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Session 2001- 02
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Standing Committee Debates
Fight Against Fraud

Fight Against Fraud

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European Standing Committee B

Tuesday 12 February 2002

[Miss Ann Widdecombe in the Chair]

Fight Against Fraud

[Relevant Documents: European Union Document No. 7255/01, the Commission Report on the third review of the structure and rates of the excise duties on tobacco products and draft Directive amending Directive 92/79/EEC on the approximation of taxes on cigarettes, Directive 92/80/EEC on the approximation of taxes on manufactured tobacco other than cigarettes and Directive 95/59/EEC on taxes other than turnover taxes which affect the consumption of manufactured tobacco;

Unnumbered explanatory memorandum dated 25th October 2001 from HM Customs and Excise on revised Presidency Compromise for Directive amending Directive 92/79/EEC on the approximation of taxes on cigarettes, Directive 92/80/EEC on the approximation of taxes on manufactured tobacco other than cigarettes and Directive 95/59/EEC on taxes other than turnover taxes which affect the consumption of manufactured tobacco;

European Directive No. 15156/01, annual activity report of the European Anti-Fraud Office (1st June 2000-31st May 2001).]

4.30 pm

The Economic Secretary to the Treasury (Ruth Kelly): It is a pleasure to be in European Standing Committee B again under your chairmanship, Miss Widdecombe.

We shall debate several reports on European Union fraud and financial management. They cover important work, and I am pleased that the Committee has shown the priority that it attaches to the fight against fraud by holding such a debate. Before I answer questions, I wish to make a few introductory comments. When discussing the documents, we shall need to remember that the process of tackling fraud and reforming the financial management of European Union institutions is ongoing. We have already made good progress. Many problems have been identified, a reform process has been initiated, new bodies have been established, old structures have been abolished, and a new financial framework will soon be in place. The pace of change is sometimes depressingly slow, but effective change in the European Union context can happen only if we work with others, persuade them of the virtues of reform and keep pressing for results.

The first document, the annual report of the European Court of Auditors, plays a useful part in keeping up the pressure for reform. It is of concern that, for 2000 as for 1999 and for each year since 1994, the ECA was unable to give a positive statement of assurance, but the fact that it continues to seek out irregularities and to point to inadequacies in the

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financial management of EU funds gives us confidence that close scrutiny is taking place and that the Commission's attention will remain focused on the need for reform.

Once again, the level of detected irregularities is the reason why the ECA has been unable to give a positive statement of assurance. However, I remind the Committee that we cannot equate error and irregularity with fraud and waste. Indeed, in the majority of cases, discrepancies are not frauds but administrative errors, such as use of the wrong exchange rate, small overpayments to farmers or not complying fully with complex Community regulations—the sort of errors that are easily, swiftly and regularly corrected. It is easy for the press to write headlines such as ''£3 billion fraud in EC budget'', but that misrepresents what is the case.

Another point to remember is that ECA reports help to deliver improvements. For example, an ECA report recommended that the anti-fraud office—OLAF—be set up. Many of the recommendations in its 1999 report regarding the recasting of the financial regulations have been adopted in the latest draft proposal.

The annual report does not only criticise, but highlights improvements. In its report on 2000, the ECA acknowledged several areas in which improvements have been made. On agricultural expenditure, the report commended the reformed clearance of the accounts system and referred to one of its special reports, which concluded:

    ''The Commission's strategy for dealing with BSE is basically sound''.

On structural funds, the report notes:

    ''the URBAN community initiative has helped the implementation of many urban development projects and has enabled local authorities to access EU funds''.

On external aid, it stated that

    ''the Agency charged with the reconstruction of Kosovo was both efficient and economical''.

Those positive comments show that improvements can be and have been made, but we all recognise that more is needed before we can expect a positive statement of assurance.

