Protection of the EU’s Financial Interests

David Gauke Excerpts

Monday 8th February 2016 General Committees

[The Financial Secretary to the Treasury (Mr David Gauke)]

It is a great pleasure to serve under your chairmanship, Sir Edward. It is also a pleasure to be joined by the Minister of State, Department for International Development, my right hon. Friend the Member for New Forest West to discuss the three reports outlined by my right hon. Friend the Member for Ashford. The Government welcome the three reports—the European Court of Auditors’ annual audit report for the 2014 budget, the ECA report on the European development funds in 2014 and the European Commission’s “Fight against fraud 2014 Annual Report”—which continue to play a key role in informing the UK’s approach to EU fraud and financial management. The Council vote on the discharge of the EU budget in 2014 will take place at ECOFIN on 12 February and will be discussed in COREPER the day after tomorrow. The Government’s priority is to hear the Committee’s contributions on EU fraud and financial management before those meetings.

As the Committee is aware, the Government take a tough stance on EU financial management. The Prime Minister’s 2013 deal, which represented the first ever real-terms cut to the EU budget framework, set the context and imposed financial constraints that are forcing the Commission to prioritise spending and focus on value. Against that backdrop, we welcome the European Court of Auditors’ report on the 2014 EU budget, which, in particular, increased the focus on performance and results.

Compliance is important, but without considering performance we will never achieve the maximum value for money. It is necessary, but not sufficient. As Vice-President for budget Kristalina Georgieva said, a 100% compliant road to nowhere

“is a 100% waste of our taxpayers’ money”.

We are therefore pushing hard for a more effective EU performance framework that delivers results.

Proper financial management is essential and it is clear that the ECA’s verdict on the EU accounts does not yet give taxpayers sufficient confidence in the system. While EU revenues and commitments were given a clean audit, the Government regret that there has been no significant improvement in the estimated level of error for EU payments. Consequently, the ECA has been unable to grant EU budget expenditure a positive statement of assurance for the 21st consecutive year. This estimated level of error in the EU budget—reflecting expenditure that is not compliant with EU regulations—stands at 4.4%, which is well above the acceptable 2% threshold, and shows only marginal improvement on last year’s 4.5% error rate. We are not achieving the rigorous standards of budgetary management that we expect to see at EU level. We are therefore pushing all those involved to make further improvements.

Until the 2009 audit, previous Governments had consistently voted to approve the discharge of EU annual budgets. However, in 2010, under the current Chancellor, the UK took the unprecedented step of abstaining on the Council decision to approve the Commission’s management of the EU budget. Subsequently, for the past four years, the UK has voted against the discharge of annual EU budgets. We intend to continue to do so this year, issuing our own counter-statement calling for an increased focus on performance and setting out our own recommendations.

On EU spending in the UK, I am pleased to confirm that where the ECA has identified specific cases of potential weakness in the UK, the relevant authorities have engaged with the Commission and the ECA to resolve those issues. In the majority of cases, the necessary recovery action or sanction has either been completed or is under way.

Finally, I turn to the Commission’s report on the fight against fraud in 2014. Based on Commission estimates, established fraud is likely to affect only about 0.02% of EU payments. None the less, any fraudulent misuse of EU funds is unacceptable. That is why the Government take a zero tolerance approach to such criminal activity by fully supporting anti-fraud in the EU, including co-operating with the European anti-fraud office, OLAF.

I want to conclude by assuring the Committee of the Government’s strong commitment to improving EU budget management, borne out by our focus on three key areas: driving simplification to reduce compliance errors; encouraging a sharper focus on performance and results; and continuous improvement of domestic control systems to ensure the effective management of EU funds in the UK.

I will now hand over to the Minister of State, Department for International Development, to say a few words about the report on European development funds. I look forward to the subsequent debate.

[The Chair]

Mr Swayne, do you wish to make a short statement?

