fat (New Zealand dairy imports)

HC 23-xxii (1999-2000), 21 June 2000

21266

9/2000

Trans-European Networks — telecommunications

HC 23-xxvi (1999-2000), 26 July 2000)

21394

10/2000

Community support scheme for olive oil

HC 23-xxviii (1999-2000), 1 November 2000 (for debate in European Standing Committee A, not yet held)

21505

12/2000

Commission management of Union support for development of human rights and democracy in third countries

HC 23-xxxi (1999-2000), 29 November 2000

21396

13/2000

Expenditure of the European Parliament's political groups

HC 23-xxix (1999-2000), 15 November 2000

21855

14/2000

Greening of the CAP

HC 28-iii (2000-01), 17 January 2001

21650

15/2000

16/2000


Cohesion Fund

Phare and TACIS programmes


HC 23-xxx (1999-2000), 22 November 2000

21811

17/2000

Commission's control of the reliability and comparability of Member States' GNP data

HC 28-iii (2000-01), 17 January 2001



PROTECTION OF THE COMMUNITIES' FINANCIAL INTERESTS

(21887)

13572/00

COM(00) 718


Protecting the Communities' financial interests — the fight against fraud: Commission's Annual Report 1999.
Legal base:
Document originated: 8 November 2000
Forwarded to the Council: 13 November 2000
Deposited in Parliament: 11 December 2000
Department: HM Treasury
Basis of consideration: EM of 20 December 2000
Previous Committee Report: None
To be discussed in Council: No date set
Committee's assessment: Politically important
Committee's decision: For debate in European Standing Committee B (together with the Court of Auditors Annual Report for 1999)

Background

  2.1  On 26 January 2000, we reported on the Commission's annual report for 1998 on protecting the Communities' financial interests and the fight against fraud.[9] On 25 October 2000, we reported on a Commission Communication presenting a strategy for protection of the Communities' financial interests. We noted that it appeared to contain little that was new or different in terms of tackling fraud and irregularity.

The document

  2.2  This document is the eleventh Annual Report by the Commission on protecting the Communities' financial interests and the fight against fraud. It is divided into three main sections. The first highlights Community-wide developments, both legislative and administrative, designed to improve the protection of the Communities' financial interests. The second provides some statistical analyses of the overall level of fraud and irregularity. The third outlines developments in co-operation between the Commission, the Member States and other Community Institutions in this area. Annexes provide supporting data. The document also includes a report from the Commission summarising the communications made by Member States on their inspection and findings as regards traditional own resources (chiefly, Customs and Excise duties collected by the Member States and assigned directly to the Community budget).

  2.3  The first section, on relevant legal and administrative developments, refers to:

  • the regulatory and administrative arrangements establishing the new European Anti-Fraud Office (OLAF) within the Commission. OLAF replaced the Commission Task Force for the Co-ordination of Fraud Prevention (UCLAF). OLAF can operate independently of the Commission and may, of its own volition, decide to investigate any matter within a Community Institution or body, and can send files to the national judicial authorities. It also has functions in advising on, for example, the drafting of Community legislation from a fraud prevention perspective;

  • legislative proposals (now adopted) for protection of the euro against fraud;

  • proposals for strengthening existing Community legislation against money laundering (now agreed);

  • further exploration of the possibilities of reinforcing the criminal law protection of European financial interests — in particular the need for a "corpus juris" which, in effect, would introduce penal provisions for the purposes of protecting the Communities' financial interests;

  • linked to the wider administrative reforms within the Commission, a comprehensive re-casting of the Commission's management and financial control methods, splitting internal audit from expenditure decisions and decentralising such decisions to directorates;

  • a major re-casting of the key Financial Regulation (which we have currently under scrutiny);

  • amendments to the Community transit system and the Common Transit Convention (dealing with the movement of goods imported into the Community and the payment of Customs dues);

  • reforms within the Common Agricultural Policy, including simplified legislation, for example, in relation to export refund arrangements which have been a particular area for irregularity and fraud;

  • comprehensive improvements to the regulatory framework for the management of the Structural Funds, to come into operation with the new programme period for the funds, 2000-2006; and

  • proposals for amending existing Community legislation in respect of the awarding of public procurement contracts, including provisions to reduce the risks of dishonest tendering.

  2.4  During 1999, the Commission also put in hand action for improving the preferential tariff arrangements and for following up the results of its major enquiry into the functioning and effectiveness of administrative co-operation and mutual assistance between Member States in the VAT sector.

