The European Scrutiny Committee has made further
progress in the matter referred to it and has agreed to the following
POLITICALLY IMPORTANT: FOR DEBATE
COURT OF AUDITORS ANNUAL REPORT FOR 1999
Report on the activities financed from the General Budget, together with the Institutions' replies.
Report on activities of the Sixth and Seventh European Development Funds, together with the Institutions' replies.
|Deposited in Parliament:
||11 December 2000|
|Basis of consideration:
||EM of 20 December 2000
|Previous Committee Report:
|To be discussed in Council:
||For debate in European Standing Committee B (together with the Commission's Annual Report for 1999 on protecting the Communities' financial interests)
1.1 The European Court of Auditors (ECA)
is responsible for the external audit of the Community's public
finances. It examines the legality, regularity and soundness of
the management of all the Community's revenue and expenditure,
and the revenue and expenditure of any body created by the Community.
1.2 The ECA publishes Special Reports throughout
the year on its audits of particular areas of revenue or expenditure.
In its Annual Report, it provides an overview of its activities
as a whole and also reviews action taken by the Commission and
other relevant bodies in response to its Special Reports. The
Annual Report includes the ECA's Statement of Assurance for the
financial year in question. The Report also covers the Sixth,
Seventh and Eighth European Development Funds and a Statement
of Assurance in respect of them, as these funds are separate from
the General Budget.
1.3 The Annual Report and Statement of Assurance
allow the Council and the European Parliament (the two arms of
the Community's Budgetary authority) to consider how well the
Community budget was implemented, and whether the budgetary processes
for the year should be closed by the Parliament granting, on the
recommendation of the Council, a "discharge" to the
Commission. Article 276 EC requires the Commission to act on any
comments made by the Council and the European Parliament in granting
the discharge, and to report back on the actions it has taken
in response, if requested.
1.4 In considering the report, we have been
assisted by the Explanatory Memorandum (EM) of 20 December 2000
from the Economic Secretary to the Treasury (Miss Melanie Johnson).
As well as providing the Government's views on the report, it
also contains a helpful summary of the report itself (which is
over 500 pages long). We annex the EM to our Report (Annex A)
and cross-refer to it where appropriate by paragraph number. The
EM contains relevant paragraph references to the Report itself,
and also has an annex listing references in the Report to the
Report on the General Budget
1.5 The document on which we report is provisional,
but we expect that the final version when published in the Official
Journal will simply correct any typographical errors.
1.6 The report contains a chapter on own
resources followed by chapters on each of the five main categories
of expenditure (the CAP, structural measures, internal policies,
external aid, and administrative expenditure). It concludes with
chapters on financial investments and banking activities, and
the Statement of Assurance. The Minister's EM provides a summary
of each of the subject-specific chapters of the report (EM, paras
9-42). The EM also summarises the Commission's responses to the
issues raised by the ECA.
1.7 The report refers to a number of ECA
Special Reports, published in 1999 and in other years. We reported
on the ECA's Annual Report for 1998 on 26 January 2000.
Since that Report, we have reported on 19 Special Reports and
these are listed in Annex B to this Report. In the case of the
ECA Special Report No. 11/2000 (on the olive oil support scheme)
we recommended a debate in European Standing Committee A, which
should be held shortly.
1.8 The ECA notes that 1999 was an important
year for financial management in the Community. Following the
crisis of confidence in the Commission's management, which led
to the resignation of the Santer Commission, the new Commission
began immediately on a new reform programme. The ECA notes that
this involved three related themes: reform of the way political
priorities are set and resources allocated, important changes
to personnel policy, and a radical overhaul of financial management
and control. We reported on the White Paper on reform of the Commission
on 12 April 2000.
On 19 April 2000, we reported on the Commission's Action Plan
for improving financial management and procedures.
On 29 November 2000, we reported on the Commission's proposal
for a complete recasting of the Financial Regulation and referred
it for an opinion to the Committee of Public Accounts.
This Regulation is the main instrument which lays down rules for
all aspects of the establishment of the budget and the implementation
of revenue and expenditure, the definition of the role and responsibilities
of those involved in implementation; and the monitoring and control
of implementation. A new Regulation is regarded as a key plank
in reform of financial management within the Commission. Steps
have already been taken, ahead of adoption of a new Regulation,
to separate internal audit from financial control within the Commission
and to decentralise control to Directorates. The ECA notes that
most of the weaknesses which the reform programme is seeking to
address are points which it has emphasised in its reports on many
occasions. It welcomes the steps the Commission is taking to improve
financial management and also the introduction of Activity Base
Management (ABM), as proposed in the White Paper, which it says
should assist the Commission to improve its setting up priorities
in line with available financial and administrative resources.
1.9 The ECA also notes that the Commission
has announced reform programmes for specific budgetary areas,
which also address concerns it has expressed earlier. These include
proposals for management of the external aid programmes, based
on an analysis of the weaknesses reflected in various earlier
ECA reports. The ECA notes that Member States are responsible
for the day-to-day management of the bulk of the Community budget,
particularly in the areas of the Common Agricultural Policy and
the Structural Funds. It notes that its Special Reports continue
to draw attention to serious and persistent weaknesses in Member
States' management and control systems. It recognises that important
initiatives have been taken by the Commission to improve matters
by strengthening the financial controls that the Member States
themselves are required to maintain over Community-financed (or
It notes, however, that implementation of the new systems remains
incomplete and that the Commission needs to increase its pressure
on Member States to implement them fully.
1.10 Aside from its consideration of the
Commission's reform proposals, the ECA comments that some progress
has been made in some specific areas as a result of its previous
audit observations. These include action to remedy specific weaknesses
in some projects and programmes (for example, the programme of
assistance to South Africa, reforms to the measures for the subsidised
use of skimmed milk and skimmed milk powder for animal feed, action
on some own resources matters).
In other areas, however, such as reform of the wine market organisation
and the taking of corrective action following the detection of
errors or irregularities in the management or the European Regional
Development Fund, the ECA says that the Commission response has
been slow, or partial.
1.11 In its Statement of Assurance on the
1999 accounts, the ECA again draws attention to problems with
the Community's financial statements similar to those found in
previous years. Weaknesses in accounting systems and procedures
mean that the information presented in some cases is incorrect
or incomplete. The problems in management and control systems
covering operational expenditure, both at the Commission and in
Member States, continued to give rise to a significant incidence
of errors, mainly at the level of final beneficiaries. In view
of its findings, the ECA again declined to provide assurance that
the transactions underlying the financial statements are legal
and regular, except in the case of own resources and the institutions'
internal staff expenditure. This is the sixth year running in
which the ECA has declined to give a positive Statement of Assurance
on the legality and regularity (as distinct from the reliability)
of the transactions underlying Community expenditure. The ECA
strongly encourages the Commission to continue with implementation
of its reform proposals, but notes that changing the management
culture of the organisation will also be a key part of effecting
real improvements in financial management.
1.12 The ECA again draws attention to the
danger of misinterpreting or misrepresenting the errors found
in its audits as indicating the level of fraud affecting the Community
budget. It says that references in its reports to payments where
the amounts are wrong because of error and irregularity primarily
concern problems of inadequate financial management and control.
The bulk of the errors occur in the main expenditure programmes
managed by the public authorities in the Member States, and particularly
concern such things as small overpayments to farmers and payments
for expenditure by public authorities which is not eligible for
EU co-financing. Only a small proportion of the breaches of the
regulations found by the ECA have justified further investigation
by the Commission's independent anti-fraud unit (OLAF) or the
authorities with criminal jurisdictions in the Member States.
It notes that the 1995 Convention on the protection of the Community's
financial interests has still not been ratified by all the Member
States (the UK has ratified) and that the parallel Convention
dealing with corruption in connection with the EU budget has been
ratified by only one Member State. It argues that this shows that
Member States are not yet fully discharging their responsibilities
under Article 280 of the Treaty for combatting fraud against the
Community budget. It agrees with the Supervisory Committee of
OLAF that much remains to be done to improve co-operation between
OLAF and the Member States in the investigation and prosecution
of fraud and corruption involving the EU budget. We have reported
separately on the Commission's annual report for 1999 on the protection
of the Community's financial interests and the fight against fraud.
1.13 The ECA report makes clear that the
Statement of Assurance audit is based on a sample of transactions
which does not permit estimation of error rates in relation to
particular Member States. It provides no overall estimate of the
scale of errors, either formal (an error which has no directly
quantifiable effect on the amounts transacted) or substantive
(where the error does affect the amounts of transactions).