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[Rob Marris (Wolverhampton South West) (Lab)]

It is a pleasure to appear before you, Sir Edward; I do not think that I have had the pleasure before. I have a brief question for the Financial Secretary to the Treasury. I understood him to say that 0.2% of EU spending was thought to be subject to fraud. Have the UK Government made an assessment of the level of fraud and irregularities, which can be different, relating to the UK’s share of that EU expenditure?

[Mr Gauke]

I thank the hon. Gentleman for his question. It is 0.02% that is identified as being fraud. I think that a slightly larger number is suspected of and looked at as being fraud, but when it comes down to it, only 0.02% is established as being fraud.

In terms of the UK comparison, it can be difficult to make exact comparisons. All managing authorities across the UK have in place robust anti-fraud measures. Those include fraud risk assessments, mandatory checks on payments, fraud awareness training and regular referrals to OLAF where suspected fraud arises. We also support OLAF through the work of the designated UK anti-fraud co-ordinator, AFCOS, which is based in the City of London Police alongside Action Fraud. AFCOS continues to engage actively with OLAF and other member states to investigate and bring criminal proceedings against perpetrators of EU fraud. It would also be fair to say, looking at the ECA’s assessment of member states, that it samples member states’ activities; it is not intended to be a thorough audit of each and every member state to produce those numbers, so there is not a specific UK error rate on fraud, just as there is not for financial management errors.

[Kelvin Hopkins (Luton North) (Lab)]

It is a pleasure to serve under your chairmanship, Sir Edward. Hon. Members may notice a sceptical note in my questions, but—[Interruption.] They are just very accurate. We are a very substantial net contributor to the European budget, and 4.4% of the budget going amiss is the equivalent of certainly £1 billion and possibly more. Should we not be more concerned than some of the large recipient countries, because it is our money that is going into the wrong pockets?

[Mr Gauke]

It is certainly right that we should be concerned about that money. That would be the case regardless of whether we were a net contributor, but the hon. Gentleman makes a fair point: we make a substantial contribution to the EU budget every year. The UK has traditionally played a leading role in ensuring budgetary discipline in the European Union, and I highlight the Prime Minister’s achievement in 2013 of a real-terms cut in the EU budget for the multi-annual financial framework. An important area for us is ensuring that money is spent wisely and that we do not spend too much money at an EU level. We are a strong advocate of sound financial management and are committed to ensuring that EU funds are safeguarded and managed well. The Commission has ultimate responsibility for the implementation and management of the EU budget, but all member states, including the UK, must take responsibility in terms of putting pressure on the Commission and ensuring that money spent by member states is spent well.

[Kelvin Hopkins]

No doubt there are particular budgets that are more vulnerable and particular countries where the budget is not as appropriately controlled as it might be. The Financial Secretary talked about simplification. Are the British Government targeting certain areas and do they have concerns about particular countries where the budget might not be appropriately spent?

[Mr Gauke]

In terms of the UK’s action in this area, we have in place comprehensive procedures to ensure that EU funds comply with UK and EU rules, including a role in programme audits and preventive anti-fraud measures. The hon. Gentleman raises concerns about particular areas. Structural funds, for example, which are a sizeable part of the EU budget, have to be focused upon. The Commission set up a high level group on European structural investment funds simplification last year, whose work is ongoing. Although the agenda is in its early stages, the UK continues to engage actively by advising on simplified costs and financial instruments.

In agreeing the terms of the 2014 to 2020 structural funds regulations, the UK actively pushed for and achieved greater use of simplified costs, reductions in document retention periods, and lighter and more automated annual reporting. In terms of good practices, DCLG’s work in improving public procurement procedures was highlighted in an ECA special report last year. The Department has set up an internal network to review public procurement issues, including the issue of guidance, case studies and reviews of public procurement checks and audits.

As I have said, the UK takes this matter very seriously. Although the Commission has ultimate responsibility for implementation and management of the EU budget, we have a role in taking responsibility to push for reforms.

[Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)]

It is a pleasure to serve under your chairmanship, Sir Edward. May I say I admire how you have generated such a beautiful gender balance on the bench beside you?