As I mentioned, Commission reforms represent work in progress. The reform agenda has three key objectives: the introduction of a better system of assessing priorities; an overhaul of financial management in the Commission; and the modernisation of personnel policy. Fundamental reform takes time to implement because the culture in an organisation must be changed. However, progress has been made on all three objectives. In particular, I shall inform the Committee of the most recent progress on financial management.

The strengthening of the financial regulation—the Commission's budgetary rule book—has long been seen as a crucial part of the reform package. The regulation was introduced in 1977 and has been amended several times, all of which tended to make the system more complex. The task for reformers was to produce a coherent revision that enshrined clear and

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strong principles of budgetary control, but avoided minute details that led only to confusion and unintentional non-compliance.

I am pleased to report that the Council's work on the Commission's proposals is at an advanced stage, thanks to the recent priority that the Spanish presidency gave to the regulation. Work is on track for a new regulation to come into force next year. The new financial regulation should help to reduce complexities, introduce a truly independent internal audit, increase the accountability of front-line officials and bring both objective setting and evaluation to the forefront of budget setting.

However, such changes to the financial management rule book will be insufficient to stop the small minority who deliberately try to defraud the European Commission's budget. The Government believe that any deliberate attempt to defraud the budget is grave. There must be zero tolerance of fraud and fraudsters, and necessary resources must be found for detection and prosecution.

One of the ECA's criticisms for financial year 2000 was that progress has been slow in the reorganisation of the European Union's anti-fraud work, and, especially, that staffing increased more slowly than was foreseen. Given the important role that OLAF must play, that is a worry. Although the position has improved since 2000, it is not fully resolved, and, even now, staff levels are only around 80 per cent. of the authorised complement.

Yet, OLAF has made progress, and it has tightened up the legal framework. In 2000, that included tightening up the penal-judicial dimension. It has worked with the Council to improve links between relevant authorities in member states, and Eurojust, an EU judicial co-operation unit, has been established to work alongside OLAF. OLAF has conducted many investigations across a range of European Union activities, such as illegal trafficking of agricultural products, fraudulent claims for European regional development fund and European social fund moneys, and a wide-ranging investigation into cigarette smuggling.

The problem of cigarette smuggling is not unique to the United Kingdom: it affects almost all EU member states. Among the documents tagged to today's debate is a report from the Commission on the rate of excise duty applied on cigarettes. The Government do not believe that reducing UK duty rates to those of Italy or Spain, for example, would have a significant impact on our major cigarette smuggling problem. Those countries have low tobacco tax but still suffer widespread cigarette smuggling. International organised crime syndicates are responsible for the great bulk of cigarette smuggling. Their operations occur on a large scale, and most of the cigarettes originate from outside the EU. The solution is to crack down on smugglers, which is being done in the UK with increasing success.

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We are debating important documents that highlight many problems that must be tackled. However, there are many positive developments. Several Commission and Council initiatives have taken effect, although others will take longer. I assure the Committee that the Government will continue to play an active role in keeping the fight against fraud and waste high on the European agenda.

The Chairman: We have until 5.30 pm, at the latest, for questions to the Minister. Questions should be brief and asked one at a time. Hon. Members are likely to have ample opportunity to ask several questions.

Mr. John Bercow (Buckingham): As a junior shadow Home Office spokesman for 13 months, Miss Widdecombe, I greatly enjoyed being subject to your ministrations. I hope that I will similarly enjoy your firm and fair authority this afternoon, and I welcome you to the Chair.

I am grateful to the Minister for her opening statement. What is the current status of the review of internal control systems in each directorate-general and of the creation of an audit capability in each directorate to provide advice and assurance about the system?

Ruth Kelly: As the hon. Gentleman is aware, internal control systems are an important part of the new approach to combating irregularities and fraud in the EU. That process has been initiated, but it is still developing because it is part of a wider agenda to change the entire culture of the institutions. That must be achieved.

Dr. Nick Palmer (Broxtowe): Has it been possible to build on the measures outlined in the document to take account of the events of 11 September and the subsequent crackdown on money laundering, or are we still relying on what was foreseen in 1999-2000?


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