  2.5  In the second sector of the report, dealing with co-operation with, and partnership between, Member States, the Commission refers to its intention to have more regular meetings of the Advisory Committee for the fight against fraud (CoCoLAF). It notes that eight Member States had totally or partially ratified the conventions and protocols on protecting the Communities' financial interests (the UK has ratified all the instruments concerned). It notes that, at the end of 1999, the Justice and Home Affairs Council adopted a report designed to improve judicial co-operation between Member States and the EU, specifically relating to transnational organised networks. It also refers to training provided by OLAF to Member States to improve the knowledge of national staff in combatting fraud; and to steps taken to help candidate countries, in particular Poland, to strengthen their actions against fraud and organised crime.

  2.6  In the third section, the report provides statistics and some analyses about fraud and other irregularities. It emphasises a number of points that need to be kept in mind:

  • fraud and other irregularities occur on the revenue side of the Communities' budget as well as on the expenditure side; as regards revenue, it is Member States which are wholly responsible and over half of the revenue (i.e. that from Custom and Excise dues and VAT) is known to be subject to considerable fraud;

  • on the expenditure side of the budget, Member States are responsible for over 80% of the budget (principally in respect of the Structural Funds and the CAP);

  • whilst the effect on the Communities' budget, and hence on Community tax payers, is the same, irrespective of the form of the irregularity committed, the actions to be taken to counteract such losses must reflect the nature of the irregularities. Mistakes made by claimants or by paying agencies which arise apparently accidentally must be rectified as far as possible e.g. by improving administrative practices, simplifying rules and so on; irregularities committed intentionally, particularly where criminal fraud is involved, also require appropriate penalties and are more likely also to give rise to the need for tighter administrative controls or further legislation;

  • the distinction between fraud and other irregularity is an important one, but it is inherently difficult to reach a view, at any one point in time, about the true scale of one as against the other; irregularities which appear at first sight to be merely errors may turn out on further examination to be fraudulent, and vice versa; the final judgement in many cases will only be made after the competent courts have made decisions; and

  • because of these difficulties, and because of the continuing inconsistencies in the way in which Member States report irregularities to the Commission, any figures purporting to show the scale of fraud and other irregularities must be treated with caution.

  2.7  In our Report last year on the Commission's 1998 report, we noted that Member States notified over 5,000 cases of fraud or irregularity, involving about 577 million euros and that an estimated 20% of these cases, in number and value (i.e. 115.4 million euros), involved a suspicion of fraud. This year's report shows the number of fraud cases notified by Member States as involving 190 million euros, or, about 31% of the total estimated cost of all irregularities reported, including fraud (618,957 million euros). The Commission notes, however, that the figures must be treated with caution. In addition OLAF reported that it handled 252 new cases during 1999, of which a significant number involved criminal conduct.

  2.8  On the revenue side, there is a decline in the area of traditional own resources. However, the apparent decline in that area may be misleading. The figures from OLAF are calculated on a basis of a minimum impact, so that, for example, 17 million euros was the estimated figure for new cases involving cigarettes opened in 1999, but the total loss could amount to about 325 million euros. An accurate figure will only be possible once investigations have been terminated. The scale of organised "economic crime" in cigarettes may be approaching the estimated scale of alcohol trafficking, estimated in the report as over 500 million euros. The report says that alcohol trafficking and cigarette smuggling now vie with one another as the most serious form of fraud, although it comments that some Member States do not yet seem prepared to draw the necessary conclusions. Fraud in these areas shows up in terms of loss of tax revenue to Member States, but has the effect of increasing their GNP contributions to the Communities' budget.

  2.9  On the expenditure side, in its sectoral analysis, the report says that in the area of agricultural expenditure fraud and other irregularities are declining, possibly reflecting the changing balance of expenditure away from export refunds and towards direct payments, which are less open to irregularity. However, the category of expenditure most affected is still export refunds (38% of the overall budgetary impact of irregularities) even though export refunds made up only 14% of the total EAGGF Guarantee Section expenditure). In the other main area of budgetary expenditure — structural measures — the report indicates a continuing substantial increase, both in terms of the number of new cases reported by Member States and in terms of their budgetary impact. The number of reported cases has risen by over 70%, with the budgetary impact increasing three-fold. OLAF opened a relatively small number of investigations in co-operation with Member States but their budgetary impact increased more than three-fold as compared with 1998. The trend for Member States to notify more cases of irregularity may, or may not, be indicative of a real rise in irregularities. At the end of 1999, the total amount still to be recovered in respect of cases reported by the Member States was 234.8 million euros for the period 1994-1999. The amount effectively recovered in respect of those reported cases was 87 million euros, or one quarter of the amount declared to be affected by irregularity.

