Select Committee on European Scrutiny Twelfth Report


SOUND FINANCIAL MANAGEMENT AND FIGHTING FRAUD


(22439)
9208/01
COM(01)255/2

(22438)
9207/01
COM(01) 254

Protecting the Communities' financial interests — the fight against fraud:
Commission's Annual Report 2000.


Protecting the Communities' financial interests — the fight against fraud:
Action Plan for 2001-2003.


Legal base:
Document originated:(a) 23 May 2001
(b) 15 May 2001
Forwarded to the Council: (a) 23 May 2001
(b) 17 May 2001
Deposited in Parliament: 20 June 2001
Department:HM Treasury
Basis of consideration: EMs of 20 June 2001
Previous Committee Report: None
To be discussed in Council: None planned
Committee's assessment:Politically important
Committee's decision:(Both) For debate in European Standing Committee B, together with the Court of Auditors' Annual Report for 2000



The documents

  2.1  Document (a) is the Commission's twelfth Annual Report on protecting the Communities' financial interests. It is divided into three main sections. The first covers legislative initiatives to improve the protection of the Communities' financial interests. The second section covers the activities of Member States and includes, for the first time, a summary of the measures implemented in 1999 and 2000 by Member States for the purpose of protecting the Communities' financial interests. The third section includes an analysis of data on fraud and irregularity reported by Member States or investigated by OLAF (the European Anti-Fraud Office), together with statistics on recovery of funds and any follow-up.

  2.2  In the first section, the Commission notes that there was little change in the framework legislation, pending ratification of the Fraud Convention and its protocols by the Member States. It summarises the new legal instruments in the areas of money laundering, currency counterfeiting, counterfeit goods and piracy, public procurement, judicial instruments, judicial cooperation in penal matters, and crime prevention generally. Noteworthy developments identified in the section include:

    —  reforms to the procedures to combat transit fraud, involving customs duties;

    —  proposals for further legislation on fraud against VAT and excise duties;

    —  changes to the level of collection expenses, which will allow Member States to retain 25% [1];

    —  strengthened controls on banana imports following the discovery of fraud in using false banana import licences and improvements in the control and audit system for CAP payments generally;

    —  two proposals for Regulations and guidelines on the improvement of the financial management and control of Structural Funds expenditure and the application of financial corrections in the event of irregularities;

    —  measures to strengthen financial management and the quality and speed of implementation of external aid projects;

    —  a proposal to recast the Financial Regulation with a view to improving financial management; and

    —  initiatives to improve financial management and control forming part of the reform of the Commission, including setting-up the Internal Audit Service, new audit sections within the Directorate Generals and the audit monitoring committee; and initiatives to 'fraud­proof' future legislation and financial management rules and procedures as much as possible.

  2.3  The section also covers the operations of OLAF, including its structure and its powers of investigation vis-à-vis the European Central Bank and European Investment Bank. It provides specific examples of OLAF's cooperation with member states, candidate states and third countries.

  2.4  The second section covers the measures adopted by Member States with a view to protecting the Community's financial interests. This is a new section and reflects the requirement under Article 280 (5) EC for the Commission, "in co­operation with the Member States", to submit an annual report to the European Parliament and the Council on the measures taken to counter fraud affecting the financial interests of the Community. The information is presented in the form of a table under the following broad headings:

    —  Main legislative and administrative changes;

    —  Main changes in the organisation of control services;

    —  Co­operation between the competent authorities;

    —  The recovery issue; and

    —  Highlights of the fight against fraud.

  2.5  The report notes that the only Member States to have fully completed the ratification process of the Fraud Convention and its three protocols are the UK, Denmark, Greece, Spain, France and Portugal. Italy has also completed ratification, but the Commission had not received formal notification. Other States (Germany, Austria) have ratified the Convention but not all of the protocols, and the process is under way in the remaining States.

  2.6  The third section sets out figures on the level and nature of detected fraud and irregularities. In last year's report, the Commission attempted to separate cases of fraud from those of irregularities (i.e. transactions not fully supported by proper documentation but not necessarily fraudulent). But this distinction has not been repeated this year, possibly recognising that practices differ between Member States.[2]

  2.7  The tables below set out the basic figures. In 2000 the total number of detected cases involving fraud and irregularities was 6,915, compared with 6,401 in 1999, an increase of 8%. The amounts involved in these cases rose to _2,031 million in 2000, an increase of 141% compared with 1999. Of the _2,031 million, some _1,144 million (1.3% of the EU budget) related to fraud or irregularity in respect of revenue, i.e. against the EU's own resources, and _885 million (1% of the EU budget) involved fraudulent expenditure, of which _580 million was agriculture expenditure and _156 million related to external actions, on which OLAF concentrated in 2000.