Report on the activities of the Sixth, Seventh
and Eighth European Development Funds (EDFs)
1.14 The EDFs originate from the international
agreements, known as the Lomé Conventions, which created
an association between the Member States and 71 African, Caribbean
and Pacific countries, and to Council Decisions relating to the
association of 24 overseas countries and territories. The Community
provides aid to these countries to finance development projects.
Payments during 1999 totalled 1,275.4 million euros. The Minister
summarises the main points made by the ECA regarding these funds
in paragraphs 47 to 52 of her EM. The ECA find that on the whole
the underlying transactions were legal and regular. However, it
stresses that the audits carried out by the Commission in 1999
revealed evidence of ineligible expenditure and the ECA recommends
that the Commission remedy this by recovering any funds paid unduly
or reporting to OLAF any cases where fraud is suspected.
The Government's view
1.15 The Minister sets out the Government's
views in paragraphs 55-59 of her EM. She draws attention, in particular,
to the role played by the Government in the creation of the new
anti-fraud office (OLAF) and says that the Government will continue
to press OLAF to recruit the agreed number of extra staff as quickly
as possible and to make use of its new powers and independence
from the Commission. She says that the Government is working with
the Commission and other Member States to improve financial management
and control, for example through its membership of the group of
Personal Representatives of Finance Ministers which aims to improve
co-ordination between the Commission and the Member States in
general. The Government welcomes the Commission's reform programme
and underlines the importance of ensuring that it is supported
by all the parties involved, including the European Parliament
and the Council. She notes that there are four criticisms of the
UK in the report and these are listed in the Annex to her Explanatory
Memorandum. She says that a full response will be made by the
UK to the Commission as part of the normal follow-up procedure.
Advance copies will be provided to the House. She expects that
the ECA Annual Report will be discussed by ECOFIN in March and
that the European Parliament should decide on discharge, on the
recommendation of the Council, by the end of April.
1.16 The European Court of Auditors'
Annual Report for 1999 covers a period of transition. Whilst the
findings in the report in respect of continuing weaknesses in
financial management and, sometimes, associated policies reflect
a pattern of consistent observations by the European Court of
Auditors over a period of years, there is more this year of a
more positive kind in terms of actions being taken by the Commission
systematically to address these concerns. Most of these flow from
the proposals in the White Paper for reform of the Commission,
or from the conclusions of the Agenda 2000 programme about the
expenditure and allocation of Community resources for 2000-2006.
Those include reforms in respect of administration of the Common
Agricultural Policy and also the structural funds. It is, however,
too soon for any of these changes to be showing through in terms
of their effects on financial management and performance.
1.17 In relation to the Common Agricultural
Policy, for example, we see that the European Court of Auditors
notes that the financial year 1999 shows no significant improvement.
It regards the joint financing by the Community of quota purchases
for milk as not complying with the principle of sound financial
management and notes that the Commission has yet to provide the
analysis to justify the currently high level of aid for skimmed
milk and skimmed milk powder. It regards the recovery of arrears
in respect of imports of milk products at a preferential rate
from New Zealand as unsatisfactory. It criticises the Commission
as not sufficiently quick to act as regards measures to prevent
re-occurrence of the problems.
1.18 As regards the structural funds,
it says that the Commission has not yet established comprehensive
databases to provide an overview of the status of structural fund
programming and to monitor progress on the ground. It complains
of difficulty in obtaining general information on the nature and
impact of projects which have been jointly financed and it complains
about the delays in the closure of files relating to structural
fund programming periods prior to 1994 which should have been
tackled much earlier.
1.19 As regards external aid, the Commission
says that evaluation in the context of the PHARE and TACIS programmes
has improved as a result of its reports but that progress remains
to be made with regard to the independence of those doing the
assessments, the aims of evaluation and the quality of the reports
and follow-up to them.
In the context of the PHARE and TACIS programmes, the European
Court of Auditors refers to projects being launched late and in
a hurry, and with little significant progress being made. It notes
that, despite the fact that regulations set a six-month deadline
for the Commission to reach decisions on requests from non-governmental
organisations (NGOs), it actually takes the Commission on average
12 months to do so. It notes that an agreement between the European
Community and the United Nations concerning finance for humanitarian
programmes and aid for development came into effect in August
1999. However this did not resolve the fundamental problem of
the nature of the relationship between the United Nations and
the Commission. The European Court of Auditors thinks it likely
that relations will remain strained and difficulties in monitoring,
eligibility and auditing will persist. It says that, if need be,
the Community should be prepared to reduce, or even suspend, its
aid to the United Nations agencies whose results do not reach
an acceptable standard.
1.20 We refer to these examples of shortcomings
as evidence of the continuing need for improvements in financial
management by the Member States and by the Commission. The Report
rightly emphasises the responsibilities of the Member States as
well as the Commission. In this regard, we drew attention in our
report on the European Court of Auditors' Special Report No. 11/2000
on the support scheme for olive oil to what we called the "blind
disregard shown by the Member States concerned for the basic principles
of financial accountability, not to mention the interests of Community
tax payers". In our view, that amounted to little short of
a scandal. We regarded it as typifying both the shortcomings of
the Common Agricultural Policy and the lack of proper financial
controls within the Community. We have recommended it for debate.
1.21 It has been customary for us to
recommend the Annual Report of the European Court of Auditors
for debate in Standing Committee, though last year this did not
happen. We think it right to do so again this year, and we recommend
that it be debated in European Standing Committee B, along with
our report on the Commission's annual report for 1999 on the protection
of the Communities' financial interests and the fight against
fraud (see paragraph 2 of this Report). Such a debate will provide
a good opportunity not only to debate the continuing shortcomings
revealed by this report but also the progress being made in implementation
of the main elements of the Commission's reform programme.
Explanatory Memorandum from Miss Melanie Johnson,
Economic Secretary, HM Treasury
Annual Report of the European Court of Auditors
concerning the financial year 1999
1. The European Court of Auditors (ECA) is the
institution of the European Community responsible for external
audit of the other Community institutions. In addition to powers
to make special reports from time to time, the ECA is required
by Article 248 of the Treaty of Amsterdam to provide the European
Parliament and the Council with an Annual Report on the implementation
of the Community's budget together with a Statement of Assurance
as to the reliability of the Community's financial accounts and
the legality and regularity of the transactions underlying them.
This Explanatory Memorandum covers the Annual Report and Statement
of Assurance on the Financial Year ending 31 December 1999, containing
the observations of the ECA and the responses to them of the relevant
institutions. The requirement for a Statement of Assurance to
accompany the Annual Report was put into operation for the first
time in respect of the 1994 financial year.
2. The Annual Report also covers the sixth and
seventh and eighth European Development Funds and the ECA has
produced a separate Statement of Assurance on these Funds, which
are separate from the general budget.
3. The Annual Report and Statement of Assurance
allow the Council and the European Parliament (the two arms of
the Community's budgetary authority) to consider how well the
budget was implemented and whether the budgetary process for the
year should be closed by the Parliament granting, on the recommendation
of the Council, a 'discharge' to the Commission. Article 276 of
the Treaty requires the Commission to act upon any comments made
by the Council and the Parliament in granting the discharge and
to report back on the actions it has taken in response, if requested.
4. The structure of the annual report on the
1999 budget is as follows:
Report on activities financed from the General
(Each chapter is followed by the Institutions'
Chapter 1 - Own resources
Chapter 2 - The Common Agricultural Policy
Chapter 3 - Structural measures
Chapter 4 - Internal policies
Chapter 5 - External aid
Chapter 6 - Administrative expenditure
Chapter 7 - Financial instruments and banking activities
Chapter 8 - The statement of assurance and supporting
Report on the activities of the sixth, seventh
and eighth European development funds
(Each chapter is followed by the Institutions'
Chapter I - Implementation of the sixth, seventh
and eighth EDFs as at 31 December 1999
Chapter II - Statement of Assurance concerning the
European Development Funds
Chapter III - Follow up of previous observations
Chapter IV - Other observations
Annex I - Financial information on the general budget
of the European Union, and charts
Annex II - Reports and opinions adopted by the Court
of Auditors during the last 5 years
5. This year the ECA has continued its policy
of placing more emphasis on publishing, in Special Reports, the
more detailed results of audits which covered specific subjects.
The following Special Reports have been published in 2000.
