Fight Against Fraud

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Mr. Hopkins: My hon. Friend makes a good point about exporting surplus. Is it not exactly the CAP system of price maintenance that creates the surpluses that must be exported—dumped in effect—on poorer countries?

Mr. Connarty: That has always been one of my principled objections to the concept of paying the producer a certain sum of money to produce even though there is no use for the product. I hope that we will move beyond that when the CAP is reformed. If we do not, enlargement of the EU will turn the corruption hell into a corruption mountain because it is quite an attractive way of bending the rules. All the practices have already been tried out by present EU members and will be exported quicker than anything else to the incoming economies.

I have one reservation, which I think I share with members of the European Scrutiny Committee. It is strange that the hon. Member for Buckingham seemed to see it as a problem. The fact that OLAF was set up within the Commission concerned some of us who wanted a completely independent body to investigate fraud. It has accountancy and other independences but it is not independent of the Commission. It is part of the Commission, so it still has some way to go to fulfil my personal aspirations for its use. Its link to Eurojust will be strong as there is now open dialogue on that. That will make it much stronger.

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Although change would have happened anyway, there is clearly an impetus from 11 September. I hope that the justice and investigation systems of Europe will come closer together, because as long as they are independent, we will never have the tight control that we require or the tight link between the administrative, justice and investigative departments of the European Union. It is important to have a decent case management system and an established IT system. This is the only year in which it can be claimed that OLAF is running the current system, rather than the previous one. It has carried over quite a lot, and has made massive strides. Section 1 of the document contains good examples of its activities. The example of bananas can be replicated in every section of the EU budget where OLAF has found substantial fraudulent practices. The textile sector is valued at 30 million euros, and it is quite common to find such a value listed.

On the prospect of enlargement, I have visited several applicant countries as a member of the European Scrutiny Committee and the all-party group on European Union accession. When I consider the administrative, legal and policing abilities of those countries, I worry about what will happen. I echo, and possibly amplify, what my hon. Friend said. It is already clear that the first thing done by some countries, such as Romania, is to set up a methodology to copy what they think that they are coming into. That is the problem. They think that they are coming into a system that is capitalism run riot, and that the point is to get money from it.

I have been to conferences of applicant countries, at which they discuss only how to get money from the EU. We have moved on and are talking about a common political and humanitarian purpose. However, people from former eastern bloc countries clearly view the EU as a capitalist system where the purpose is to get as much out of it as possible. Sadly, many people are already translating that as a way of extracting money illegally. A Lithuanian gang working in Spain was the first group to counterfeit euros.

We must give OLAF more resources. I was disappointed to see the Opposition point-scoring in attacking the slight growth in the percentage of the EU budget that is spent on administration. They did not realise that they were attacking the money that is being spent on OLAF. OLAF is part of the administration budget, because it is part of the Commission. Money is going into fraud investigation, systems, officers and intelligence that will help us to cope with the already sophisticated fraud in the EU, and that will prepare us for an onslaught of the most innovative fraudulent practices that we have ever seen in Europe when enlargement comes. People think that they are coming into a large organisation that passes round money and that they can siphon it off if they are skilful enough in accounting or counterfeiting.

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It astonished me just how many people with whom I talked in those countries could cite case after case in which people from the eastern bloc believe that they will have more access to easy money in the EU. OLAF is one way to prevent that from becoming a reality.

Mr. Hopkins: I am interested in what my hon. Friend is saying, as it confirms some of my concerns. The EU is likely to contain a large number of member states in future years, and fiscal transfers will be appropriate, as some countries will be very poor and some will be rich. Does he agree that where fiscal transfers are appropriate, it might be better to make them to Governments who would be responsible for allocating funds in their own countries, rather than having a system that allocates funds directly to producers, or whatever? Governments are much more likely to police the spending of that money more carefully, as their own budgets would also be affected.

