EU: Fraud (EUC Report)

Baroness Morgan of Ely Excerpts

Wednesday 11th December 2013 Grand Committee

[Baroness Morgan of Ely (Lab)]

My Lords, I thank the noble Lord, Lord Stoneham, for his introduction. I also thank the committee for its work not just on this report, but over many decades. The reputation of this committee is second to none. Certainly during my years on the budget control committee in the European Parliament, we used to look forward to giving evidence to your committee because we knew that there would be a thorough investigation, with sophisticated understanding of the complexities of the way in which EU finance works—so I feel privileged to speak in front of you today.

The clamour for change and the screaming headlines against the EU when the Court of Auditors published its annual report were things we learnt to live with on an annual basis. I learned then—this is underlined in the report—that the picture is much more complicated. There needs to be a better understanding than the one those screaming headlines suggested.

We need to be absolutely clear of what we are talking about when we discuss fraud. The Court of Auditors first takes sample payment transactions in the EU at EU level, national level, regional level and even down to individual beneficiary level. Any errors found in these audits are classified as either quantifiable—which means there is a potential impact—or not. The impact rate of the error is then extrapolated to reach a most likely error rate. That then applies to each department, and then to the budget as a whole. It is completely different from the way in which we do things in Britain and that is probably part of the reason for the misunderstanding.

We should be clear that those error rates cannot simply be translated into an amount lost. Let me give an example. If you have a tender process to build a road and someone completed the forms in a way which did not comply with all the rules, that does not mean that the road was not built or that you did not get value for money; it means that the forms were not completed in the correct way. That would be counted as a problem; it would be put into the figures as problematic.

As the noble Lord, Lord Stoneham, reminded us, 80% of finance is controlled by member states. In fact, the money never leaves Britain. It does not go to the EU and come back; it never leaves Britain. Therefore it is expected that member states should put systems in place to protect the EU’s financial interests.

It is also worth noting that the Court of Auditors has signed off the EU account for the sixth year in succession. It has given a clean bill of health to the Commission’s accounting books. That means that every euro spent from the EU budget was duly recorded in the books and properly accounted for. However, for payments the court requires an error rate of less than 2% before the EU budget can be declared to be free from material error. At the moment the error rate is below 5% but, as it is not close enough to that 2%, it will not sign off the payments account.

Turning to the subject of the report, deliberate fraud is different from errors. It constitutes a criminal action and has to be dealt with severely. The question being asked in the report is whether the systems and mechanisms that are in place are adequate to measure fraud and defend the EU against it. Is the UK taking up that responsibility and policing this area seriously?

The recommendations made in the report seem eminently sensible. The proposals to establish a government agency or department to take overall responsibility and for OLAF, the anti-fraud unit of the EU, to have one point of contact make sense. OLAF did not exist when I was in the European Parliament but was set up while I was there. I can assure noble Lords that there was a great deal of in-fighting when it was set up, but I hope things have settled down since then.

It makes sense to have one point of contact. I was a member of the budget control committee in 1999 when the Commission was forced to resign in response to the failure to take seriously the matter of fraud against the EU budget. The subsequent report written by the wise men suggested that it was impossible to find anyone, at any level, in the Commission to take responsibility. That phrase stood out to everyone. My concern is that having sat in the European Parliament for 10 or 15 years considering this issue and hearing that it is up to the member states to do something about it, I do not want to come back to the UK and hear, “It is not our problem. It is a difficulty for the EU. We all have to work together”.

This falling between two stools is the problem here. It is a fate that we must avoid in the UK. Knowing who is responsible for collecting and collating information and where the buck stops is fundamental to good governance. I take issue with the suggestion that the multiple jurisdictions of the UK provide a block to this. We manage to organise this for every other aspect of the EU’s relationship with the UK, so why not in the area of fraud?

Of course, the amount of fraud is by its nature difficult to quantify, so the Commission’s figures are only estimates, but it seems that there is a lack of enthusiasm to engage with the detection and reporting of fraud against the EU. This is underlined by the fact that the Commission has reported a very low number of irregularities as fraudulent in the UK, which has a relatively high EU spending rate compared with other member states, suggesting a degree of non-compliance with reporting principles. Will the Minister therefore explain what control systems and mechanisms are being put in place to detect fraud, in particular in the higher risk areas?

It was extremely disappointing that the Government did not answer the issue of VAT fraud against the EU budget seriously. Of course, a larger proportion of VAT goes to member states, but the contribution to the EU’s budget is fundamental. The figure of £2 billion that was suggested by the noble Lord, Lord Bowness, is fundamental to the revenue stream of the EU. Carousel fraud is not insignificant. While nobody is suggesting that the EU should extend its competence into tax enforcement, it is entirely legitimate for the Commission to question member states on their pursuit of this fraud which has a material effect on the Commission’s budget.

The prosecution of fraud remains a national matter, and while the UK does not want to sign up to the European Public Prosecutor’s Office, I question whether we take our responsibilities seriously in terms of prosecuting fraud against the EU budget. I remember on several occasions hearing how OLAF investigations were passed on to member states but were not pursued with any vigour in the member state. We heard evidence from some very senior British police enforcement representatives who suggested that although they understood their responsibilities, they had an inbox full of domestic crimes and targets on specific crimes that they had to meet so, somehow or other, EU fraud cases always seemed to find their way to the bottom of the in-tray. What is the Government’s target for prosecution? We have heard that 18% are prosecuted. What is the target? That seems to be a way to get this to the top of the in-tray of those police enforcement agencies.

Finally, will the Minister outline the timetable for the proposed fraud directive, and explain how he intends to use the expertise of the European committee in the Lords for those deliberations?