EU: Fraud (EUC Report)

Lord Stoneham of Droxford Excerpts

Wednesday 11th December 2013 Grand Committee

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[Lord Stoneham of Droxford]

That the Grand Committee takes note of the Report of the European Union Committee on The Fight Against Fraud on the EU’s Finances (12th Report, Session 2012–13, HL Paper 158).

[Lord Stoneham of Droxford (LD)]

My Lords, this Motion was at one stage in the name of the noble Baroness, Lady Corston. As noble Lords may already know, the noble Baroness was unwell last week and is recuperating at home. Therefore, I am speaking on her behalf.

The European Union Committee’s Sub-Committee E on Justice, Institutions and Consumer Protection, of which I am a member, prepared the report which is now before the Grand Committee. The Motion invites the Grand Committee to take note of the report The Fight Against Fraud on the EU’s Finances. I welcome the involvement in this debate of my noble friend Lord Newby. Given his experience in Customs and Excise, I cannot think of a Minister more qualified to reply to a debate on fraud.

In July last year, under the considered and diligent stewardship of the predecessor of the noble Baroness, Lady Corston—the noble Lord, Lord Bowness—the sub-committee of which I am a member decided to launch an inquiry into fraud on the European Union’s finances. The committee sought to gauge the vulnerability of European Union funds to fraud and assess the effectiveness of the European Union’s anti-fraud system and the effectiveness of the member states in pursuing any crimes perpetrated against the European Union’s budget.

In addition, the inquiry was timed to coincide with the publication of a directive aimed at protecting the European Union’s financial interests through the criminal law. We saw more than 30 individual witnesses and some members of the committee, including myself, travelled to Brussels, where we saw all the relevant EU agencies and bodies tasked with dealing with fraud, plus a number of MEPs. We are very grateful to all those who submitted evidence to our inquiry.

Since 2011, the Commission has produced a number of legislative proposals designed to improve the protection of the EU’s financial interests which are highlighted in the report. In addition, since the report’s publication in April this year, the Commission has also brought forward a regulation reforming Eurojust—the European Union’s criminal justice agency—and the controversial proposal introducing the concept of the European Public Prosecutor’s Office, which is designed to prosecute crimes affecting the Union’s financial interests. The Government have decided not to opt in to the Eurojust proposal, against the express view of this sub-committee, and the coalition agreement has ruled out the UK’s participation in the European Public Prosecutor’s Office.

European law makes combating fraud on the EU’s finances the responsibility of both the European Commission and the individual member states, but the member states’ authorities remain responsible for administering 80% of the money. Given this fact, the overwhelming weight of responsibility for the protection of the EU’s financial interests falls on the individual member states and, in the context of criminal frauds, their crime-fighting bodies.

The report recognises the hidden nature of criminal fraud. We understand that estimating the levels of fraud perpetrated in the individual member states with any degree of accuracy is very difficult. These problems are magnified once you introduce the additional complexity of the European Union’s 28 member state structure, but these difficulties should not allow the member states to ignore their responsibilities.

I plan to concentrate on four key aspects of our report: first, the vulnerability of EU funds to fraud and their potential scope for fraud; secondly, fraud specifically in the UK related to EU funds; thirdly, the European fraud concerning VAT; and, fourthly, the European Union’s anti-fraud structure. I turn first to one of the main conclusions of our report; namely, the vulnerability of EU funds to fraud. In 2011—the year that forms the main focus of the committee’s inquiry—the EU’s budget was €141.9 billion. In 2011, the total government revenue in the UK for the same year was £589 billion. The UK’s budget is three and half times the EU budget.

Under its obligation to report annually on its anti-fraud work, the Commission produces a figure for fraud in the European Union based on the frauds reported to it by the relevant member state authorities. The figure for 2011 was €404 million, or 0.28% of the EU’s 2011 budget. Many of our witnesses told us that this was an underestimate of the problem, and Rosalind Wright QC, former director of the Serious Fraud Office in the UK, said this figure represented the tip of the iceberg. The Commission rejected the iceberg analogy and suggested that EU funds were no more prone to fraud than national budgets, while the UK Government argued that EU funds,

“will always be vulnerable to fraud”.