Mr. Connarty: I thank my hon. Friend for placing that suggestion on the record. I am sure that those who are interested in the enlargement of Europe will consider it. I would not like to venture an opinion on which system we will use. It is clear that in some applicant countries, large sections of the economy are entirely subsidised by Departments. They dole out money to people to keep them underemployed and prevent them from flooding from the country to the towns and overwhelming industries. There is a lot of undermanning and systems that we would not approve of but which keep their economies afloat.

We should bring them into the European Union in a free, open market and with proper structural funds that help them through their troubles, and not get into a situation in which those who see the European Union as a rip-off society that they want to join can get away with it. Such people undermine the ability of their own citizens to gain greatly from being members of the European Union, as they should. I am very pro-enlargement, but cautious, and I want OLAF to be strengthened, because it is one way to ensure that the experiment helps all people and does not enrich the most corrupt people in those countries.

6.21 pm

Ruth Kelly: This has been an enjoyable debate with interesting contributions from both sides. I am personally delighted by the energy and attention to detail shown by the hon. Member for Buckingham, although I should say straight away that I reject completely his allegation that the European Community is somehow involved in a smash and grab raid on taxpayers' money. That bears no relation to reality. I reject also his claim that the Government are not interested in clamping down on fraud and irregularity. Any level of fraud cannot be tolerated, and we are committed to ensuring that we clamp down on it whenever it is found. That is why the UK is such a strong supporter of reform of the Commission, which I will return to later.

We must accept that there is a difference between fraud and irregularity. My hon. Friend the Member for Luton, North mentioned a spectrum, with fraud

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and corruption at one end and irregularity and minor error of detail at the other. It is difficult to pinpoint exactly where each transaction lies on that spectrum, but irregularities can involve merely a simple error—failing to complete a form within the EU timetable, for example. As such, while we remain committed to combating irregularities, they cannot be interpreted as synonymous with fraud, and it is very important to distinguish between the two. The Government are committed to combating both, as well as to streamlining procedures and simplifying regulations so that it is as simple as possible for people to comply with them and for irregularities to cease.

I agree also with the hon. Member for Buckingham that the establishment of OLAF is not an end in itself. It is the start of a process of reform to which we are committed. As he and the rest of the Committee are no doubt aware, my right hon. Friend the Prime Minister made a statement in the House in 1999 to call for root and branch reform of the Commission. It was the UK that circulated a paper of reform ideas to the Commission and other member states prior to the Berlin Council. In the same year, my right hon. Friend the Chancellor called at ECOFIN for a full prevention office as part of that programme of reform. He suggested an office that remained in the Commission but was independent of it and had stronger powers and greater independence than its predecessor. Those proposals were warmly welcomed by other member states, which are also committed to reform of the Commission and the crackdown on fraud and irregularities.

The office is now established and has started doing good work. Several investigations have been successfully carried out, and I will return to some later. The hon. Gentleman highlighted the difficulties that OLAF is having with recruitment of staff. OLAF wants to recruit highly skilled and motivated people, and it is much better to get the right people than merely to fill the numbers. So far 260 people have been taken on. It still has some way to go to fill its full complement, but I am sure that it will achieve that before too long. It is committed to employing more staff and to encouraging people to apply, but it is also redeploying some of its existing staff while not jeopardising employment in the rest of the organisation, and it is clearly working under considerable constraints.

I also agree with the priority that OLAF has initially placed on combating internal cases of fraud and corruption. Internal corruption must be eradicated if we are truly to establish a new culture within the Commission, and OLAF's priority must be to promote cultural change as a mechanism to drive out fraud and irregularity within the entire system. OLAF now has its own team of magistrates and judicial advisers to ensure that its investigations are thorough, while upholding the rights of people under investigation. Over the longer term, that will enhance the credibility and authority of OLAF.