Special report 1/00 Classical
Special report 2/00 Aid
given by the European Union to Bosnia-Herzegovina with a view
to restoring peace and the rule of law
Special report 3/00 European
Social Fund and the European Agricultural Guidance and the Guarantee
fund-Measures to assist the employment of young persons
Special report 4/00 Rehabilitation
actions for ACP countries as an instrument to prepare for normal
Special report 5/00 The
Court of Justice's expenditure on buildings
Special report 6/00 Granting
by the Community of interest subsidies on by the European Investment
Bank to small and medium-sized enterprises through its temporary
Special report 7/00 International
Fund for Ireland and the Special Support Programme for Peace and
Reconciliation in Northern Ireland and the Border Countries of
Special report 8/00 Community
measures for the disposal of butterfat
Special report 9/00 Concerning
Special report 10/00 Public
contracts awarded by the Joint Research Centre
Special report 11/00 Support
scheme for Olive oil
Special report 12/00 Management
by the Commission of European Union support for the development
of human rights and democracy in the third countries
Special report 13/00 Expenditure
of the European Parliament's political groups
Special report 14/00
Greening the Cap
Special report 15/00 Cohesion
Special report 16/00 Phare
and Tacis programmes
Special report 17/00 Commission's
control of the reliability and comparability of the Member State's
Special report 19/00 Assistance
to Palestinian Society
Special report 20/00 Organisation
of the sugar market
The ECA plans to publish several more Special Reports
later in the year.
Statement of Assurance
6. In interpreting the Statement of Assurance
(SoA) it is important to note that:-
the SoA audit is restricted in scope
to supporting the terms of the Statement of Assurance. Thus whilst
it raises points bearing on value for money it is not expressly
concerned with that subject. The focus of the SoA audit is on
the reliability, legality and regularity of the Community's financial
transactions and it is impossible to extrapolate from the calculations
of 'error' rates to any particular figure for 'wastage' of Community
it does not identify 'fraud' as such.
The ECA makes few observations about the motivation behind the
'errors' in legality and regularity which it identifies. Some
may represent the effect of deliberate criminal fraud. At the
other extreme, some will certainly represent genuine misunderstandings
in good faith about, for instance, eligibility of expenditure
for Community support perhaps because regulations have been drafted
the EC budget makes a distinction between
financial commitments and payments. A commitment is a legal obligation
to spend money, the payment covers actual expenditure. A commitment
to make a payment to support expenditure by a farmer may in itself
be legal and regular even if it emerges later that the expenditure
claimed by the farmer was non-existent, or overstated, or wrongly
described. In that case, the payment made to the farmer
(if there were one before the irregularity in the claim was discovered)
would be found to be subject to error;
although the Commission is accountable
for implementation of the budget through the discharge procedure,
only about a fifth of the budget is spent directly by the Commission.
Member States, third countries or some other intermediary body
administers the rest. In these cases, the Commission may be some
way removed from the beneficiaries of EC intervention, and reliant
on compliance with the relevant regulations by national and local
administrations in Member States as well. However the Commission
has a duty to set clear implementing rules for administrations
to follow, to explain their application and to ensure that Member
States' financial management is adequate;
the SoA audit is based on a sample of
transactions selected by a methodology which, taking account of
the structures and volumes of transactions comprising the overall
budget, is intended to allow the ECA to extrapolate from the sample
to conclusions about the total with reasonable confidence. It
does not, however, permit estimation of error rates in relation
to particular Member States;
the ECA distinguishes between 'substantive'
errors and 'formal' errors. These terms have particular technical
meanings in the SoA audit (which are defined in paragraphs 8.21
and 8.23 of the report). A substantive error is a specific
quantifiable error directly affecting the amount of the transactions
underlying Community funds disbursed. A formal error is
an error which has no directly quantifiable effect on the amounts
of the transactions underlying Community funds disbursed. It does
not follow that formal errors are never significant;
this year, as last year each chapter
of the report which deals with specific areas of revenue or expenditure
includes a specific appraisal in the context of the Statement
7. This Memorandum does not attempt to explain
all the points raised. The following sections highlight the main
themes emerging from the report, with references to the text.
Summaries of the Commission's responses, which are included in
the report, follow each section in italics. At Annex A to this
Memorandum is a list of the main references by name to the UK
in the report; these are not all criticisms, some of the references
are purely descriptive.
From 1st January 1999, the EC budget
is applied in euro by application of the Council regulation (EC)
No 1103/97. In this Memorandum EURO amounts are converted to £
using the exchange rate on 30 December 1999 which was 1 EURO =£0.6217.
References in this Memorandum are to paragraphs
of the Annual Report.
8. The report notes that 1999 was marked by the
resignation of Santer's Commission after the First Report of the
Committee of Independent Experts. In September 1999, the new Commission
began work on its reform programme. During 2000, the Commission
has been developing the details of its proposal, including publication
of its Reform White Paper and commencing the process of implementation.
The general introduction to the report stresses the
With regard to the revision of the Financial Regulation,
the Court has made recommendations on:
the authorising officer's responsibility;
the introduction of the independent
the requirement for accounts to be presented
in accordance with international standards;
the introduction of borrowing for the
purpose of investing in buildings for the use of the institutions;
simplification of the provisions concerning
the definition of commitments and the carry-over of appropriations;
a reduction in the exceptions to the
basic principles of the financial regulation.
The Court notes that important initiatives have been
taken to improve Member States' financial control systems but
that implementation of the new systems continues to be incomplete.
The Court states that the Commission needs to increase its pressure
on the Member States to implement them fully.
The Court notes that the 1995 Convention on the protection
of the Community's financial interests has still not been ratified
by all Member States and thus feels it is necessary to explore
all possible instruments, either within the existing Community
legal framework or through appropriate amendments to the treaty,
to protect the Community's financial interest.
Chapter 1 - Own resources
9. Own resources finance the Community budget.
These are divided into four categories. The first is Customs duties,
including those on agricultural products. The second is sugar
levies. The third is contributions based on VAT, and the fourth
is GNP- based contributions.
Revenue (million euro)
Revenue (£ million)
Traditional own resources
13, 857.6 million
8, 615.3 million
1, 353. 2
- 169. 2
Other adjustments and contributions
The total represents an increase overall of 2,8 %
over revenue for 1998.
10. The Court is generally satisfied with the
results of its checks on resources as regards the reliability
of the accounts and the legality and regularity of the transactions
entered in the accounts of the Member States (para 1.17). However,
the Court states that in some cases traditional own resources
were not made available or made available late and thus the Commission
and national authorities should take appropriate action (para
1.17). With regard to VAT and GNP resources, the Court obtained
reasonable assurance on the reliability system for collating the
resources (para 1.22).
11. With regard to the comparison of data to
combat fraud in the Own Resources field, the Court highlights
a methodology based on a comparison of intermediate consumption,
using fiscal and statistical sources which has proved useful in
two Member States. It recommends all Member States use this methodology,
once improvements have been made (para 1.72).
The Commission reports that it acts on all cases
where resources are made available late (1.11).
The Commission welcomes the Court's recommendation
of the methodology mentioned in the report and will proceed in
discussions with Member States (1.72.)
Chapter 2 The Common Agricultural Policy
12. In 1999, expenditure of the Guarantee Section
of the European Agricultural Guidance and Guarantee Fund amounted
to 39, 541 million euros, which is 49% of the European Union budget.
The ECA states that there were substantive errors affecting the
legality and regularity of the underlying transactions. However,
the majority of cases involve minor over-declarations by individual
beneficiaries in regards to surface -areas or the number of animals
(para 2.26). The Court points out, nevertheless, that despite
the fact that formal errors do not affect the value of the examined
transactions, the frequency is considerable. 80% of these errors
involve Member States' implementation of checks by local or central
management (para 2.34) or failure to keep compulsory records (para
2.35). The Court notes that the Commission authorised payment
orders outside the deadline laid down in the regulation (para
2.33). The Court states that there is no significant improvement
as regards the legality and regularity of the underlying transactions
for the financial year 1999. The Court recommends that the Member
States and the Commission heighten the impact of their controls
13. Corrections made in the clearance decisions
for 1995 are much higher than those made in 1994. This is due
to a time lag, as the 1995 figures include amendments for the
financial year 1994. Also, the Court notes that the amendments
would have been at least 147. 5 million euros greater if the Commission
had applied appropriate flat rate corrections for key control
failures, and that a penalty should have been imposed on Member
States whose management quotas were unsatisfactory. It took four
and a half years to clear the accounts, which is detrimental to
the Community's financial interest (para 2.43-2.60).