  2.8  These totals comprise cases communicated by Member States and cases investigated by OLAF. The former consisted of 2,403 new cases of fraud or irregularity on the revenue side of the EU budget amounting to _535 million and 4,200 cases on the expenditure side amounting to some _600 million. According to the Explanatory Memorandum, the large increase in the number of irregularities detected is almost entirely due to the inclusion of figures relating to the New Zealand butter case in the UK.

  2.9  OLAF identified 120 cases, representing an estimated amount of about _600 million relating to revenue — more than an eight-fold increase (758%) compared with 1999 and probably reflecting, in part, the increased effectiveness of OLAF in tackling smuggling. In addition to the revenue cases, OLAF investigated some 200 expenditure cases involving _300 million.

  2.10  The Commission points out that during the year there were some notable successes in the fight against fraud, especially in tackling illicit trafficking in products containing butter, illegal "dollar" banana imports into the EU under cover of false import licences and cigarette fraud.[3]

  2.11  Document (b), the Commission's Action Plan for 2001-2003, sets out the measures and initiatives to be implemented in the context of the strategic approach adopted in 2000 to counter fraud and irregularities.[4]

  2.12  The Commission, other EC institutions and the Member States are all involved in the management of EC funds, giving them a shared interest in countering fraud, which is reflected in the Action Plan for 2001­2003. The four main objectives of the Action Plan are described by the Commission as follows:

    "—  developing an overall anti­fraud policy: the approach is based on Article 280 of the Treaty, which combines measures to prevent and combat fraud in order to afford effective and equivalent protection throughout the Community. Concrete measures will include a communication on "fraud­proofing", i.e. legislation will be systematically submitted to a risk analysis to filter out highly sensitive cases, particularly where there could be an impact on the Community's financial interests; a system is to be set up for exchanging information between Member States, allowing tenderers who have been convicted of certain offences to be excluded from public contracts; training and assistance programme in the area of the protection of the euro against counterfeiting; the conclusion of a anti­fraud cooperation agreement with Switzerland;

    —  fostering a culture of cooperation between all the responsible authorities: The creation of OLAF has given the European Union a powerful instrument for the protection of the Communities' financial interests. The Commission now wants to optimise this instrument, structuring the exchange of information and putting in place innovative methods of cooperation so that OLAF can fully discharge its functions and, in particular, provide an overview at Community level.

    —  an inter­institutional approach to preventing and fighting fraud and corruption: the aim is to make all Commission officials and beneficiaries aware of the ethical aspects of financial management and to lay down guidelines to prevent any conduct which might harm the Community's political, legal and financial interests.

    —  strengthening the criminal law dimension of the fight against fraud: the most serious cases of wrongdoing must be subject to criminal proceedings, but there are still obstacles to be overcome here. To this end, the Commission plans to encourage the adaptation of national criminal law policies to the new Treaty obligations and the development of a strategy based on close and regular cooperation with the judicial authorities in the Member States and the various extra­Community bodies. Concrete measures will include a Draft Directive on the implementation of certain provisions of the Conventions on the protection of the EC financial interests and, also a protocol with Eurojust. The Commission will adopt a Green Paper on establishing a European prosecutor by the end of 2001 and a broad consultation will take place throughout 2002."

The Government's view

  2.13  In her Explanatory Memorandum, the Economic Secretary to the Treasury (Ruth Kelly) welcomes the Commission's Annual Report. She comments that the report shows that much has been achieved in the form of new legislation, specific improvements and reforms in particular sectors and efforts to help applicant countries. However, she notes that much still needs to be done and that the Government will continue to support further measures. In particular, the Government has pushed for a clearer distinction to be made between cases of suspected fraud, irregularities, and administrative negligence. She says that work is being undertaken on this. As regards the increase in detected cases, she tells us that:

    "The Government is disappointed that the levels of fraud and irregularity reported by Member States show a large increase in the agricultural and own resources sectors; however it is important to note that these increases are partly due to increased effectiveness of controls, and partly to the inclusion of figures for a small number of large-scale, long-running cases... and that it does not necessarily mean that the error rate is generally increasing. The Government welcomes the efforts of OLAF, and the co-operation of the Member States concerned, in the detection of fraud.