I have two questions, if I may. My first is for the Minister of State. I am interested in this issue because I have spent much of my life in parts of the developing world and on aid projects. I have a very precise question, but, by way of a short preamble, I have a lot of sympathy with those who are at times critical of agencies that operate internationally. At one stage in my life I was in Yemen to look at a college built with World Bank money and with United Nations Food and Agriculture Organisation development. My terms of reference were simple: we have built this building, now tell us what to do with it. It was not necessarily the best project that had been set up. The Minister mentioned the recent report, published on the EU website, on the amount of money wasted. He said that in his and the Government’s view, the report was “very good”. Will he explain precisely what “very good” is?

[Roger Mullin]

My supplementary to the Financial Secretary is also about the international aspects of fraud. Many projects funded through the European Union require multinational partnerships. I am aware that some fraud has occurred in more than one member state. Does he have a general view of how the UK compares with other EU member states on multinational projects?

[Mr Gauke]

There is a general view that the UK is strongly determined to address fraud. We have a strong record of budgetary discipline in the EU and with multinational projects, and we have demonstrated that we take fraud very seriously.

From the documents before us, it is hard to draw comparisons between the UK and other member states. There is no directly comparable error rate for the UK’s management of EU funds against which the ECA’s error rate for the EU budget can be measured. To our knowledge, there are no national accounts of major economies, including the UK’s, that can be meaningfully compared with the ECA’s audit of EU accounts. Only a few countries—the UK is one—produce whole of Government accounts. It is hard to compare precisely our record with those of other member states or countries outside the EU. The UK remains determined to root out fraud, wherever it might be.

[Stephen Hammond (Wimbledon) (Con)]

Like so many others, I want to say that it is a pleasure to serve under your chairmanship, Sir Edward. I confess to my right hon. and hon. Friends on the Front Bench that I have not read these documents cover to cover.

[Stephen Hammond]

It is indeed shocking, although I thought it would be more useful to spend my weekend trying to ensure that my hon. Friend the Member for Richmond Park (Zac Goldsmith) is elected in May.

I agree with my right hon. Friend the Member for Ashford that it is shocking that this is the 21st year in which the accounts have not been properly audited and signed off. That would not be acceptable in the financial world. With my financial hat on, I read three of the chapters, and I would like to test something with the Financial Secretary. Chapter 3 is about getting results from the EU budget. The common themes include poor performance setting, poor planning and objectives that are not fit for management purposes. My hon. Friend will have noticed that it states that budgetary strategy is not aligned with political strategy, which is an explicit criticism of the inability to make proper financial judgments.

Hidden in the documents—the Commission did not even bother to reply—is paragraph 3.79, which gets to the heart of the lack of results in partnership arrangements. I would like to hear from my hon. Friend exactly how the Government will put pressure on the Commission to respond with more a bit more force than its bland statements.

[Mr Gauke]

My hon. Friend raises an important point. It is traditional in these debates that we focus on error and specifically on fraud, but as I touched upon in my opening remarks the focus on performance should not be forgotten. We welcome the ECA’s increased focus on performance while retaining its valuable role on compliance. That shows there is recognition that compliance without performance will achieve little. Strengthening the ECA’s work on performance could help to maximise the efficiency, economy and effectiveness of EU spending.

It is also in line with Vice-President Georgieva’s budget for results initiative, which aims to develop a more performance-orientated budget that delivers tangible results for EU citizens. We see this as an important opportunity to help to improve the transparency of EU spending to taxpayers, and its value and efficiency. My right hon. Friend the Chancellor made our position clear at ECOFIN last year.

We are working closely with the Commission on this issue, offering our expertise in areas such as transparency and value for money. The Commission is keen to drive this agenda forward. In particular, it is our priority to ensure that this work feeds into the mid-term review of the multi-annual financial framework this year. It is important that the work in this area is joined up with other related initiatives to improve budgetary management, such as proposals for simplification of the common agricultural policy and structural funds, which were launched earlier this year by the Commission, and the wider mid-term review this year.