14. The Court comments on the actions taken in
the light of previous observations made in its reports on: wine
products, milk quotas, skimmed-milk powder for animal feed. In
the case of reduced-rate imports and disposal on the market of
milk products from New Zealand and of Swiss cheese (para 2.77),
despite some measures that were taken to stop the reoccurrence
of problems with preferential imports, the Court considers that
the Commission was not quick enough to act and has not initiated
any specific investigations into the imports of other agricultural
products at the preferential rates of duty (Special report No
4/98, para 2.113- 2.123).
15. The Commission points out that neither
they nor the Member States had very much time to research the
substantive errors found by the Court; in some cases the Members
States' comments had not yet been received (2.26). However, the
Commission does accept the Court's view that errors have been
made and thus will take steps to recover the amounts involved.
16. With regard to the New Zealand butter
case, the Commission states that it will "contact the UK
authorities to obtain the legal advice on which they have decided
not to pursue the NZDB (New Zealand Dairy Board) for a contribution
to the security". It will notify the Court of subsequent
developments (para 2.122).
17. With regard to the clearance of accounts
procedure the Commission argues it is lengthy because the Member
States' rights of defence must be respected. (para2.45). On individual
corrections, the Commission does not agree with the Court's finding
that it should have been greater than EUR 147.5 million. The EAGGF's
proposed decisions are based on compliance with the established
criteria, the information and evidence transmitted by the Member
States during the accounts clearance procedure and the principle
of equal treatment between Member States (para 2.60).
Chapter 3 - Structural measures
18. The Structural Funds consist of: the European
Regional Development Fund (ERDF), the European Social Fund (ESF),
the Financial Instrument for Fisheries Guidance (FIFG), and the
Guidance Section of the European Agriculture Guidance and Guarantee
Fund. The 1999 budget for commitments and payments totalled 39,167
million euros and 30, 658 million euros respectively.
19. For commitments, the budget implementation
rate was 94% and 87% for payments. Payment requests by the Member
states totalling 6,498 euros had still not been examined and settled
at the end of the year (para 3.3-3.22).
20. The Court argues that the number of anomalies
found in the declarations of expenditure co-financed by the Community
continues to be high and that the most significant errors were
ones that had been pointed out in previous financial years (para
21. With regard to outstanding commitments; the
Court says that the outstanding amounts were not justified in
a third of the transactions audited in the ESF and in the 28%
of the transactions audited in the EAGGF-Guidance budgetary areas
22. The Court emphasised that it found weaknesses
in the security database, which allow unauthorised users within
the DG to make amendments to the database. The Court has therefore
forwarded its recommendation to the Commission (para 3.57).
Follow-up of previous observations
23. The Court believes that in relation to the
final adjustments of the 48 cases examined, the Commission only
took satisfactory corrective measures in 16 cases (para 3. 83-
84). Moreover, the Commission rarely applies Article 24 of Regulation
(EEC) No 4253/88 in respect to reducing, suspending or cancelling
Community assistance in cases where the Commission disagrees with
the Member States' corrections.
24. The Commission emphasises that the level
of errors found by the Court is indicative of the "deficiencies
that exist in the Member States' financial control of the funds
which are typical of the management of any complex programme"
rather than a significant proportion of Community funds being
misspent. In response to the Court's criticism of substantive
errors in payments, the Commission states that it will investigate
the cases mentioned by the Court and will make necessary financial
corrections ( para 3.44).
25. Furthermore, the Commission takes on board
the views of the Court's findings in relation to the information
systems in place for managing the ESF. With regard to the unsatisfactory
follow up of the 32 cases remaining, the Commission accepts that
there was total or partial lack of a follow up for 9 of them and
states that the amount to be repaid is estimated to be EUR 5 million
Internal Polices Chapter 4.
26. The internal polices of the European Union
consist of measures relating to vocational training, education,
youth, culture, audiovisual media, information measures regarding
energy policy, the environment, trans-European networks, transport,
controls of nuclear safety, consumer protection and research and
technological development (para 4.2).
27. The Court's audit concluded that the legality
and regularity of the underlying transaction for commitments and
payments recorded continues to reveal a significant incidence
of errors in payments in addition to a lower incidence of errors
of commitments. The errors were both substantive and formal. The
Court considers that more effort should be made in the selection
of projects to establish the proposed costs and significantly,
monitoring of the projects to verify the costs claimed (para 4.22).
The Commission's control of claims submitted by beneficiaries
must be improved (para 4.23).
28. With respect to the follow up of previous
observations i.e. the nine contracts managed by at the Transport
and Energy DG and eight contracts by the Research DG, the Commission
must make efforts to carry out the outstanding action agreed in
the light of the audit's findings (para 4.26).
29. In response to the Court's findings regarding
the substantive errors on payments, the Commission argues that
the act of making the payments themselves was not in error; they
state that under the present cost statement system, unless an
error can be detected when checking the cost statement, it has
to be paid in full. Only an on-the-spot audit can detect the type
of over charging which was found by the Court (para 4.16). As
regards the Court's remarks on the Commission's follow up, the
Commission states that it is aware of the importance of recovering
entitlements in the interests of sound financial management and
will act on the Court's recommendation (para 4.25).
Chapter 5 External aid
30. External aid comprises external measures,
food aid expenditure, humanitarian or emergency aid and the external
aspects of certain Community polices (fisheries and the environment).
It should be noted that this chapter includes observations on
the PHARE public administration programmes, the refugee return
programme in Bosnia, sound financial management issues relating
to the non-governmental organisations and the agreement between
the European Community and the United Nations.
31. The final budget was 6,477 million euro.
As in the previous year most of the commitments were made in the
fourth quarter of the year, in December. In relation to the PHARE
programme, the PHARE and TACIS Special Funds, the co-financing
activities managed by Non-Governmental Organisations in developing
countries and expenditure for aid to Bosnia, the Court notes that
because their audit covered only selected areas, its objective
was not to draw general conclusions, but to determine if there
were any significant problems regarding the legality and regularity
of the transactions verified and the quality of the internal control
systems (para 5. 14- 15). The Court concludes that these did not
reveal significant legality and regularity errors. However, the
Court points out that improvements are needed in internal control
32. As regards follow-up of previous observations,
the Court states that in respect of Annual and Special Reports,
there are inadequate procedures for evaluation of PHARE and TACIS
programmes. However, they do point out that the introduction of
an evaluation unit in DG SCR (Common Service for External Relations)
has improved the situation (para 5.50-5.55).
33. With regard to the legality and regularity
of errors, the Commission explains that the systems have been
already reinforced and improved.
Chapter 6 Administrative expenditure
34. This consists of expenditure on staff, accommodation
and other miscellaneous costs. The available appropriations amounted
to 4,504 million euro. The audit of the legality and regularity
of the main administrative expenditure was satisfactory.
35. The European Parliament, the Council,
the Commission, the European Court of Justice, the Court of Auditors,
the Economic and Social Committee and the Committee of the Regions
have produced detailed comments.
Chapter 7 Financial Instruments and banking
36. This comprises operations in the form of
loans and borrowings, guarantees, investments or expenses incidental
to these operations.
Guarantee Fund for external actions
37. The Edinburgh European Council of December
1992 decided to implement the Guarantee Fund for external Actions.
The Fund was then established on 31 October 1994 and is drawn
on if the beneficiary of a loan granted or guaranteed by the Community
to or in a third country defaults. As from 31 December 1999, the
Guarantee Fund has received funds from the budget amounting to
1, 638. 4 million euro (para 7.3). In 1999, the Guarantee Fund
activities generated 41. 1 million euro in net interest revenue,
while the 0.05 % annual commission payable to the EIB (European
Investment Bank) for its financial management of the Fund amounted
to 0.06 million euro (para 7.8). The Court points out that the
rate of remuneration has not changed since 1995 while the Fund's
total resources have increased. Therefore the Court urges that
this annual fee should be reviewed.
38. The Commission explains that at the end
of each budgetary exercise the EU and the EIB under the convention
regarding the management of assets of the Guarantee Fund may decide
to review the level of the management fee. As a result of the
considerable increase in the EIB's remuneration over the last
3 years the Commission will therefore ask the EIB at the end of
the budgetary exercise 2000 to present an indication of the costs
incurred. If necessary the Commission will negotiate a revision
of the remuneration structure.
