European Financial Interests

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Miss Johnson: The United Kingdom has taken a great interest in that subject and it is important to maintain our standing in that respect. The current financial regulation is an unwieldy, complex and ambiguous document, partly because of several ad hoc revisions in order to deal with individual problems. As a result, in 1997, the European Court of Auditors proposed a complete recasting exercise, which is now in progress. The Commission presented a proposal in October 2000 for a clearer and less ambiguous document. The key change concerns the modernisation of the financial control system, with clearer roles and responsibilities for those involved in financial transactions.

My hon. Friend will be interested to know that the new regulation makes it clear that those who make operational decisions must bear responsibility for ensuring that money is properly controlled and well spent. Perhaps that should be taken for granted in all such systems, but it has not been in the past and it is now a core principle of the new regulations. The system is, obviously, similar to the one with which we are familiar here, and we fully support the principles that have been relied on.

We also want the new regulation to lead to high-quality objective setting and evaluation, as part of the budgetary process. The Commission has made related proposals on activity-based budgeting, which will be important in that regard. We will work hard to ensure that the relevant issues form a key part of the new regulation. We shall encourage the Council to accord the highest priority to the consideration of the Commission's proposal, to avoid unnecessary delay.

Mr. Wilkinson: I am glad that the Minister clarified matters with respect to Eurojust. Is she aware that it is holding its first meeting tomorrow, in the Council of Ministers building, and that the Belgians, who will hold the presidency in the second part of this year, have said that a full version of Eurojust will be a priority of their presidency? Does the Minister think that there can be a full version without a single prosecutor for Europe, as titular head or president of the organisation? How will it be able to work effectively without a corpus juris, to which she has declared her opposition? Will Eurojust's progress in combating cross-border fraud be reported to European Standing Committee B?

Miss Johnson: The Government do not believe that a European public prosecutor is either a necessary or a very practicable option. We have supported the idea of close links between OLAF and Eurojust to ensure that OLAF can refer the appropriate fraud cases to Eurojust. We think that that is more likely than a Euro-prosecutor to be effective in tackling EC budget fraud.

The appointment of a European public prosecutor would involve major changes in laws and procedures, and we think that it would be impracticable to superimpose a corpus juris on the UK legal system. The European public prosecutor would not be fully accountable. It is hard to see how real accountability could be built into the arrangement. Significant practical difficulties would be involved.

We do not think that the proposal would provide a coherent approach to instances of fraud in the EC budget involving non-EU as well as EU jurisdictions. We do not think that it would help in protecting the EC budget. It is important to leave time for Eurojust to get under way.

The Commission has a problem with lack of action by member states in the absence of legal instruments on trans-national frauds. The corpus juris would introduce an autonomous criminal code for investigation, prosecution and punishment relating to fraud and other crimes against the Community's finances. It would also involve major changes in laws and procedures.

As the hon. Gentleman said, the first meeting of the interim Eurojust body took place this week. I am pleased that the Belgians intend to act on the full Eurojust, but we cannot yet expect great improvements, as it is merely at its inception. However, we have considerable hopes for it.

Mr. Wilkinson: May I follow up the Minister's interesting elucidations and ask her whether Her Majesty's Government will veto the imposition of a corpus juris and the initiation of a single prosecutor for Europe? Do Her Majesty's Government have the powers to exercise such a veto if such proposals are made?

Miss Johnson: As I have already told the hon. Gentleman, we do not support the proposals and will prosecute our case, if I may use that metaphor, in the EU as we best see fit, to maintain the position that we have long held. I will need to write to the hon. Gentleman about a veto.

Motion made, and Question proposed,

    That this Committee takes note of European Union Document No. 13572/00, Protecting the Communities' Financial Interests—the fight against fraud: Commission's Annual Report 1999; and the unnumbered explanatory memorandum dated 20th December 2000 submitted by HM Treasury relating to the Court of Auditors' annual report for 1999; and supports the Government's continuing efforts to promote and support measures to improve financial management and fight fraud against the EU budget.—[Miss Melanie Johnson.]

11.17 am

Mr. Ottaway: Several times, the Minister has pointed out that we are debating the Court of Auditors' report for 1999, and that Mr. Prodi did not take over as president of the Commission until autumn 1999, so blame should be attached not to him but to Mr. Santer. I think that that summarises her position.

Miss Melanie Johnson: I made no comments about Mr. Santer. However, we in the UK Government made our position on the change clear at the time.

Mr. Ottaway: By implication, the Minister seeks to distinguish between the old regime and the new by pointing out that the new regime began in the autumn. I make no other point than that.

The 1999 report is pretty damning. It is an indictment of the old practices of the Commission. The Court of Auditors found that lucrative farm subsidies were consistently misallocated, aid payments were barely monitored and millions of pounds were spent on misguided projects. The Minister said that that was not fraud but error, but the definition of error is stretched somewhat when one starts to dig into the 480 pages that make up the catalogue of mistakes, misunderstandings and fraud about which the Commission has been unable or unwilling to do anything.