My hon. Friend the Member for Wimbledon raises an important point. Having heard Vice-President Georgieva discuss these matters on a number of occasions, I know that she is clearly very personally committed to a move towards ensuring that performance is at the forefront of how EU money is spent, and that is an initiative that we support and welcome.

[Stephen Hammond]

I am grateful for that response and I am sure that many in this Committee will hope that Vice-President Georgieva’s performance will show the result of that next year.

The one other issue that I just wanted to raise with my hon. Friend is the contentious nature of state aid rules and infringements, because obviously that goes quite far towards the heart of trade. Paragraph 6.39 indicates that there were 14 projects that infringed state aid rules and the Commission’s response is, “We’ll deem whatever action’s necessary.” Given that these projects are obviously usually highly controversial and get to the source of quite a lot of disagreements, can he assure the Committee that we will be pushing the Commission to act where deemed necessary so that action is taken?

[Mr Gauke]

In terms of UK infringement of state aid rules, the mandate of the relevant audit authorities for structural funds in the UK includes checks on compliance with state aid rules. The UK project reference here is not identified by the ECA, so it is not possible to comment on the nature of the errors. However, if my hon. Friend’s concern is about ensuring that state aid rules are properly enforced, I say to him that we will continue to push the Commission to focus on the areas of greatest error, and we think that that would be beneficial in ensuring that the EU state aid regime works as effectively for Europe as it can.

[Rob Marris]

I have a question for the Minister of State. In her explanatory memorandum dated 10 December, Baroness Verma, the Under-Secretary of State, Department for International Development, pointed out that the European development fund is the European Union’s main development co-operation instrument and that the total budget for it in 2014 was £34.5 billion. She also said that about 15% of that came from the United Kingdom. I say “about 15%”, because in paragraph 2 she says it was 14.68% and in paragraph 21, on page 391 of the bundle, she says it was 14.82%—it is about 15%. The Minister of State referred to 11% of DFID’s budget being spent via the European Union. Could he say briefly what the process is for deciding the percentage of DFID’s budget that is spent via the European Union?

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[Mr Gauke]

I thank all right hon. and hon. Members for their participation in the debate. I thank the hon. Member for Kirkcaldy and Cowdenbeath for his warm words of appreciation. He brings an amiability to his role as the Member of Parliament for Kirkcaldy and Cowdenbeath that is perhaps unprecedented.

[Mr Swayne]

In recent times.

[Mr Gauke]

Indeed.

I thank the hon. Members for Luton North and for Wolverhampton South West for their questions, which I will attempt to address. I also thank other hon. Members who participated in the debate.

As the Committee is aware, the Government have taken an increasingly robust stance on financial management. Although the estimated European Court of Auditors 4.4% error rate from the 2014 EU budget shows a slight improvement in the estimated level of error, it is a marginal reduction from the 4.5% error rate in the previous year and remains well above the ECA’s acceptable threshold of 2%.

We want to see more ambition and progress in the area, so, as I confirmed earlier, the Government will vote against discharge of the 2014 EU budget at this month’s ECOFIN. That is the most public way for member states to take a tough stance on financial management and the Government continue to make that stand for UK taxpayers. None the less, we welcome the efforts of Vice-President Georgieva to manage the budget better and to focus on performance. The UK is taking a proactive role in driving that agenda forward.

The hon. Member for Luton North asked about the difference between fraud and error, which was touched on by his Front-Bench colleague. Fraud is the deliberate criminal misuse of EU funds. Financial errors are breaches of often complex EU regulations. Of course, the Government take a zero-tolerance approach to fraud. As I said earlier, only an estimated 0.02% of EU payments are established as fraudulent, according to Commission data. The “Fight against fraud 2014 Annual Report” shows that, across the EU, cases of suspected or potential fraud affected around 0.26% of EU payments and 0.8% of EU revenues. Of these, Commission estimates suggest that around 8% are likely to go on to be established as actual fraud. So I do not think we should consider that that 4.4% is all fraud.

[Kelvin Hopkins]

I thank the Minister for his explanation. However, the discrepancy between definitely defined fraud and the money that has been spent inappropriately suggests a relaxed attitude to expenditure—money splashing about and finding its way into the pockets of people who might be politically helpful and so on. It may not be fraud, but it leans that way.