European Investment Fund (EIF)
39. The EIF manages three projects financed by
the Community Budget: "Growth and Environment European"
pilot project, the "European technological facility
start up" and the "small medium- sized enterprise"
(SME). With regard to the follow up of previous observations,
the Court states that the implementation rate of the Growth and
Environment" pilot project has improved (para 7.13). With
regard to the other programmes, the Court states that the time
delay between budgetary implementation and actual implementation
of these programmes casts doubt on the principles of transparency
and annuality. Therefore the Court recommends that the Commission
provide an explanation on this matter in its balance sheet (para
40. The Commission notes the time delay and
will find ways of improving the matter. The Commission will also
provide an explanatory note in the balance sheet, so that the
amounts corresponding to funds held by the EIF can be identified.
Financial mechanisms of the European Economic
41. The objective is to reduce the economic and
social disparities between the regions of the EEA. This is carried
out by providing non-reimbursable grants as well as interest rebates
on loan from the EIB. The Court notes that the EIB refused to
give access to the documentation on four projects which the Court
considers fall within its mandate (para 7.24).
42. The Commission explains that it made available
all the information at its disposal for the four projects noted
in para 7.24. The EIB's comment on this lack of access is that
the projects in question fell under the previous financing regime,
namely EEA (European Economic Area) funds alone, and were paid
out in 1994 before these countries' accession.
Chapter 8 The Statement of Assurance and
43. For the financial year ended 31 December
1999, the European Court of Auditors examined the consolidated
accounts of the European Communities. The accounts for which the
Commission are responsible are the consolidated revenue and expenditure
account and balance sheet and explanatory notes. The Court continues
to express serious criticisms of the legality and regularity of
the payments and the transactions underlying them. The President
of the Court of Auditors, Jan O. Karlsson, states that with regard
to revenue, the audit did not show incidence of error in own resources.
With regard to commitments, the audit showed that legal obligations
entered into were 390 million euro in excess of available appropriations
for international fishery agreements, Structural Operations and
External Action (para 8.18). With regard to payments, the Court
criticised a number of matters which included the failure to comply
with regulations (para 8.23- 8.24) and systems weaknesses (para
8.25-8.30). In view of the Court's findings, the Court declined
to provide an assurance that "the transactions underlying
the financial statements are legal and regular except in respect
of own resources, other commitments and the Institutions' staff
44. The Court explains that a medium term improvement
requires a combination of general and specific measures including
the clarification and simplification of Community financial regulations
and improvement of control procedures, particularly at the level
of Member States.
45. The Court argues that the Commission needs
to improve accounting framework, which is integral to the basic
standards that could serve to homogenise the institutions' account
(para 8.35-8.38). Nonetheless, the Court welcomes the Commission's
important step of presenting to the budgetary authority an action
plan of procedures to improve financial management (para 8.58).
46. In response to the Court's criticism of
the Commission's accounting framework, the Commission has commenced
a methodological analysis of the accounting process with the aim
of completing statements satisfying the accounting standards.
In order to achieve this the Commission will be contracting high-level
external assistance. The ECA report includes replies from the
European Parliaments and the Economic and Social Committee (ESC).
Report on the Activities of the Sixth, Seventh
and Eighth European Development Funds.
47. The European Development Funds (EDF) are
the product of international agreements between Member States
and 71 African, Caribbean and Pacific (ACP) States and of the
Council decisions concerning the association of 24 overseas countries
and territories. These funds are for financing development projects
and programmes. The Commission is responsible for their management.
Payment for the sixth, seventh, and eighth EDF in 1999 amounted
to 1, 275.4 million euro, as at 31 December, compared with 1,
439.6 million euro in 1998 (para 3).
48. The Court highlights the fact that the system
for managing the Stabex bank account (for the system for stabilising
export revenue) leads, for short term economic results, to considerable
funds remaining unused. This is contrary to the principles otherwise
adopted for the management of the Lomé Conventions' other
resources (para 13-15). The Court states that there have been
delays in implementing programmable aid in relation to the sixth
and seventh EDFs. The Court comments that this can in some cases
jeopardise the sums initially earmarked by the Commission for
the States concerned (para 16-17).
49. In response to the comments on the Eighth
EDF Stabex, the Commission states that the surplus consists of
the remaining cash balance from the 7th EDF and Stabex
payments made under the 8th EDF (para 14.) Moreover,
the Commission states that ACP - EC Committee of Ambassadors agreed
on 26 September 2000 to transfer the remaining Stabex funds to
the special EDF account which will be used to finance development
50. In response to the Court's criticism of
the delay in implementing programmable aid, the Commission points
out that for the most part this is a result of internal conflict,
endemic weakness or corruption in the partner country's public
administration system (para 16).
The EDF statement of assurance
51. The Court is satisfied that the accounts
for the financial year 1999 reflect an accurate picture of revenue
and expenditure for the sixth, seventh and eighth EDFs for the
52. As regards the legality and regularity of
the underlying transactions, the Court states that for the sixth,
seventh and eighth EDFs for the financial year ended 31 December
1999 these are, on the whole, legal and regular. However, the
Court stresses that the audits carried out by the Commission in
the financial year of 1999 revealed evidence of ineligible expenditure
and the Court thus recommends that they remedy this by recovering
any funds paid unduly or reporting to OLAF any cases where fraud
is suspected (para 52-53).
53. Treasury Ministers are responsible for the
Community budget and matters concerning financial control generally.
Other Ministers are concerned with those parts of the budget relating
to their own Departmental interests.
(i) Legal basis: Under Article
248 of the Treaty the ECA draws up an annual report on implementation
of the Community budget to inform the procedure under Article
276 for discharging the Commission from its responsibility for
implementing the budget for the year in question. The discharge
is granted by the European Parliament on the recommendation of
the Council. In granting a discharge, there may be obligations
laid upon the Commission to report back upon actions taken to
address matters of concern.
(ii) European Parliament procedure:
See (i) above.
(iii) Voting procedure: The Council
votes by qualified majority on whether to recommend discharge.
The European Parliament decides whether to grant discharge by
a majority of its Members and three fifths of the votes cast.
(iv) Impact on UK law: None.
54. The Community budget is a matter of exclusive
Community competence. The ECA is acting fully within its powers
in producing the annual report on budget implementation in 1997,
and the budget discharge procedure of which it forms part is entirely
within the powers conferred by the Treaty on the Institutions
55. The European Court of Auditors' report on
budget implementation in 1999 again repeats criticisms of financial
weaknesses made in previous years. While the Court of Auditors
declines to specify an average rate of error, the level of errors
found is clearly unacceptable. But it is wrong to say that it
is all fraud and waste. The Court emphasises that these errors
do not represent the level of fraud against the Community budget.
The report says that the bulk of errors represent such things
as small overpayments to farmers and payments for expenditure
which does not meet strict EU eligibility rules. Thus there are
two aspects to the action needed to reduce errors: anti-fraud
measures, and improvements in financial management and control.
56. With regard to anti-fraud measures,
the Court is concerned that the 1995 Convention on the protection
of the Community's financial interests, and its protocols, has
still not been ratified by all Member States. The UK was one of
the first to ratify the Convention in autumn 1999. The government
agrees that it is important for the remaining Member States which
have not ratified the convention to do so as soon as possible.
57. The Government strongly encourages and supports
measures to reduce fraud against the EC budget. The Chancellor
played a significant role in the creation of the new anti-fraud
office, OLAF, and the Government is ready to cooperate fully with
it to fight crime against the EC budget. During the year the Council
agreed to substantially increase the staff complement of OLAF,
bringing it to double that of its predecessor, UCLAF. The Government
will continue to press the office to recruit the necessary staff
as quickly as possible and to make full use of its new powers
and independence from the Commission.
58. The Government is working with the Commission
and other Member States to improve financial management and
control. This includes working to simplify regulations and
provide clarification of what expenditure is eligible. The Commission
is only directly responsible for around 20 per cent of Community
expenditure, the remainder being administered by the Member States.
The Government fully supports, through its membership of a group
of Personal Representatives of Finance Ministers, the work of
the Commission in developing measures which aim to improve co-ordination
between the Commission and the Member States in general.
59. The report welcomes the work which is being
done as part of the Commission reform programme to address
the weaknesses criticised by the ECA. The reform programme includes
measures to improve internal control, strengthen contractual arrangements,
and focus more strongly on results and performance measurement.
