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Session 2000-01
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European Standing Committee B Debates

European Financial Interests

European Standing

Committee B

Wednesday 28 February 2001

[Mrs. Ray Michie in the Chair]

European Financial Interests

[Relevant Documents: European Union Document No. 13572/00, relating to protection of the Communities' financial interests; the unnumbered explanatory memorandum dated 20 December 2000, submitted by H.M. Treasury on the Court of Auditors' Annual Report for 1999; and European Union Document No. 13512/00, the Eleventh Annual Report by the Commission on the Structural Funds (1999).]

10.30 am

The Chairman: Good morning. Before I call the Minister to make her opening statement, I remind the Committee that the quorum is three.

The Economic Secretary to the Treasury (Miss Melanie Johnson): I am very pleased that the Committee has asked for a debate on the European Court of Auditors' report on the 1999 financial year, and the European Commission's fight against fraud report for 1999. I am pleased because those two documents cover such an important subject. It is right that the Committee should show the priority that it attaches to tackling fraud and waste against the European Communities' budget by holding a debate on the documents. It might help if I make a few introductory comments before I answer questions.

I shall start with the European Court of Auditors' annual report. I am sure that the Committee is aware that the European Court of Auditors still finds that the level of errors is too high for it to be able to give a positive statement of assurance. That is clearly unacceptable, but we need to bear in mind a number of points when considering the 1999 annual report.

First, we must not equate error with fraud, or even with serious irregularity. I am sure that the Committee appreciates that and would not stoop to the level of the popular press, with its ``£3 billion of fraud found in the EC budget!'' headlines. We know that the court has found what it terms ``substantive error'', which is defined as

    ``a specific quantifiable error directly affecting the amount of the transactions underlying Community funds disbursed.''

The majority of such cases are not fraudulent. In fact, the ECA makes it clear in its 1999 report that the bulk of errors represent such things as small overpayments to farmers and payments for expenditure that were not eligible for co-funding under complex regulations.

Secondly, the report acknowledges that things are changing. On agricultural expenditure, for instance, the report says that

    ``over the past few years the Community has made a significant attempt at improving the control procedures by establishing the integrated administration and control system''.

On structural funds, it says:

    ``the Commission...secured the enactment of regulation 2064/97 which provides for a greater degree of verification of costs claimed by final beneficiaries''.

Moreover, in drafting the new structural funds regulation for the 2000-06 programming period, we have learned the lessons of the past and ensured that it is less complex and ambiguous and that financial control requirements are clearly set out. We must now ensure that those changes are fully implemented if we are to gain a benefit. It will take time for the effect of the changes to be felt, but I believe that we are moving in the right direction.

Thirdly, the report covers 1999. The Prodi Commission did not take office until September 1999. From the beginning, reform has been high on that Commission's agenda. Prodi appointed Neil Kinnock as Vice-President with responsibility for administrative reform, and he immediately undertook a comprehensive review that culminated in his reform White Paper, which was published in March 2000. The Government welcomed that White Paper, which we believe is a comprehensive and far-reaching blueprint for reform. In particular, the Government welcome the three main objectives of the paper, which are to introduce a better system for setting priorities; to overhaul financial management in the Commission; and to modernise personnel policy.

The United Kingdom has been highlighting such issues for many years. We have helped by providing information on best practice, as well as by ensuring that the Council continues to focus on the need to follow through on the reform plans. Real, fundamental reform will take time to implement, but we are pleased that the Prodi Commission has taken action quickly on several issues to underline its commitment to the reforms. It has reorganised internally to focus attention on the responsibility of operational staff, which will ensure that resources are well used and safeguarded from fraud.

The Commission has also established a central financial service to provide advice and guidelines to operational directorates-general on fulfilling responsibilities. Such measures will replace the previous ex ante financial control system, which blurred the lines of responsibility for financial management. They are supported by the introduction of a professional internal audit service to ensure that effective financial controls are in place.

