Fight Against Fraud

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Mr. Michael Connarty (Falkirk, East): The hon. Gentleman is about to ask questions, but can we first establish that the system that we are discussing was in a sense the system under his own party? Does his party not have blood on its hands? The common agricultural policy, to which reforms have been needed for some time, is much the same as it was when his party was in power. I am a member of the European Scrutiny Committee and we have said that reform of the common agricultural policy would eradicate several opportunities for fraud.

Mr. Bercow: I was about to say that I was grateful to the hon. Gentleman for his intervention, but I am not sure that I am. I have a great liking and a healthy respect—

The Chairman: Order. Will the hon. Gentleman please face the Chair?

Mr. Bercow: I apologise, Miss Widdecombe. That was a discourtesy, which I dare not repeat.

I had started to say that I have both a great liking and a healthy respect for the hon. Gentleman, but he is being uncharacteristically and precipitately partisan. I thought that I had so far been the model of emollience. I accept that such a process has happened under Governments of both colours and what he said about the origins of the common agricultural policy contains a good deal of sense. If the hon. Gentleman challenges me to defend all past decisions of previous Conservative Ministers on the matter, and notably the decisions of those who served at the head of the Heath Government of 1970 to 1974, he will not find me a willing taker. It is important to put that on the record.

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Let me not be distracted a moment longer from the questions on which I wish to focus. What are the Government doing to put pressure on the Commission to implement reform rather than talk about it? That is a crucial distinction. Recommendations have been made in many spheres, and the Minister slipped into referring to a draft proposal that had been amended, revised and—her demeanour suggested—improved during discussions. However, she seemed dewy-eyed about the fact that an amended and improved draft proposal is in the offing. The Minister will not hold it against me if I tell her that the important point is to have a good proposal that is implemented as quickly as possible. It would be useful to know the steps that the Government are taking to pressure the Commission into speedy reform.

What are the Government doing to simplify the complex eligibility rules and to minimise the number and cost of errors made at home? When will the European Union reform the incestuous and potentially fraudulent system of A30 earmarked grants? Many commentators believe that we need an above-board process of open and competitive bids. Currently, the grants allow for expenditure on party political funding and pro-integration propaganda—even if that is not the intention. That is wholly unacceptable, and I am sure that the Minister will want to deprecate it. I look forward to hearing the Government's plans for fundamental changes to the existing, flawed system.

What assessment has the Minister made of the instrument for structural policies for pre-accession programme and the SAPARD programme, which is the special accession programme for agricultural and rural development? These matters are dealt with on pages 283 to 305 of the report. The budget for 2000 to 2006 is no less than 11 billion euros, which is a very large sum. At this relatively early stage in the allocation of funds, I am keen to establish the Government's view of the likely efficacy and fraud-minimisation potential of the programmes.

What does the Minister make of the verdict of the president of the European Court of Auditors who declared that the implementation of the 2000 budget was characterised by

    ''the emergence of a very large surplus of revenue over expenditure, amounting to over 11.6 billion euros''?

That point was touched on earlier, and we enjoyed the Minister's initial thoughts. Will she focus on that subject a little more? We are discussing a sum that is equivalent to more than 14 per cent. of the final payment expenditure. If we are discussing one seventh of total funds to be allocated, we must know why we got into that mess, and what financial mechanisms are in place, or will be in place shortly, to avoid any repetition.

I am worried about the court's recommendation that the Commission should examine how it may better use the supplementary and amending budget procedure to avoid excessive budget surpluses. Are the Government sympathetic to that proposal? If so, when

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will it take effect? Does the Minister have a ballpark estimate of the speed and likelihood of avoiding the surpluses or, at any rate, greatly reducing them?

My seventh inquiry—my list is very modest—relates to the discovery by the court of ''persistent weaknesses'', to use its words, in member states' checking of community operations concerning programmes in which management is shared between the Commission and the member states. That was the case for the integrated administrative and control system payments, which is the so-called IACS, the export refunds and the control regulation for structural measures. On collaboration between European and national supreme audit institutions, the president concludes that progress requires collaboration between national Parliaments and the European Parliament. My perusal of the documents has left me unclear about what is happening on the subject.

Several inquiries flow from the Treasury's July 2001 document, which is entitled ''Statement on the 2001 EC Budget and Measures to Counter Fraud and Financial Mismanagement''. I applaud the document, and I tell the Minister that it is has not only been helpful on the learning curve, but it has spawned several inquiries in my mind that would probably not otherwise have occurred to me. She will agree that it is a valuable document in that respect, if no other.