The UK’s National Fraud Authority which, until its recently announced abolition by the Home Secretary, was tasked with co-ordinating anti-fraud action in the UK, told us that the current level of fraud suffered by the UK public purse amounts to about £20.3 billion per annum, which suggests that for 2011 in the UK, 3.4% of the public purse was lost to fraud. So, in line with the Commission’s evidence that the EU’s budget is no more prone to fraud than national budgets, the committee took the estimate for fraud in the UK and applied it to the EU’s annual budget for 2011 and arrived at a figure for fraud on the EU’s budget for 2011 of €4.82 billion, a figure more than 10 times more than the Commission’s official figure.

The committee’s report recognised the various caveats and warnings that have been applied to the process of deriving these figures for fraud on the EU’s budget from national figures. Nevertheless, it is clear to the committee that the Commission’s official figure for 2011 of €404 million offers only a glimpse of the levels of fraud perpetuated against the EU’s finances. If the Government are right that EU programmes will always be vulnerable to fraud, and in some member states increasingly so, the final figure will be even greater. I note that in its recent impact assessment in support of the proposed European Public Prosecutor’s Office, the Commission suggested that the actual level of fraud on the EU’s budget was in the region of €3 billion, so it is moving towards the committee’s figure.

In their formal response to this report, the Government expressed concern about our estimate of the level of EU fraud, adding that they did not recognise the committee’s figure. We were disappointed with the Government’s lack of engagement with this key conclusion of our report, so I offer the Minister an opportunity during this debate to engage with this aspect of our conclusions. Given this disappointing context, we were unable to see how the member states’ and Commission’s claims to protect the EU’s financial interests could be justified. We hope that the introduction of the directive on protecting the EU’s financial interests via the criminal law, which introduces an EU-wide definition of fraud on the EU’s finances, will help to alleviate this problem.

We also looked specifically at the extent to which fraud against the EU’s budget was committed from within the UK and assessed the rigour of the Government’s duty to report evidence of fraud to the Commission. I regret that the picture that emerged was not good. The committee recognised that the same difficulties that apply to estimating fraud on the EU’s budget also apply to assessing the levels of EU fraud committed from within our shores. None of our witnesses was willing to place a precise figure on the problem, but the National Fraud Authority suggested a figure of £41 million, about 1% of the total EU-funded expenditure in the UK. However, it warned us to treat this estimate with a “high degree of scepticism”.

What emerged is that no single government department or body appeared to co-ordinate or take ownership of the UK’s fight against EU fraud. The Government told us that they take all these matters seriously and EU fraud “extremely seriously”, but the responsibility to deal with fraud and to report it to the Commission falls on the individual department dealing with the relevant funds. When asked, the Minister was not “sure” whether the Government collated all the different departmental figures into one place. This lack of co-ordination concerned us and confirmed our view that individual member states, including the UK, do not devote significant resources to pursuing EU fraud and, as is their responsibility under EU law, to reporting it to the Commission.

We therefore recommended in the report that the Government nominate a single department or agency to co-ordinate the fight against EU fraud in the UK and to take responsibility for attempting to quantify the problem. In their response to us, the Government agreed that this information should be shared between government departments and that, while there is room for improvement, such sharing already takes place. We welcome this, although we have wondered why it has been so difficult for the committee to get a clearer estimate of the level of the problem in the UK, even allowing for the nature of fraud, from those witnesses we saw from the relevant national bodies.

Furthermore, on 2 December the Home Secretary by way of a Written Statement announced the abolition in March 2014 of the National Fraud Authority. I note that her Statement makes no mention of EU fraud, nor does it assign responsibility for dealing with the problem to any specific UK body. I therefore have to ask the Minister: who will be responsible for leading the fight against EU fraud in the UK after 31 March 2014?