  2.10  As regards the Commission's direct expenditure, OLAF opened 107 new investigations in 1997 with an estimated overall budgetary impact of 73 million euros. Almost three quarters of these cases concerned "external policies" (for example the programmes of support to Central and Eastern Europe).

  2.11  As regards the recovery of amounts involved in cases of fraud and other irregularities, the report regards the situation as remaining unsatisfactory. However, it says that, in 1999, the Commission stepped up measures to ensure more rapid and efficient recovery procedures, working in co-operation with the competent authorities in the Member States.

  2.12  The final section of the report notes that the implementation of Article 280(5) EC requires the Commission to report on Member States' activities to protect the Communities' financial interests. That article came into force only in May 1999. The Commission says that more time is needed to develop this report. It intends to produce a summary incorporating responses from Member States as and when they are available. The Commission's report for 2000 will cover Member States' activities in 1999.

  2.13  The report does include a summary report on communications from Member States on their inspection activities and findings of principle in the area of traditional own resources (customs dues). The report notes that there has been an increase in the number of reported cases but a fall in the established amount. Last year the Commission concluded that the data from Member States was insufficiently comparable to allow valid conclusions to be drawn. It notes again this year a similar lack of comparability in the information. However, it considers that at least the problems of securing consistency are now better understood and there will be continuing consideration in the Advisory Committee on Own Resources. The table at Annex 3 of this report shows that the amount of fraud/other irregularity established for 1999 was 339 million euro, a decrease from the 1998 figure of 374 million euro. There has been an increase in the number of the reported cases, but a fall in the established amounts. This could indicate a reduction in the major cases of fraud or an increased overall capacity of detection by administration.

The Government's view

  2.14  In her Explanatory Memorandum of 20 December 2000, the Economic Secretary to the Treasury (Miss Melanie Johnson) welcomes the setting up of OLAF and the increased resources it will have compared with its predecessor. She notes that caution must be exercised in analysing trends and making comparisons. She emphasises the distinction between fraud and irregularity, and points out that most of the cases in the report's statistics do not refer to deliberate fraud. She concludes that the Government continues to give a high priority to measures to improve financial management and the fight against fraud and that the Government will continue to play an active role in that area through CoCoLAF and in ECOFIN discussions.

Conclusion

  2.15  This report helpfully brings together an account of a wide range of measures which the Commission and Member States have taken forward in 1999 and subsequently to prevent fraud and other irregularity, to identify it more effectively, and to develop more appropriate responses. We have reported on all the specific legislative changes that have been made, or are in progress. The report brings home again the responsibilities of the Member States as well as the Commission in combatting irregularity and fraud. Whilst recognising that the data provided in the report must, as the Commission says, be interpreted with caution, it seems likely that most of the estimates of the scale of fraud and irregularities derived from them err on the prudent side.

  2.16  The figures derived from cases reported by Member States show a significant increase in the value of reported cases which may involve fraud. Whether or not the underlying level of fraud is increasing, the figures give cause for continuing concern. Member States, as well as the Commission, clearly need to increase their efforts, in particular in the combatting of trans-national fraud. This particularly affects the revenue side of the Communities' budget where administrative responsibility for collection rests wholly with Member States but where there is also a premium on co-operation. We note, with concern, the slow progress being made by Member States in signing up to the Amsterdam Protocols on protection of the Communities' financial interests.

  2.17  We report in paragraph 1 of this Report on the Court of Auditors' Annual Report for 1999 and have recommended it for debate in European Standing Committee B. We recommend that this document be debated at the same time, so that they can be considered together.



EUROPEAN AVIATION SAFETY AGENCY

(21933)

14329/00

COM(00) 595


Draft Regulation on establishing common rules in the field of civil aviation and creating a European Aviation Safety Agency.
Legal base: Article 80(2) EC, co-decision, qualified majority voting
Document originated: 27 September 2000
Forwarded to the Council: 5 December 2000
Deposited in Parliament: 10 January 2001
Department: Environment, Transport and the Regions
Basis of consideration: EM of 18 January 2001
Previous Committee Report: None; but see (20831) 13735/99: HC 23-xxiv (1999-2000), paragraph 2 (12 July 2000)
To be discussed in Council: June 2001
Committee's assessment: Politically important
Committee's decision: For debate in European Standing Committee A (together with the Commission Communication on a Single European Sky already recommended for debate)