Paragraph 43, on page 10, refers to several shortcomings—I am taking a specific example, because we are concerned with specifics rather than the holistic overview—in the monitoring of wine production. Has there been a discernable improvement on that? There is talk of a problem with the number of vineyard registers; it is implied that there are too few rather than too many. Has the problem of understaffing at the inspection body been addressed? That was alluded to with angst and disapproval in the Treasury document, and it would be useful to have an update on the position seven months later. Can the Minister offer us hope that the situation is materially better than it was when the Treasury published its report?

My next point relates to internal policies, to which there is a helpful reference on page 11 of the Treasury document. Of course, the court has found significant overcharging in that sector on the execution of internal policies managed by the Commission. Substantive errors stemmed from ineligible expenditure, and formal errors were attributable to failures by final beneficiaries to observe the terms of contracts. Will the Minister update us on that unsatisfactory position?

Several questions occurred to me when I read page 15 of the Treasury document, which focuses on the programme for Commission administrative reform. The Minister will know that a central financial service was set up in May 2000 to introduce common standards of control throughout the Commission directorates-general and to provide advice on sound

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financial management. What assessment has been made of the efficacy of that service, which is not far short of being two years old?

An internal audit service has been operational since June 2000, and the head of the service was appointed in December 2000. Last July, the Treasury told us—using the present tense—that other staff were being recruited. How many are now in post, and what progress can the Minister report?

An important part of the Minister's opening remarks related to the recast financial regulation. I have a feeling that the word ''recast'' will feature prominently in our debate, or during subsequent consideration of these matters. It seems to be the vogue term for the proposed change to the financial regulation that is applicable to the general budget of the European Union. The proposal is aimed at modernising financial management procedures. In fairness, the proposal was brought forward in October 2000, and it is legitimate to say that fraud occurs during each year, that it gets worse in some cases and there is a large job to be done. Therefore, when will the regulation be ratified and implemented?

Further parts of the Treasury document focus on countering fraud against the EU budget. OLAF has revealed the smuggling of vast quantities of bananas from Equador via the Italian port of Catania. As I am sure the Minister will be aware, a joint operation in June 1999 by OLAF and the Italian Guarda di Finanza brought about an arrest of the importer allegedly responsible and a customs agent, and for that we pay tribute to them. Has there since been a reduction in banana fraud? What are the dimensions of the problem? How much does it cost public funds throughout the European Union?

David Cairns (Greenock and Inverclyde): Straight bananas?

Mr. Bercow: Does the hon. Gentleman want to intervene?

The Chairman: Order.

Mr. Bercow: I beg your pardon, Miss Widdecombe. I was being my usual courteous self to the hon. Gentleman, whose maiden speech it was my privilege to compliment some months ago.

I now turn to an issue that will, I suspect, be of great interest to the hon. Gentleman and other Committee members—adulterated butter. The hon. Gentleman might believe that that is a subject of levity. I hope that he does not, because it is a matter of the greatest seriousness.

I am a self-effacing and modest soul, and I admit that until I studied the papers I did not know what adulterated butter was. It did not sound appetising, but I looked into it, and found, significantly, that between 1997 and 1999 several Italian-based companies manufactured industrial butter from animal fat and synthetic products—the hon. Member for Gravesham (Mr. Pond) looks as though his appetite is rapidly diminishing—which they sold on as butter to clients in France and Belgium. The product

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attracted illegal export refund subsidies at the expense of the Community budget, and OLAF investigations led to arrests.

Has the fraud in adulterated butter ceased or diminished since then? I am more than willing to pay tribute when it should be paid and to give credit when it is due. If significant cases of investigation, arrest, prosecution and conviction have effectively closed down fraud in particular sectors, that is welcome. The anxiety is that professional fraudsters might, and probably will, turn their attentions elsewhere. Nevertheless, if there are successes, we should know about them.

A frustrating aspect of the legislative and governmental process is that often one reads a document, hears about a particular case, reads about it with interest and awaits with eager anticipation, bated breath and beads of sweat on one's brow the debate on the subject in European Standing Committee B, or a Delegated Legislation Committee. One lives in hope that the Government will have something further to say on the matter, only to have one's hopes dashed. I fear that the Minister had not intended to discuss adulterated butter, but if she would do so this afternoon or subsequently in writing, it would be greatly appreciated.

Given media reports in Spain about suspicions of irregularities or fraud in the subsidies paid for flax production in Spain, and inquiries by OLAF and anti-corruption officials in Spain, what information can the Minister give us about the report on that important and worrying matter that has been forwarded to the competent judicial and administrative authorities?