    "The Government welcomes most of the measures and proposals in the Report; however it does not believe that it is necessary to relaunch the debate on a European Public Prosecutor. This proposal was not taken up by the Nice European Council and the Government feels it is too soon to re-open the debate now."

  2.14  As regards the Action Plan, the Minister tells us:

    "The Government welcomes this Action Plan, which shows that the Commission is taking seriously the need to improve financial management of Community funds and preventive measures to reduce the amount of fraud and irregularity against the budget. The Government had previously welcomed the Commission's Global Strategy, on which this Action Plan is based. The Government particularly welcomes the inclusion of target dates and allocation of responsibility in this plan, which will allow better monitoring of progress. The Government also supports the Council's call at the June ECOFIN, for next year's 'Fight against Fraud' report to include a financial evaluation of the progress of this Action Plan.

    "The Government supports most of the elements of the Action Plan; however it does not believe that it is necessary to relaunch the debate on a European Public Prosecutor. This proposal was not taken up by the Nice European Council and it is too soon to re-open the debate now. Neither does the Government support the Commission's proposal for a new Directive with the intention of speeding up the convergence of Member States'material penal law concerning fraud, corruption and money laundering. The UK believes the correct way forward is for all Member States to complete ratification as soon as possible. The UK ratified the Fraud Convention and its protocols in October 1999."

Conclusion

  2.15  As usual, the statistics on fraud and irregularities need to be handled with caution. It is highly unlikely that they tell the full story, though they also include some double counting. Nevertheless, the figures are useful because they represent real cases of detected fraud and irregularities. As such, it seems that some of the increase in cases reflects an intensified effort to counter fraud and irregularities by the Commission and Member States. We welcome this.

  2.16  We are pleased to see that the progress of the Action Plan will be closely monitored, which is especially important in view of the slow progress in establishing OLAF.

  2.17  We recommend that the Annual Report and Action Plan be debated in European Standing Committee B and that they be debated alongside the Annual Report from the Court of Auditors (on which we report in paragraph 4 below). This debate will provide the House with a good opportunity to consider the rising number of cases of detected fraud and irregularities against the EC's financial interests and to express a view on the counter-measures, including the proposal for a European Public Prosecutor, set out in the Action Plan.


Total cases of fraud and irregularities communicated by the Member States and under investigation by OLAF

Area of the budget
Number of cases
% change
Amount (in _ m)
% change
  
2000
1999
  
2000
1999
  
Traditional own resources
2,523
2,832
-11%
1,144
337
239%
EAGGF Guarantee
2,988
2,749
9%
577
287
101%
Structural actions
1,256
713
76%
139
146
-5%
Direct expenditure
148
107
  
171
73
  
Total
6,915
6,401
8%
2,031
843
141%


Cases of fraud and irregularities communicated by the Member States

Area of the budget
Number of cases
% change
Amount (in _ m)
% change
  
2000
1999
  
2000
1999
  
Traditional own resources
2,403
2,752
-13%
535
266
101%
EAGGF Guarantee
2,967
2,699
10%
475
232
105%
Structural actions
1,217
698
74%
114
121
-6%
Total
6,587
6,149
7%
1,124
619
82%


Cases under investigation by OLAF

Area of the budget
Number of cases
% change
Amount (in _ m)
% change
  
2000
1999
  
2000
1999
  
Traditional own resources
120
80
50%
609
71
758%
EAGGF Guarantee
21
50
-58%
102
55
85%
Structural actions
39
15
160%
25
25
0%
Direct expenditure
— Internal policies
— External policies
  
57
91
148
  
  
107
  
  
14
157
171
  
  
73
  
Total
328
252
30%
907
224
305%




1   Effective from 1 January 2002 for amounts recorded after 31 December 2000. Back

2   The Consultative Group for the Co­ordination of the Fight against Fraud (COCOLAF) has created a working group to look at the production of guidelines on the definition and reporting of fraud/irregularity. Back

3  Bananas from Central and South America where US companies have large banana plantations. Back

4  (21444) 10020/00; see HC 23-xxvii (1999-2000), paragraph 17 (25 October 2000). Back


 
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