It also includes a wholesale revision of the Financial Regulation
in order to provide an appropriate regulatory framework for the
reform of financial management, on which the Commission has recently
produced a proposal (and on which I submitted an EM on 18 November).
The Government has strongly backed Commission reform and expects
the new Commission to act decisively. These reforms are far reaching
and aimed at producing a cultural change within the Commission.
They cannot be implemented overnight, and it is important that
they are given support from all parties involved the Commission,
its staff, the European Parliament, and the Council.
60. There are four criticisms of the UK in the
report; these are listed in the attached Annex. A full response
will be made by the UK to the Commission as part of the normal
follow-up procedure and I will ensure that both Houses receive
an advance copy.
61. The report itself does not have direct financial
implications. To the extent that the audit has identified irregularities
these may be followed up by the Commission, with implications
for the final settlement of revenues or recovery of payments.
To the extent that the Community's financial resources have been
wasted in some areas they could have been employed on other spending
within the limits of Financial Perspective ceilings and of available
Own Resources; or could, in principle, have allowed the Community
budget to be set at a lower level.
62. The report does not raise compliance costs
63. The report will be discussed by the Council's
Budget Committee before consideration by ECOFIN in March 2001.
The European Parliament should decide on discharge, on the recommendation
of the Council, by 30 April 2001.
REFERENCES TO THE UK
Para 2.26 Errors in over- declaration of
surface area and in the number of head of livestock
Para 2.64 Late submission for clearance
Para 2.69 Correction made regarding the
Over-Thirty-Months Scheme in relation to BSE
Para 2.113- 129 Dairy products imported at preferential
rates, detailing action by UK authorities and collection of underpaid
Reports of the European Court of Auditors
on which the European Scrutiny
Committee has reported since 26 January 2000
European Scrutiny Committee Report
Phare Cross-Border Co-operation Programme (1994-98)
HC 23-xiii (1999-2000), 6 April 2000
The principle of additionality
HC 23-xiv (1999-2000), 12 April 2000
FAIR programme (Fisheries, Agriculture and Agro-Industrial Research)
HC 23-xvi (1999-2000), 10 May 2000
Classical Swine Fever
HC 23-xvi (1999-2000), 10 May 2000
Aid to Bosnia and Herzegovina
HC 23-xiv (1999-2000), 12 April 2000
European Social Fund and EAGGF measures to assist employment of young people
HC 23-xviii (1999-2000), 17 May 2000
Rehabilitation actions for ACP countries as an instrument to prepare for normal development aid
HC 23-xviii (1999-2000), 17 May 2000
Court of Justices expenditure on buildings
HC 23-xvi (1999-2000), 10 May 2000
Interest subsidies on loans from the European Investment Bank
HC 23-xxi (1999-2000), 14 June 2000
International Fund for Ireland and Special Support Programme for Peace and Reconciliation in Ireland
HC 23-xx (1999-2000), 7 June 2000
Community measures for disposal of butter fat (New Zealand dairy imports)
HC 23-xxii (1999-2000), 21 June 2000
Trans-European Networks telecommunications
HC 23-xxvi (1999-2000), 26 July 2000)
Community support scheme for olive oil
HC 23-xxviii (1999-2000), 1 November 2000 (for debate in European Standing Committee A, not yet held)
Commission management of Union support for development of human rights and democracy in third countries
HC 23-xxxi (1999-2000), 29 November 2000
Expenditure of the European Parliament's political groups
HC 23-xxix (1999-2000), 15 November 2000
Greening of the CAP
HC 28-iii (2000-01), 17 January 2001
Phare and TACIS programmes
HC 23-xxx (1999-2000), 22 November 2000
Commission's control of the reliability and comparability of Member States' GNP data
HC 28-iii (2000-01), 17 January 2001
PROTECTION OF THE COMMUNITIES' FINANCIAL
Protecting the Communities' financial interests the fight against fraud: Commission's Annual Report 1999.
||8 November 2000|
|Forwarded to the Council:
||13 November 2000|
|Deposited in Parliament:
||11 December 2000|
|Basis of consideration:
||EM of 20 December 2000
|Previous Committee Report:
|To be discussed in Council:
||No date set|
||For debate in European Standing Committee B (together with the Court of Auditors Annual Report for 1999)
2.1 On 26 January 2000, we reported on the
Commission's annual report for 1998 on protecting the Communities'
financial interests and the fight against fraud.
On 25 October 2000, we reported on a Commission Communication
presenting a strategy for protection of the Communities' financial
interests. We noted that it appeared to contain little that was
new or different in terms of tackling fraud and irregularity.
2.2 This document is the eleventh Annual
Report by the Commission on protecting the Communities' financial
interests and the fight against fraud. It is divided into three
main sections. The first highlights Community-wide developments,
both legislative and administrative, designed to improve the protection
of the Communities' financial interests. The second provides some
statistical analyses of the overall level of fraud and irregularity.
The third outlines developments in co-operation between the Commission,
the Member States and other Community Institutions in this area.
Annexes provide supporting data. The document also includes a
report from the Commission summarising the communications made
by Member States on their inspection and findings as regards traditional
own resources (chiefly, Customs and Excise duties collected by
the Member States and assigned directly to the Community budget).
2.3 The first section, on relevant legal
and administrative developments, refers to:
- the regulatory and administrative arrangements
establishing the new European Anti-Fraud Office (OLAF) within
the Commission. OLAF replaced the Commission Task Force for the
Co-ordination of Fraud Prevention (UCLAF). OLAF can operate independently
of the Commission and may, of its own volition, decide to investigate
any matter within a Community Institution or body, and can send
files to the national judicial authorities. It also has functions
in advising on, for example, the drafting of Community legislation
from a fraud prevention perspective;
- legislative proposals (now adopted) for protection
of the euro against fraud;
- proposals for strengthening existing Community
legislation against money laundering (now agreed);
- further exploration of the possibilities of reinforcing
the criminal law protection of European financial interests
in particular the need for a "corpus juris" which,
in effect, would introduce penal provisions for the purposes of
protecting the Communities' financial interests;
- linked to the wider administrative reforms within
the Commission, a comprehensive re-casting of the Commission's
management and financial control methods, splitting internal audit
from expenditure decisions and decentralising such decisions to
- a major re-casting of the key Financial Regulation
(which we have currently under scrutiny);
- amendments to the Community transit system and
the Common Transit Convention (dealing with the movement of goods
imported into the Community and the payment of Customs dues);
- reforms within the Common Agricultural Policy,
including simplified legislation, for example, in relation to
export refund arrangements which have been a particular area for
irregularity and fraud;
- comprehensive improvements to the regulatory
framework for the management of the Structural Funds, to come
into operation with the new programme period for the funds, 2000-2006;
- proposals for amending existing Community legislation
in respect of the awarding of public procurement contracts, including
provisions to reduce the risks of dishonest tendering.
2.4 During 1999, the Commission also put
in hand action for improving the preferential tariff arrangements
and for following up the results of its major enquiry into the
functioning and effectiveness of administrative co-operation and
mutual assistance between Member States in the VAT sector.
2.5 In the second sector of the report,
dealing with co-operation with, and partnership between, Member
States, the Commission refers to its intention to have more regular
meetings of the Advisory Committee for the fight against fraud
(CoCoLAF). It notes that eight Member States had totally or partially
ratified the conventions and protocols on protecting the Communities'
financial interests (the UK has ratified all the instruments concerned).
It notes that, at the end of 1999, the Justice and Home Affairs
Council adopted a report designed to improve judicial co-operation
between Member States and the EU, specifically relating to transnational
organised networks. It also refers to training provided by OLAF
to Member States to improve the knowledge of national staff in
combatting fraud; and to steps taken to help candidate countries,
in particular Poland, to strengthen their actions against fraud
and organised crime.
2.6 In the third section, the report provides
statistics and some analyses about fraud and other irregularities.