Background

  3.1  Civil air transport in the Community has been progressively liberalised since 1988. There are now common rules which address licensing, market access, pricing and the application of the Community's competition rules. But there is no Community-based system for establishing common rules in respect of aviation safety and environmental protection. Existing Community arrangements are based on Regulation 3922/91 EEC on the harmonisation of technical requirements and administrative procedures, and on the work of the Joint Aviation Authorities (JAA). The JAA is an informal organisation set up by the aviation authorities of a number of European countries in 1990. There are currently 24 members of the JAA, including all 15 Member States. All the rules adopted through the JAA machinery then have to be processed through the Community machinery which can lead to delays and difficulties where attempts are made to reopen issues agreed through the JAA process. The further development of aviation safety regulation has been under discussion in the Community for some years. In 1998, the Council mandated the Commission to negotiate the setting up of a new European Aviation Safety Authority as an international organisation. Member States' representatives agreed a draft outline Treaty in October 1999. However, some Member States flagged up potential constitutional problems in ratifying such a Treaty and the Council then asked the Commission to draw up proposals for an alternative Community-based system, involving the creation of a new Community agency. In June 2000, the Transport Council invited the Commission to make a proposal for such an Agency.

The document

  3.2  The Commission has now published a draft Regulation providing the framework for a new system of aviation safety regulation, including a new Community Agency. In his Explanatory Memorandum of 18 January 2001, the Parliamentary Under-Secretary of State, Department of the Environment, Transport and the Regions (Mr Chris Mullin) summarises the proposal as follows:

"—  The Council and the European Parliament would set the basic principles for safety regulation (through a Council Regulation), including essential requirements setting the levels of safety and environmental protection to be met. The current draft Regulation sets out the basic principles and essential requirements in areas related to the certification of aeronautical products and appliances, whereas those for other areas — personnel (for example, flight crew licensing), air transport operators, airports and air traffic management (ATM) would be the subject of further Regulations;

"—  The Commission would be delegated powers to adopt, through comitology procedures, the necessary procedural rules to implement the essential requirements; and

"—  The Agency would grant certificates attesting the conformity of types of aeronautical products with the essential requirements and would be charged with drawing up technical codes to guide industry. It would help the Commission develop proposals for basic principles and essential requirements in the other areas (i.e. those not covered by the current proposal). The Agency would also monitor the implementation of this and subsequent Regulations in Member States, in particular where Member States, rather than the Agency, continue to issue certificates (for example, Certificates of Airworthiness for individual aircraft), licences (for example, pilots licences) and other approvals."

  3.3  The Minister notes that the Transport Council in December 2000 agreed Conclusions welcoming the proposal as a good basis for future work and highlighting specific issues to be addressed.

The Government's view

  3.4  The Minister says that the Government has consistently supported proposals to establish a new European Aviation Safety Organisation, recognising the inadequacies of the existing JAA-based arrangements. It takes the view that an international organisation is unlikely to be achievable because of the constitutional difficulties for some Member States. It considers that the Community model mapped out in the Commission's proposal could provide the building blocks for the creation of a new Agency, sufficiently robust and professional to command the support of the industry. He notes, however, that the issues set out in the Transport Council's Conclusions in December 2000 need fully to be addressed. He does not identify what these issues are.

  3.5  The Minister notes that delegation of tasks to an Agency is permissible in Community law, provided it is controlled by reference to objective criteria. He recalls that there are other Agencies created by Council Regulation, so the proposal is not unprecedented. The Government is concerned, in particular, that the proposed Agency should be delegated sufficient executive powers to ensure that safety rules and certification decisions are adopted more efficiently and effectively than under the present arrangements, and that it attracts the best quality leadership and staff. He says that other key issues to be fleshed out include the involvement of the national safety regulators in the work of the Agency and the interface between their respective activities; the transitional arrangements between the present arrangements, especially the work of the JAA, and a new system; and the participation in the Community arrangements of non-EU countries. The Government has held regular meetings with the Civil Aviation Authority and with the UK industry (manufacturers and airlines). He says that both support the principle of developing a Community solution and that they share the Government's analysis of the key issues to be addressed.

  3.6  The Minister notes that, at this early stage, a Regulatory Impact Assessment cannot be produced, though he thinks that the creation of a more efficient European system should, in time, reduce the burdens on UK industry. The proposed regulation is very much a framework measure and, accordingly, the Minister concludes that a detailed picture of costs and benefits is unlikely to emerge until the more detailed implementing measures are developed.