Action has also been taken on other areas of concern to the UK, such as the code of conduct for Commissioners, which was approved at the Prodi Commission's first meeting in September 1999. There are also proposals for an advisory group on standards in public life, which will provide independent guidance on appropriate standards of behaviour at all levels of the organisations. Also, a ``whistleblowers' charter'' underlines the duty of all staff to report concerns about wrongdoing, and provides protection for those who use the procedures responsibly. The Government expect the proposals to be implemented as soon as the proper consultation procedures with staff and the other institutions concerned have been carried out.

In the year under review, the most important development in the fight against fraud was the establishment of the new European Anti-Fraud Office, OLAF, in June 1999, following an initiative by my right hon. Friend the Chancellor. It will be a strong, independent body to fight fraud against the European Union budget. The new head of OLAF, Franz-Hermann Bruener, took office in March 2000. The Council and European Parliament approved extra staff for the office, bringing its full complement to 300, double that of its predecessor. Recruitment of the new staff is now under way, and the office has already been active in fighting frauds, ranging from illegal importation of bananas from Ecuador, to irregular payments to staff of the Commission delegation in Sweden.

Today, we are debating the Commission's fight against fraud report for 1999. The Government view any level of fraud against the EC budget as a grave issue, and believe in zero tolerance of fraud and fraudsters. We must therefore view any increase of the level of reported fraud with concern. However, we must be careful about interpreting statistics. First, the report does not cover only fraud, but also ``irregularity'', where no intentional wrongdoing has been proven. Secondly, an increase in the level of reported fraud and irregularity may be due to improved detection or improved notification of cases by member states to the Commission. The Commission notes in its introduction that the rate of frauds and irregularities is, broadly speaking, comparable to previous years. The only significant new trend concerns structural measures, which reflects the greater efforts made by member states to inspect and detect fraud and irregularity.

A welcome development in this year's fight against fraud report is the separate classification of fraud as opposed to irregularity. The Commission has made the distinction based on information supplied by member states. It will be necessary for the Commission to refine the system by which it categorises frauds and irregularities, in co-operation with the member states. A useful first step has been made to obtain more concrete information on the level of fraud.

In summary, the documents are important. Many problems must be tackled, but there have also been many positive developments. Some of the initiatives have already begun to take effect, and others will take time to do so. I assure the Committee that our Government intend to play an active role in keeping the fight against fraud and waste high on the European agenda.

Mr. Richard Ottaway (Croydon, South): The Minister has dwelt at length on the reforms. Does she agree with her colleague the Secretary of State for International Development? The Secretary of State said:

    ``Anyone who knows anything about development knows that the EU is the worst agency in the world, the most inefficient, the least poverty-focused, the slowest, flinging money around for political gestures rather than promoting real development.''

The Minister must accept that there is widespread concern over inefficiencies in the Commission. The report that we are considering today describes circumstances that are worse than those which led to the resignation of Mr. Santer. Exactly how bad does it have to get before the Minister registers an objection with the Court of Auditors?

Miss Johnson: The hon. Gentleman is forgetting a point that I hoped I had been at pains to emphasise in my opening remarks. The report that we are considering relates to 1999, a year in which the reforms had only just begun. In fact, they only began during the course of the year. In effect, there has not been time to tackle many of the issues raised in the report.

I entirely agree with many of the comments of my right hon. Friend the Secretary of State for International Development. I will make a few points in relation to the external aid budgets in response to the specific point to which the hon. Member for Croydon, South (Mr. Ottaway) referred. On that matter, the Commission has recently adopted an ambitious reform agenda, covering programming, financial procedures, organisational staffing levels and the de-concentration of staff and financial authority to Commission delegations. There has been substantial progress in implementing the reforms already made. For example, the creation of Europaid will give a co-ordinated approach to planning and implementing projects. The new inter-service quality support group and the common framework will improve programming.

There are other measures scheduled, such as the de-concentration of staff to delegations in different countries, which I have already mentioned, and which is scheduled for the year 2001-02. Together, those reforms should bring a real improvement in the quality of EU aid. The UK is monitoring their implementation closely, supporting the Commission where we think it necessary.


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Prepared 28 February 2001