It emphasises a number of points that need to be kept in mind:
- fraud and other irregularities occur on the revenue
side of the Communities' budget as well as on the expenditure
side; as regards revenue, it is Member States which are wholly
responsible and over half of the revenue (i.e. that from Custom
and Excise dues and VAT) is known to be subject to considerable
- on the expenditure side of the budget,
Member States are responsible for over 80% of the budget (principally
in respect of the Structural Funds and the CAP);
- whilst the effect on the Communities' budget,
and hence on Community tax payers, is the same, irrespective of
the form of the irregularity committed, the actions to
be taken to counteract such losses must reflect the nature of
the irregularities. Mistakes made by claimants or by paying agencies
which arise apparently accidentally must be rectified as far as
possible e.g. by improving administrative practices, simplifying
rules and so on; irregularities committed intentionally, particularly
where criminal fraud is involved, also require appropriate penalties
and are more likely also to give rise to the need for tighter
administrative controls or further legislation;
- the distinction between fraud and other irregularity
is an important one, but it is inherently difficult to reach a
view, at any one point in time, about the true scale of one as
against the other; irregularities which appear at first sight
to be merely errors may turn out on further examination to be
fraudulent, and vice versa; the final judgement in many cases
will only be made after the competent courts have made decisions;
- because of these difficulties, and because of
the continuing inconsistencies in the way in which Member States
report irregularities to the Commission, any figures purporting
to show the scale of fraud and other irregularities must be treated
2.7 In our Report last year on the Commission's
1998 report, we noted that Member States notified over 5,000 cases
of fraud or irregularity, involving about 577 million euros and
that an estimated 20% of these cases, in number and value (i.e.
115.4 million euros), involved a suspicion of fraud. This year's
report shows the number of fraud cases notified by Member States
as involving 190 million euros, or, about 31% of the total estimated
cost of all irregularities reported, including fraud (618,957
million euros). The Commission notes, however, that the figures
must be treated with caution. In addition OLAF reported that it
handled 252 new cases during 1999, of which a significant number
involved criminal conduct.
2.8 On the revenue side, there is
a decline in the area of traditional own resources. However, the
apparent decline in that area may be misleading. The figures from
OLAF are calculated on a basis of a minimum impact, so that, for
example, 17 million euros was the estimated figure for new cases
involving cigarettes opened in 1999, but the total loss could
amount to about 325 million euros. An accurate figure will only
be possible once investigations have been terminated. The scale
of organised "economic crime" in cigarettes may be approaching
the estimated scale of alcohol trafficking, estimated in the report
as over 500 million euros. The report says that alcohol trafficking
and cigarette smuggling now vie with one another as the most serious
form of fraud, although it comments that some Member States do
not yet seem prepared to draw the necessary conclusions. Fraud
in these areas shows up in terms of loss of tax revenue to Member
States, but has the effect of increasing their GNP contributions
to the Communities' budget.
2.9 On the expenditure side, in its
sectoral analysis, the report says that in the area of agricultural
expenditure fraud and other irregularities are declining, possibly
reflecting the changing balance of expenditure away from export
refunds and towards direct payments, which are less open to irregularity.
However, the category of expenditure most affected is still export
refunds (38% of the overall budgetary impact of irregularities)
even though export refunds made up only 14% of the total EAGGF
Guarantee Section expenditure). In the other main area of budgetary
expenditure structural measures the report indicates
a continuing substantial increase, both in terms of the number
of new cases reported by Member States and in terms of their budgetary
impact. The number of reported cases has risen by over 70%, with
the budgetary impact increasing three-fold. OLAF opened a relatively
small number of investigations in co-operation with Member States
but their budgetary impact increased more than three-fold as compared
with 1998. The trend for Member States to notify more cases of
irregularity may, or may not, be indicative of a real rise in
irregularities. At the end of 1999, the total amount still to
be recovered in respect of cases reported by the Member States
was 234.8 million euros for the period 1994-1999. The amount effectively
recovered in respect of those reported cases was 87 million euros,
or one quarter of the amount declared to be affected by irregularity.
2.10 As regards the Commission's direct
expenditure, OLAF opened 107 new investigations in 1997 with an
estimated overall budgetary impact of 73 million euros. Almost
three quarters of these cases concerned "external policies"
(for example the programmes of support to Central and Eastern
2.11 As regards the recovery of amounts
involved in cases of fraud and other irregularities, the report
regards the situation as remaining unsatisfactory. However, it
says that, in 1999, the Commission stepped up measures to ensure
more rapid and efficient recovery procedures, working in co-operation
with the competent authorities in the Member States.
2.12 The final section of the report notes
that the implementation of Article 280(5) EC requires the Commission
to report on Member States' activities to protect the Communities'
financial interests. That article came into force only in May
1999. The Commission says that more time is needed to develop
this report. It intends to produce a summary incorporating responses
from Member States as and when they are available. The Commission's
report for 2000 will cover Member States' activities in 1999.
2.13 The report does include a summary report
on communications from Member States on their inspection activities
and findings of principle in the area of traditional own resources
(customs dues). The report notes that there has been an increase
in the number of reported cases but a fall in the established
amount. Last year the Commission concluded that the data from
Member States was insufficiently comparable to allow valid conclusions
to be drawn. It notes again this year a similar lack of comparability
in the information. However, it considers that at least the problems
of securing consistency are now better understood and there will
be continuing consideration in the Advisory Committee on Own Resources.
The table at Annex 3 of this report shows that the amount of fraud/other
irregularity established for 1999 was 339 million euro, a decrease
from the 1998 figure of 374 million euro. There has been an increase
in the number of the reported cases, but a fall in the established
amounts. This could indicate a reduction in the major cases of
fraud or an increased overall capacity of detection by administration.
The Government's view
2.14 In her Explanatory Memorandum of 20
December 2000, the Economic Secretary to the Treasury (Miss Melanie
Johnson) welcomes the setting up of OLAF and the increased resources
it will have compared with its predecessor. She notes that caution
must be exercised in analysing trends and making comparisons.
She emphasises the distinction between fraud and irregularity,
and points out that most of the cases in the report's statistics
do not refer to deliberate fraud. She concludes that the Government
continues to give a high priority to measures to improve financial
management and the fight against fraud and that the Government
will continue to play an active role in that area through CoCoLAF
and in ECOFIN discussions.
2.15 This report helpfully brings together
an account of a wide range of measures which the Commission and
Member States have taken forward in 1999 and subsequently to prevent
fraud and other irregularity, to identify it more effectively,
and to develop more appropriate responses. We have reported on
all the specific legislative changes that have been made, or are
in progress. The report brings home again the responsibilities
of the Member States as well as the Commission in combatting irregularity
and fraud. Whilst recognising that the data provided in the report
must, as the Commission says, be interpreted with caution, it
seems likely that most of the estimates of the scale of fraud
and irregularities derived from them err on the prudent side.
2.16 The figures derived from cases reported
by Member States show a significant increase in the value of reported
cases which may involve fraud. Whether or not the underlying level
of fraud is increasing, the figures give cause for continuing
concern. Member States, as well as the Commission, clearly need
to increase their efforts, in particular in the combatting of
trans-national fraud. This particularly affects the revenue
side of the Communities' budget where administrative responsibility
for collection rests wholly with Member States but where there
is also a premium on co-operation. We note, with concern, the
slow progress being made by Member States in signing up to the
Amsterdam Protocols on protection of the Communities' financial
2.17 We report in paragraph 1 of this
Report on the Court of Auditors' Annual Report for 1999 and have
recommended it for debate in European Standing Committee B. We
recommend that this document be debated at the same time, so that
they can be considered together.
EUROPEAN AVIATION SAFETY AGENCY
Draft Regulation on establishing common rules in the field of civil aviation and creating a European Aviation Safety Agency.
||Article 80(2) EC, co-decision, qualified majority voting
||27 September 2000
|Forwarded to the Council:
||5 December 2000|
|Deposited in Parliament:
||10 January 2001|
||Environment, Transport and the Regions
|Basis of consideration:
||EM of 18 January 2001
|Previous Committee Report:
||None; but see (20831) 13735/99: HC 23-xxiv (1999-2000), paragraph 2 (12 July 2000)
|To be discussed in Council:
||For debate in European Standing Committee A (together with the Commission Communication on a Single European Sky already recommended for debate)
3.1 Civil air transport in the Community
has been progressively liberalised since 1988. There are now common
rules which address licensing, market access, pricing and the
application of the Community's competition rules. But there is
no Community-based system for establishing common rules in respect
of aviation safety and environmental protection. Existing Community
arrangements are based on Regulation 3922/91 EEC on the harmonisation
of technical requirements and administrative procedures, and on
the work of the Joint Aviation Authorities (JAA). The JAA is an
informal organisation set up by the aviation authorities of a
number of European countries in 1990. There are currently 24 members
of the JAA, including all 15 Member States. All the rules adopted
through the JAA machinery then have to be processed through the
Community machinery which can lead to delays and difficulties
where attempts are made to reopen issues agreed through the JAA
process. The further development of aviation safety regulation
has been under discussion in the Community for some years. In
1998, the Council mandated the Commission to negotiate the setting
up of a new European Aviation Safety Authority as an international
organisation. Member States' representatives agreed a draft outline
Treaty in October 1999. However, some Member States flagged up
potential constitutional problems in ratifying such a Treaty and
the Council then asked the Commission to draw up proposals for
an alternative Community-based system, involving the creation
of a new Community agency. In June 2000, the Transport Council
invited the Commission to make a proposal for such an Agency.