The auditors refused to state the exact sums squandered, but one of the report's authors is reported to have said that the figure was between 5.5 and 7 per cent. of the Commission's budget of £60 billion. That is an even higher level of waste than that which led to the downfall of Mr. Santer, so by any stretch of the imagination, it is a damning report. Frankly, for the Minister to invite the Committee to take note of it is a pretty tame response to what is probably the worst report that has ever come out of the European Commission.

Dr. Palmer: Before the hon. Gentleman's apocalyptic remarks escalate further, I would like to draw his attention to the Commission's estimates of the percentage of the budget actually affected by fraud, on pages 27 and 28 of the report, which overall hovers around the 1 per cent. mark. Does he feel that that justifies the rhetoric that he is deploying?

Mr. Ottaway: First, I am citing the report. Secondly, the hon. Gentleman is citing the Commission, of which one is tempted to say, ``They would say that, wouldn't they?'' Thirdly, one can turn to the report of the European Parliament, a more independent body, by the rapporteur, Mr. Freddy Blak, who says on page 11 that he suspects that the figure for 1999 is at least 5 per cent. The hon. Gentleman makes a fair point, but my evidence rather outweighs his.

The Court of Auditors report goes on to state that subsidy payments made to farmers across the European Union were found to be error-ridden and chronically vulnerable to fraud. It found that farmers have ``overdeclared either surface area''—in Germany, Denmark, Spain, France, Italy and Portugal—

    ``or the number of head of livestock''.

Other bogus payments were made for non-existent storage costs, and special beef premiums were given to German farmers who provided no proof that they had slaughtered any cattle.

One of the more bizarre diversions of EU money took place in Greece. Last year, £35 million intended as farm subsidies was used instead to set up an insurance fund for farm workers and pay the administrative costs of farmers' unions. The list goes on. I assure the Committee that it is quite entertaining. I shall return to the report of the European Parliament by Mr. Freddy Blak, and pluck out of it some further examples of mishandling.

The Commission has an office in Stockholm, where the chauffeur used to take the dogs for walks, and non-existent staff were hired. The person who ran the Stockholm office returned to the Commission and was promoted.

Mr. Bill Rammell (Harlow): Will the hon. Gentleman give way?

Mr. Ottaway: I shall just finish what I am saying.

In Washington, the cost of renovating the Commission's offices was greater than the cost of acquiring them. There is a long list of errors in which a truly independent anti-fraud office could find much scope for investigation.

Mr. Rammell: It is absolutely essential that we root out fraud wherever it occurs, but I was intrigued by the hon. Gentleman's reference to the civil servant taking the dogs for a walk in Stockholm. When I was a student in Cardiff in the early 1980s, I seem to remember a similar, substantiated allegation about the then Conservative Secretary of State for Wales. We need context for our debates.

Mr. Ottaway: The hon. Gentleman may be right, and I would not endorse that abuse either. The Minister has made up her mind that she will not criticise the report. However, I use the examples to draw attention to the fact that there is a lot going on underneath the surface.

I said that I would divide my speech into two parts. The second part concerns the measures that have been put in place and those that will be put in place. Under questioning from Conservative Members, the Minister repeatedly said that the present European Anti-Fraud Office, OLAF, was independent. I pointed out that it was not that independent, because it had the same staff and engaged in the same practices, reporting to the Commission. However, the Minister reiterated that it is independent. If so, why does Commissioner Kinnock's White Paper talk about the need for an independent internal audit service? If it is independent, why reform it? If it ain't broke, why are we trying to fix it? Is the Minister saying that the present system is genuinely independent, or that it is not independent and that she supports Mr. Kinnock's proposals for an independent auditor?

The Minister is probably aware that the European Parliament appointed a surveillance committee of five experts, including the Secretary-General of Interpol and the French criminal justice specialist Mireille Delmas-Marty. Last year, and 18 months after Mr. Prodi came to office, it published a damning report. It makes it clear that the new anti-fraud office created by the EU to root out corruption in Brussels is no better than its predecessor and that it has failed to break free from political control. A year and a half after the collapse of the Santer Commission, little seems to have changed. EU officials have yet to fulfil their promises to overhaul the investigative machinery so that abuses can be detected earlier.

The report says that there has been no appreciable improvement in procedures to stop the misappropriation of funds within EU institutions, concluding that the new anti-fraud office, known by the French acronym of OLAF, is so disorganised that sensitive investigations are compromised. The report described management failure as alarming, especially as the introduction of the euro and the enlargement of the EU will offer criminals new opportunities to commit fraud. We want fraud investigation to be treated as a serious business, but we have been given OLAF, which is nothing more than a bad joke. It would be better to start again.

As I pointed out earlier, OLAF reports to Budget Commissioner Mr. Michaele Schreyer, a German Green who has been criticised for his weak administration.

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Prepared 28 February 2001