Last April, OLAF opened an investigation into allegations of fraud in the award of tenders for EU projects in Slovakia. What is the position today, 10 months on from the opening of that investigation?

Given time constraints, I shall generously, and, as it will probably transpire, unwisely, omit to focus on preventive measures to combat fraud proposed in 1999 and will focus my remaining remarks on those emanating from 2000. Have all customs transit procedures now been computerised? If not, why not, and if so, has the Minister reached a conclusion about the effectiveness in deterrence or preventive terms of that computerisation?

What is entailed in the proposal to reinforce current legislative provisions in order to improve the operation of the value added tax system in the internal market? Has that proposal been implemented? I pored over the documents and am genuinely unsighted on that point, but I have no doubt that the Minister, who is rarely lost for words and almost never unable to give an answer, will be able to release me from nescience and make me better informed.

Has the Council decision to allow member states to retain 25 per cent. of the amounts recorded for own resources as collection expenses been implemented, and if so, what have been the consequences? Is the new regulation to strengthen controls of banana imports in place and, if so, what difference has it made? Have all the proposals for the improvement of financial

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management and the control of structural funds been implemented? What reform has been undertaken of the management of external aid?

I referred earlier to the development of a civil penalty regime. The Minister seemed attracted to the idea. I may be mistaken, but she gave the impression that she was relatively relaxed about the time scale for the development of such a regime. It is my understanding that the Treasury document said that further consideration would be given in 2001. The Minister hinted that the proposal would be made effective in 2002. Can she assure the Committee that primary legislation is not required in order to implement it or, if it is, that Government time will be found?

In 2000, detected cases involving fraud and irregularities totalled 6,195 compared with 6,401 in 1999, a rise of 8 per cent. Is there a target for a financial saving in each of the next five years from the 2,031 million euros currently lost through fraud and irregularity?

I should like to focus on the four objectives of the action plan. I do not dissent from them, with one exception. I think that the Minister and I agree about the undesirability of the European public prosecutor proposal. In other respects, I suspect that we think that the objectives are sensible. We must take action as quickly as possible, so that we can deliver those objectives. The objectives refer to

''fostering a culture of cooperation between all the responsible authorities''

and reference is made to the ''innovative methods'' to be deployed by OLAF. What have they been so far? Will the Minister give specific examples of new approaches that have been deployed, and evidence of the beneficial consequences flowing from them?

The objectives demand

    ''an inter-institutional approach to preventing and fighting fraud and corruption''

and demand that we lay guidelines to prevent conduct that is harmful to the EU. Have those guidelines been finalised? Are they in the Library? Can we see them? Presumably they are not secret. The objectives mention

    ''strengthening the criminal law dimension of the fight against fraud''.

There is reference to a European prosecutor. What is the current status of the consultation on the European prosecutor? I should like an assurance from the Government that they will resist and do everything necessary to prevent the passage of that proposal.

Can the Minister explain the horrific increase in own resources fraud between 1999 and 2000 to more than 1 billion euros? Page 30 of the report states that the Court criticised the Commission for ''insufficient progress''—its words, not my gloss—on the regulatory control framework for structural measures aimed at reducing ineligible or incorrect expenditure co-financed by the EU. Can we have an update on the efficacy of regulation 2064/97?

I want to focus closely on the important issue of the authority, and therefore effectiveness, of OLAF. I am pleased that it has been set up. Some staff have been

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recruited, and some investigations have been conducted. We congratulate the office on the occasions on which it has been successful, and we are pleased with the result.

I hope that the Minister will share my concern that the European anti-fraud office could be hampered if other European institutions fail or refuse to respect its right and duty to investigate in detail all suspected cases of fraud. The hon. Lady will know that I am referring to the attitude of the European Central Bank and the European Investment Bank. The ECB on 7 October 1999 and the EIB on 16 November 1999 stated that they did not recognise the explicit power of OLAF to act in their institutions, yet heads of state or government, as the hon. Lady will concur, agreed on the need to give full effect to anti-fraud rules. Given that the European Commission decided as long ago as 12 January 2000—two years and 31 days ago—to bring an action to the European Court of Justice, what is the position today? That is a serious question. If OLAF finds that its operations are frustrated and its writ does not run in important institutions that are themselves susceptible to fraud in the European Union, how can it be sure of identifying and acting effectively against those responsible for serious frauds in large-scale European institutions?

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