3.2 The Commission has now published a draft
Regulation providing the framework for a new system of aviation
safety regulation, including a new Community Agency. In his Explanatory
Memorandum of 18 January 2001, the Parliamentary Under-Secretary
of State, Department of the Environment, Transport and the Regions
(Mr Chris Mullin) summarises the proposal as follows:
" The Council and the European Parliament
would set the basic principles for safety regulation (through
a Council Regulation), including essential requirements setting
the levels of safety and environmental protection to be met. The
current draft Regulation sets out the basic principles and essential
requirements in areas related to the certification of aeronautical
products and appliances, whereas those for other areas
personnel (for example, flight crew licensing), air transport
operators, airports and air traffic management (ATM) would be
the subject of further Regulations;
" The Commission would be delegated
powers to adopt, through comitology procedures, the necessary
procedural rules to implement the essential requirements; and
" The Agency would grant certificates
attesting the conformity of types of aeronautical products with
the essential requirements and would be charged with drawing up
technical codes to guide industry. It would help the Commission
develop proposals for basic principles and essential requirements
in the other areas (i.e. those not covered by the current proposal).
The Agency would also monitor the implementation of this and subsequent
Regulations in Member States, in particular where Member States,
rather than the Agency, continue to issue certificates (for example,
Certificates of Airworthiness for individual aircraft), licences
(for example, pilots licences) and other approvals."
3.3 The Minister notes that the Transport
Council in December 2000 agreed Conclusions welcoming the proposal
as a good basis for future work and highlighting specific issues
to be addressed.
The Government's view
3.4 The Minister says that the Government
has consistently supported proposals to establish a new European
Aviation Safety Organisation, recognising the inadequacies of
the existing JAA-based arrangements. It takes the view that an
international organisation is unlikely to be achievable because
of the constitutional difficulties for some Member States. It
considers that the Community model mapped out in the Commission's
proposal could provide the building blocks for the creation of
a new Agency, sufficiently robust and professional to command
the support of the industry. He notes, however, that the issues
set out in the Transport Council's Conclusions in December 2000
need fully to be addressed. He does not identify what these issues
3.5 The Minister notes that delegation of
tasks to an Agency is permissible in Community law, provided it
is controlled by reference to objective criteria. He recalls that
there are other Agencies created by Council Regulation, so the
proposal is not unprecedented. The Government is concerned, in
particular, that the proposed Agency should be delegated sufficient
executive powers to ensure that safety rules and certification
decisions are adopted more efficiently and effectively than under
the present arrangements, and that it attracts the best quality
leadership and staff. He says that other key issues to be fleshed
out include the involvement of the national safety regulators
in the work of the Agency and the interface between their respective
activities; the transitional arrangements between the present
arrangements, especially the work of the JAA, and a new system;
and the participation in the Community arrangements of non-EU
countries. The Government has held regular meetings with the Civil
Aviation Authority and with the UK industry (manufacturers and
airlines). He says that both support the principle of developing
a Community solution and that they share the Government's analysis
of the key issues to be addressed.
3.6 The Minister notes that, at this early
stage, a Regulatory Impact Assessment cannot be produced, though
he thinks that the creation of a more efficient European system
should, in time, reduce the burdens on UK industry. The proposed
regulation is very much a framework measure and, accordingly,
the Minister concludes that a detailed picture of costs and benefits
is unlikely to emerge until the more detailed implementing measures
3.7 The Minister notes, in particular, that
funding details have yet to be worked out. The proposal put forward
by the Commission envisages that the Agency should be financed
partly through a Community subsidy and partly by fees for services
to users, such as charges for certificates. The Minister says
that the details of the balance between these two sources of funding
have yet to be discussed.
3.8 The Minister also tells us that discussions
to date have thrown up some significant questions about the scope
of the new system in its initial stages for example, whether
the Agency would deal with the type of certification of all aircraft
or only those over a certain size which will fundamentally
affect the regulatory impact. He promises to produce a Regulatory
Impact Assessment when there is further clarity on the scope of
the proposal and the likely costs and benefits.
3.9 As regards subsidiarity, the
Minister says that "the proposal has implications for the
extent of Community competence in this area. The Community already
has competence in the field of aviation safety through Regulation
3922/91 EEC on the harmonisation of technical requirements and
administrative procedures in the field of civil aviation."
He explains that Regulation 3922/91 provides for the Council to
adopt requirements draw up by the JAA and that, as more of these
requirements are adopted, more areas within the field of aviation
safety will fall within the competence of the Community, with
matching reduction in the areas where Member States have competence.
He notes that the proposed draft Regulation would repeal Regulation
3922/91 and establish Community competence in those areas where
it sets safety requirements. In those areas where Member States
retain competence, the draft Regulation provides for the Agency
to deliver Opinions upon which the Commission will make proposals.
The Minister says that the Government accepts the case for increased
Community competence on the basis that experience to date suggests
that the objectives sought cannot be achieved efficiently and
effectively by Member States themselves.
3.10 As regards the timetable, the Minister
notes that the Swedish Presidency intends to seek a Common Position
at the Transport Council in June 2001.
3.11 There seems to be strong support
in the aviation industry, in the United Kingdom and elsewhere
in the Community, for the objectives behind this proposal and,
broadly speaking, for the practical arrangements proposed. However,
we note that the Government's support is qualified by its concern
that the issues set out in the Transport Council's Conclusions
in December should be fully addressed. It would have been helpful
if the Minister had spelt out what these were. As he did not do
so, we now ask him for that information.
3.12 We note what the Minister says about
Community competence. We ask him to tell us how far the proposal,
if adopted, might affect the capacity of the United Kingdom to
reach bilateral agreements, for example with the United States
aviation authorities about the mutual recognition of certified
aviation products and servicing arrangements.
3.13 We note that it appears to be the
intention that there should be subsequent Council Regulations
extending the areas covered by the proposed Community arrangements.
We see that these could extend, at some time in the future, to
matters such as air traffic management (including air traffic
control), so there seems to be a link between this proposal and
others on which we have reported, including that relating to the
so-called "Single European Sky". The latter proposal,
on which we reported last year, was principally intended to address
the problems of growing delays in civil aviation in Europe as
a result of congested airways. In that context, there have been
strong arguments for establishing new high-level agreements on
a Community approach to the allocation of European civil air space,
and its interface with military flights. This could include a
new Community organisation for the purpose.
3.14 In our report on the "Single
European Sky" proposal we commented on the linked issue of
the Community's accession to EUROCONTROL, currently blocked because
of the dispute over Gibraltar. We also raised questions about
the possible consequences of these developments, including a larger
role for EUROCONTROL. We recommended that the Commission's proposals
in respect of the Single European Sky, including the issue of
Community accession to EUROCONTROL, be debated in European Standing
Committee A. In view of the importance of the proposal on which
we now report, and its linkages with these other matters, we recommend
that the proposal be discussed in European Standing Committee
A, and that it be debated at the same time as that other document.
In the meantime we ask the Minister to respond to our questions.
1 (20764) OJ No. C 349; see HC 23-vi (1999-2000), paragraph
6302/00; see HC 23-xiv (1999-2000), paragraph 8. Back
-; see HC 23-xv (1999-2000), paragraph 9. Back
12598/00; see HC 23-xxxi (1999-2000), paragraph 11. Back
Integrated Administrative and Control System (IACS) concerning
agricultural expenditure, and Council Regulation (EC) No. 2064/97
on financial control of the structural funds. Back
revenue side of the budget. Back
13572/00; see HC 28-v (2000-01), paragraph 2. Back
respect of central and eastern European countries and former members
of the USSR respectively. Back
- ; see HC 23-vi (1999-2000), paragraph 13. Back
13735/99; see headnote to this paragraph. Back