OLAF also has a strong independent director, who was appointed after consultation with the Council and European Parliament. The director will have statutory

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protection from dismissal. That should lead to an enhancement of his authority. He will be able to open investigations on his own initiative, draw up reports and have immediate and unannounced access to buildings. Institutions will have to report to him on whether they are following up recommendations, how they have interpreted them and how they are carrying them out. The director reports regularly to the Council and European Parliament, so that they will be alerted if his reports are not being carried through and acted on.

OLAF will be a strong force for change, and I am pleased that my hon. Friend the Member for Falkirk, East (Mr. Connarty) drew attention to the positive work that it is performing. OLAF has put in place a network of anti-fraud communicators to establish permanent contact between the communication, public relations and training co-ordination unit of OLAF and its national counterparts.

As the hon. Member for Buckingham pointed out, there is a European freephone system that anyone in the member states can use to report a fraud. That should be an effective way of starting to change the culture, and of encouraging people to report fraud. I cannot give the hon. Gentleman current figures on how many phone calls have been received, but if he wishes to pursue the matter, we will supply him with them.

I was disappointed that the hon. Gentleman did not ask for the freephone number for the United Kingdom, which I can give him if he wishes to use it to report fraud. For the record, it is 0800 963 595. If he has any cases to report, the telephonists will be delighted to hear from him.

The hon. Member for Buckingham referred to the transparency under which OLAF operates. The OLAF manual has been introduced to improve its working methods and procedures. The aim is to ensure that its work is transparent and effective, while respecting the appropriate legal basis and human rights. The office has also replaced its old database, which had been criticised, particularly in the Court of Auditors report.

Some of OLAF's work will be judged on how it carries out individual investigations of fraud. The hon. Gentleman mentioned the case of fraud in the importation of bananas, the co-operation with the Italian authorities on that, and how effective it had been. He also mentioned the fraud involving adulterated butter, which was a major success for OLAF, working in co-operation again with the Italian authorities. There is also the Spanish flax case: OLAF and the Spanish Fiscalia Anti-Corrupcion have been working together to ensure that that had been thoroughly investigated. The report has been forwarded to the competent judicial and administrative authorities.

I was disappointed that the hon. Gentleman did not mention OLAF's report into EU subsidies paid in Slovakia. [Interruption.] Of course, I may have not heard him, because he made numerous points and if he

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did point to the case, I did not catch wind of it. That case was also very important. I admit that I do not have the exact levels of fraud to hand that occurred since the conclusion of each individual investigation. However, logic leads one to conclude that fraud in those areas has been reduced as a consequence of the investigations. I hope that we will see real evidence of reductions in irregularity and fraud as a result of the investigations.

When OLAF investigates Commission expenditure, the Commission has ultimate responsibility under the treaty for budget execution. That responsibility includes instituting effective fraud prevention procedures, and it must follow up reports from OLAF. I hope that that will contribute to cultural change in the future.

OLAF is only one aspect of the reforms that have been carried out and that the Government have been proactive in backing. The name of Neil Kinnock has already been mentioned in Committee, and the Government strongly support the fundamental change that is being led by the Vice-President of the Commission—Neil Kinnock himself. We need a Commission that is strong, effective and respected. Only modernisation of the Commission will improve the way in which it uses taxpayer's money and bring it in line with the best of public sector practice.

Progress has been made. The introduction of the code of conduct for Commissioners and Commission officials has been introduced, which has overhauled disciplinary procedures. Initiatives to encourage promotion on merit and better representation of women have been introduced. A whistleblower's charter was introduced and measures on senior appointments have been taken, including plans for senior officials to be subjected to a system of appraisals involving outside assessors.

Nice treaty changes formally empower the President of the Commission to require the resignation of a Commissioner. I am sure that the hon. Member for Buckingham agrees that that is an important change that will give the President greater power to control the way in which the Commission may use taxpayer's money most prudently and effectively.

The reforms of the Commission are wide ranging, and they will lead to a culture change. However, we cannot expect such changes to be achieved overnight. We must ensure that everyone is kept on board during the long process of change. All the key players inside and outside the Commission must be persuaded of the merits of reform if real change is to occur.