I turn now, briefly, to VAT fraud or carousel fraud, as it is often known. This is a highly technical fraud perpetrated against the VAT system involving a series of often non-existent transactions involving the purported movement of goods and services within the EU’s single market. At the outset of our inquiry, the Government were of the view that VAT fraud was outside the scope of our investigations, but it was clear from the evidence received that this remains a very significant problem throughout the EU. The report is clear that the committee understands the Government’s opposition to any EU measure or action which would extend the EU’s competence into tax enforcement in the UK, but we argue that this legitimate concern should not allow fraud which diminishes the amount due to the EU to be ignored or not pursued with vigour. We have our doubts that existing EU measures are tackling this problem and, therefore, the report called on the Government to suggest alternative robust measures to combat VAT fraud. In their response the Government reassured us that they are fully committed to fighting VAT fraud and that it is “pursued with vigour” by HMRC. Perhaps the Minister will confirm what that figure will be. We do not doubt their determination, but are the Government sure that the other member states’ authorities pursue this problem with similar enthusiasm and vigour?

The committee considered the quality of the EU’s current institutional framework for dealing with fraud. We found that OLAF—the EU’s anti-fraud body— remains an agency of limited powers. Budgetary restrictions force it to be selective about the cases it pursues. We are concerned that if OLAF were to be seen as a body whose recommendations are never followed up by the individual member states which lack enthusiasm in dealing with EU fraud, its effectiveness will be questionable. We also fear that the relationship between the EU’s crime-fighting agencies—Europol, Eurojust and OLAF—as currently constituted represents a tangled web which undermines any co-ordinated response to fraud on the EU’s finances.

Finally, given that it was repeatedly proposed as a solution to the problems inherent in the EU’s anti-fraud system, the report briefly addressed the then unpublished proposal for a European Public Prosecutor’s Office. This was brought forward by the Commission in July, and we issued a reasoned opinion challenging the proposal on subsidiarity grounds. We concluded the report by asking the Government how they would propose tackling the flaws identified in our report without participating in the European Public Prosecutor’s Office proposal. We have as yet not received a satisfactory reply to that question and would be grateful if the Minister could address the issue in his reply.

While combating fraud in the EU’s finances may pose unique challenges for both the EU’s institutions and individual member states, protecting the public purse in these difficult economic times remains the responsibility of us all, as we say in the opening chapter of the report. Those of us committed to countering negative public scepticism about EU institutions also have every interest in a more vigorous approach to eradicating the perception and reality of fraud. I beg to move.

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[Lord Stoneham of Droxford]

I thank my noble friend for his response and everybody who has spoken in this debate. I have already thanked, but would like to do so again, the noble Lord, Lord Bowness, for his leadership of this group. I would also like to mention Tim Mitchell, as well as Mike Thomas, and thank them for their support during this investigation.

We had a number of speeches from members of the committee, and I appreciate their support and also that of the noble Lord, Lord Davies. It was good to hear a pro-European being so pointed in his comments, both on our report and on the Government’s approach.

On the Government’s response, I understand that my noble friend was in great difficulty in going further than the response that we have already had, but those of us who were listening carefully appreciated a number of his comments. He said that more work needs to be done on estimating the level of fraud, and the committee will certainly welcome that. He talked about the new approach with the National Crime Agency; that is something that we will want to look at, particularly with its additional emphasis in setting up a special group on economic crime. I am not sure that we got quite the single-source co-ordination that we were looking for, but we appreciate the efforts that the Government and Treasury are making on tax fraud in general and his reassurances on the work being done on VAT.

I accept that it is very difficult to give a perspective on OLAF, but my noble friend said that the National Crime Agency would strengthen relationships with OLAF and Eurojust, which we welcome.

I am sure that we wish to emphasise and support the strength of feeling that my noble friend will communicate to the Home Office, via the strong arm—we hope—of the Treasury, in relation to what needs to be done regarding the single point of contact. We look forward to the Government developing their alternative to the European Public Prosecutor’s Office proposal. I thank all Members of the Committee for their support in what has been a very interesting debate.

Motion agreed.