[Mr Gauke]

First, where I would agree with the hon. Gentleman is that failures of financial management matter. Whether it is fraud or not, we should have stringent standards and take a robust approach. However, there is another context. We often talk about fraud and error, or error and fraud, in the context of welfare payments, and when politicians allow the percentages that refer to fraud and error to be described as simple fraud, those politicians tend to be criticised. Indeed, I have heard people make the case that we should refer to error and fraud, not fraud and error, because the larger part of the error and fraud budget relates to error and is not proven to be fraud. So I think that approach should also be borne in mind.

It is also the case that, as has been mentioned, much of the legislation governing the EU funds is complex, and the associated guidance does not always offer the necessary level of clarity. Some of the errors identified are systemic, recurrent, and affect various member states and EU institutions. It is therefore clear that the overarching rules governing these areas need to be addressed. I do not wish to downplay the importance of dealing with error or any kind of financial mismanagement, but it is not the same as fraud. It is not synonymous with fraud, and the element that can clearly be identified as fraud is a subset of the overall 4.4% number that we are talking about.

[Kelvin Hopkins]

rose—

[Mr Gauke]

I will give way again, but I am keen to make progress.

[Kelvin Hopkins]

Clearly, we must not confuse error and fraud. Nevertheless, if the vast proportion of the money that is inappropriately spent is described as error, it enables those who want to play it all down to be successful in reducing concern about the money that is misspent. There might be a penumbra somewhere between fraud and genuine, innocent error.

[Mr Gauke]

Yes. I do not in any way want to downplay that 4.4% number. It is too high and needs to be addressed. On the 0.02% that is identified as fraud, there may well be sums of money that in the end are not identified as fraud, but might be getting close to it. I recognise that point. However, I would not want us to consider that the two are synonymous.

The hon. Gentleman raised a point about expenditure levels. It is worth reiterating again that in 2013 the Prime Minister secured the first ever real-terms cut to the multiannual financial framework for the period 2014 to 2020, forcing necessary budget restraint. For example, both the 2014 and 2015 budgets represented cash and real-terms cuts compared with the 2013 budget, which was the last year of the previous MFF. From 2010 to 2013, we were still working on the MFF that had been agreed by the previous Government. Tempted as I am to debate the weaknesses of that agreement, I would rather focus on the successes of the 2013 agreement, negotiated by the current Prime Minister.

Turning to the detailed points made by the hon. Member for Wolverhampton South West, he first raised the directive on the fight against fraud to the Union’s financial interests by means of criminal law—the PIF directive. The UK supports the directive’s broad aims, but the draft text contained several unacceptable elements, such as the inclusion of VAT in the directive’s scope. While the Council’s general approach of 2013 removed many of the unacceptable elements, discussions are ongoing and the final text is yet to be agreed. As such, the UK has elected not to opt in to the PIF directive at this stage but continues actively to engage in EU negotiations and will consider the case for a post-adoption opt-in once the final text has been agreed. I will of course keep hon. Members informed of progress in that respect.

We of course continue to take VAT fraud seriously at both national and EU levels. In addition to working to tackle VAT fraud domestically, Her Majesty’s Revenue and Customs continues to work closely with other member states and international agencies to combat VAT and other cross-border fraud. Additionally, member states continue actively to work together to share knowledge and expertise through the Fiscalis programme and exchange information on potential missing trader intra-community fraud in the EUROFISC network. The UK has also successfully pushed for the increased use of multilateral control systems, involving a co-ordinated exercise in which two or more member states verify the tax liability of businesses, to investigate cross-border VAT fraud. However, the UK Government’s position on VAT fraud is that it should be dealt with at a national level, not an EU level, as it is primarily a national resource.

As for the other detailed points that the hon. Member for Wolverhampton South West raised, I will write to him on the specific policies outlined in the explanatory memorandum to the Commission’s “Fight against fraud 2014 Annual Report”, which, as he said, I signed on 24 August. I reassure him that it did not get in the way of the Gauke family holiday, much excitement though there would have been at the opportunity to run through the memorandum on a wet afternoon in north Wales. In the event, it did not interrupt us and I think we played Uno instead.