The hon. Member for Buckingham referred to the recast financial regulation. Of course, it has taken time to build a consensus around what such a regulation should be. The recast financial regulation is a major part of the reform that is being implemented in the Commission.

Substantial changes are being considered, and several bring the European Union budgetary rules into line with those in the United Kingdom system. However, the hon. Gentleman asked specifically when such changes might be brought into force. I put on record our appreciation of the efforts of the Spanish

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presidency, which took seriously the reform of the financial regulation and made it a priority. As a result, there is a new impetus behind that financial regulation being agreed. While it involves complete rewriting of the financial rule book, we still believe that that considerable reform will be in place by next year. That will be a real achievement.

Financial regulation will bring about real change. For example, it will define clear roles and responsibilities for those involved in financial transactions for the first time. Those who make operational decisions will bear responsibility for ensuring that money is properly controlled and spent—a reform that is long overdue. The new regulation will make objective setting and evaluation integral to the budgetary process. There will be a clear delineation between those authorising expenditure and those in charge of internal audits, which should lead to significant improvements in the way in which EU money is spent and how the scope of fraud and irregularity can be minimised.

The hon. Gentleman referred particularly to the experience of the French with the CAP. In fact, it was the first of a long list of questions. If he will forgive me, I shall not have time to answer them all today, but I shall deal with some of them. While I shall not comment on all his specific claims, I must point out that we are taking fraud in the CAP extremely seriously. It is already clear that those CAP reform measures that have been introduced will lead again to a reduction in the level of fraud and irregularity. They will bring a much more transparent process into the delivery of payments to farmers. Let us look back to 1992. While there has been a significant increase in the number of reported cases of fraud in the CAP, the value of such fraud has not risen in proportion. That is due largely to the effect of switching aid away from areas such as export refunds and market support that are susceptible to large-scale fraud and irregular practices towards direct payments to farmers that are far easier to control.

Farm-based schemes include ceilings on totals for payment. They specify the levels of control that each member state must attain. They are tightly controlled under the integrated administration and control system. The schemes also include provision for automatic application of penalties for applicants found to have committed an irregularity. As that process becomes more developed in the future, we should see a further diminution in the level of fraud and irregularity in the agricultural budget.

Several hon. Members referred to the large budget surplus at the end of 2000. It is indeed large and unprecedented and one that we do not believe is lightly to recur from year to year. As I said earlier, the Commission is rightly criticised for having such a large budget surplus, which accounts for 14 per cent. of the total. It is clear that not only should it have acted earlier, but its forecasting methods need to be improved. I agree with the report of the Court of Auditors that, if the Commission needs to use the

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appropriate powers in-year to return funds to member states if a similar situation arises in future, it should do so.

As for the precise make-up of that 11.6 billion euros surplus, about 3 billion euros were revenue because more own resources were collected than were budgeted for and more than 8 billion euros were on the expenditure side, mainly because of under-implementation on the structural funds side. The surplus led to a reduction in member states' contribution to 2001 budget that was implemented by the supplementary and amending budget. As a result, the UK's contribution was reduced by 1.7 billion euros in the supplementary and amending budget.

I should hate to give the impression that we are not concerned about the size of the overspend. Of course we are. In mitigation, I should point out that the size of the budget is difficult to forecast, partly because CAP spending is itself subject to exchange rate fluctuations and price changes that are difficult to forecast, and partly because 85 per cent. of the budget is managed by member states themselves, and the Commission is therefore dependent on member states' expenditure forecasts.

Although an underspend is not desirable, it is better to have an underspend than poor value for money as member states rush to implement projects that are not good value or clearly defined or what they would choose in the longer run if they had more time. That is one reason why structural funds involve a procedure called N + 2, in which the hon. Gentleman may be interested. Member states have up to three years to use money allocated to them. That process is considered better than member states rushing to projects merely for the sake of meeting a deadline.

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