  3.7  The Minister notes, in particular, that funding details have yet to be worked out. The proposal put forward by the Commission envisages that the Agency should be financed partly through a Community subsidy and partly by fees for services to users, such as charges for certificates. The Minister says that the details of the balance between these two sources of funding have yet to be discussed.

  3.8  The Minister also tells us that discussions to date have thrown up some significant questions about the scope of the new system in its initial stages — for example, whether the Agency would deal with the type of certification of all aircraft or only those over a certain size — which will fundamentally affect the regulatory impact. He promises to produce a Regulatory Impact Assessment when there is further clarity on the scope of the proposal and the likely costs and benefits.

  3.9  As regards subsidiarity, the Minister says that "the proposal has implications for the extent of Community competence in this area. The Community already has competence in the field of aviation safety through Regulation 3922/91 EEC on the harmonisation of technical requirements and administrative procedures in the field of civil aviation." He explains that Regulation 3922/91 provides for the Council to adopt requirements draw up by the JAA and that, as more of these requirements are adopted, more areas within the field of aviation safety will fall within the competence of the Community, with matching reduction in the areas where Member States have competence. He notes that the proposed draft Regulation would repeal Regulation 3922/91 and establish Community competence in those areas where it sets safety requirements. In those areas where Member States retain competence, the draft Regulation provides for the Agency to deliver Opinions upon which the Commission will make proposals. The Minister says that the Government accepts the case for increased Community competence on the basis that experience to date suggests that the objectives sought cannot be achieved efficiently and effectively by Member States themselves.

  3.10  As regards the timetable, the Minister notes that the Swedish Presidency intends to seek a Common Position at the Transport Council in June 2001.

Conclusion

  3.11  There seems to be strong support in the aviation industry, in the United Kingdom and elsewhere in the Community, for the objectives behind this proposal and, broadly speaking, for the practical arrangements proposed. However, we note that the Government's support is qualified by its concern that the issues set out in the Transport Council's Conclusions in December should be fully addressed. It would have been helpful if the Minister had spelt out what these were. As he did not do so, we now ask him for that information.

  3.12  We note what the Minister says about Community competence. We ask him to tell us how far the proposal, if adopted, might affect the capacity of the United Kingdom to reach bilateral agreements, for example with the United States aviation authorities about the mutual recognition of certified aviation products and servicing arrangements.

  3.13  We note that it appears to be the intention that there should be subsequent Council Regulations extending the areas covered by the proposed Community arrangements. We see that these could extend, at some time in the future, to matters such as air traffic management (including air traffic control), so there seems to be a link between this proposal and others on which we have reported, including that relating to the so-called "Single European Sky". The latter proposal, on which we reported last year, was principally intended to address the problems of growing delays in civil aviation in Europe as a result of congested airways. In that context, there have been strong arguments for establishing new high-level agreements on a Community approach to the allocation of European civil air space, and its interface with military flights. This could include a new Community organisation for the purpose.[10]

  3.14  In our report on the "Single European Sky" proposal we commented on the linked issue of the Community's accession to EUROCONTROL, currently blocked because of the dispute over Gibraltar. We also raised questions about the possible consequences of these developments, including a larger role for EUROCONTROL. We recommended that the Commission's proposals in respect of the Single European Sky, including the issue of Community accession to EUROCONTROL, be debated in European Standing Committee A. In view of the importance of the proposal on which we now report, and its linkages with these other matters, we recommend that the proposal be discussed in European Standing Committee A, and that it be debated at the same time as that other document. In the meantime we ask the Minister to respond to our questions.


1  (20764) OJ No. C 349; see HC 23-vi (1999-2000), paragraph 11. Back

2  (21070) 6302/00; see HC 23-xiv (1999-2000), paragraph 8. Back

3  (21116) -; see HC 23-xv (1999-2000), paragraph 9. Back

4  (21749) 12598/00; see HC 23-xxxi (1999-2000), paragraph 11. Back

5  The Integrated Administrative and Control System (IACS) concerning agricultural expenditure, and Council Regulation (EC) No. 2064/97 on financial control of the structural funds.  Back

6  The revenue side of the budget. Back

7  (21887) 13572/00; see HC 28-v (2000-01), paragraph 2. Back

8  In respect of central and eastern European countries and former members of the USSR respectively. Back

9  (20781) - ; see HC 23-vi (1999-2000), paragraph 13. Back

10  (20831) 13735/99; see headnote to this paragraph. Back


 
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