On missing trader intra-community fraud, it is worth pointing out that the estimates of attempted MTIC fraud have now decreased from some £2.5 billion to £3.5 billion in 2008-09, which I suspect we debated back then, to between £0.5 billion and £1 billion, which has held steady over the past four years. Nevertheless, we recognise that fraud poses a constant threat, but HMRC remains vigilant. HMRC has been in the vanguard of member states developing tools and arguments to deal effectively with VAT fraud, MTIC fraud in particular, and is active in EU forums to ensure the spread of good practice and greater co-operation between tax authorities.

Rather than attempt a definitive definition of the reverse charge this afternoon, I will include one in my letter. In short, it is about shifting the responsibility for reclaiming input taxes within a chain of transactions involving VAT. The reverse charge was something used by the previous Labour Government to counter MTIC fraud. I will write to hon. Members with a definitive definition.

On the European Public Prosecutor’s Office, the UK will not participate in the establishment of any European Public Prosecutor. Nevertheless, the Government retain a considerable interest in negotiations on the European Public Prosecutor, given its potential impact on us and bodies such as Eurojust in which we currently play a role. The Home Office leads on that matter.

The role of the anti-fraud co-ordination service varies across member states. The UK’s role includes investigating irregularities involving criminal behaviour—a function that the City of London police is well placed to perform. The AFCOS has attended EU conferences designed to facilitate the sharing of information and best practices across member states, enhancing co-operation on the important issue. The UK’s AFCOS actively supports OLAF in investigations in Brussels through facilitating interviews, statements and visits to the UK.

On structural funds, the ECA has indicated that a significant proportion of errors in its audits are related to public procurement procedures, which is partly due to the complexity of the rules. The ECA acknowledged in a recent special report on public procurement issues the good practices introduced by the UK since the errors in 2009-10. The UK authorities are aware of the need to continue improvement of public procurement procedures in structural funds programmes for the 2014 to 2020 period.

The UK welcomes the fact that the ECA recognised the different definitions of customs audit applied across member states and revised its assessment accordingly. The hon. Member for Wolverhampton South West raised a further point about preventing the falsification of documents—one of the primary ways in which fraud is committed. The UK has a number of policies in place. The Government support efforts to reduce fraud in the EU, including the work of the European anti-fraud office, OLAF, in detecting and tackling fraud, and in seeking financial redress for the EU budget when it is found.

Finally, the hon. Member for Kirkcaldy and Cowdenbeath raised the issue of different countries’ practices in ensuring compliance with EU aid spending. Member states are responsible, but ultimate responsibility lies with the Commission, which needs to ensure compliance across the EU by issuing clear guidelines and ensuring that effective control systems are in place.

I hope that those points of information and clarification are helpful to the Committee. I thank hon. Members for their ongoing engagement with the issues and for their continued support of the Government’s strong position on financial management and fraud.

Question put and agreed to.

Resolved,

That the Committee takes note of European Union Document No. 11470/15 and Addenda 1 to 6, a Commission Report: Protection of the European Union’s financial interests—Fight against fraud 2014 Annual Report, and unnumbered European Union Documents, the European Court of Auditors’ 2014 Annual Reports on the implementation of the budget and on the activities funded by the 8th, 9th, 10th and 11th European Development Funds; agrees that budgetary discipline and robust financial management at all levels remains crucial, and that EU taxpayers must have confidence that their funds are being effectively managed and implemented at an EU level; expresses disappointment that the error rate for EU budget payments shows only a slight improvement on last year; supports the Government’s efforts to continue to engage with the Commission and Member States to drive improvements to reduce the error rate, in particular, advancing the simplification agenda; stresses the importance of the EU budget achieving results as well as being compliant; and presses the Commission for a clear action plan to address the European Court of Auditors’ recommendations relating to the European Development Fund in order to improve its error rate.