Protecting the European Community's Financial Interests

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Mr. Tyrie: One of the documents shows that roughly half of the fraud and irregularity in structural funds originates in Italy. As a document has already stated that, I do not think that I will do much damage by pointing it out.

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I shall return to the question that I have been asking. The Minister may not want to give me a clear answer now—she has not done so twice so far—but does she think that we are beginning to get to grips with the problem? Are fraud and irregularity increasing or decreasing? There is a third possibility, which is that the Government do not know. Which of those three possibilities should I accept?

Dawn Primarolo: The one measure of irregularity was not sufficient—hence all the reorganisations—to allow me to make the type of judgment that the hon. Gentleman requested. Irregularities can be anything, and they are normally very small. There was not sufficient focus. The introduction of the four pillars enabled the European Court of Auditors to examine much more closely how the budgets function and to take the view that any amount of fraud or waste in the European budget should not be tolerated.

The hon. Gentleman asks me to explain the Government's approach and how we will tackle fraud. The Government have been firm advocates of the creation of OLAF and Eurojust because the fraud reported typically includes irregularities. We are trying to separate out the two, which would enable us to give the hon. Gentleman a proper answer. That work is being done because of the new financial regulations that require assessment. The fight against fraud report—the report of all irregularities in the EC budget—gives a total of 1.136 billion in 2002; the figure for 2001 was 687 million. The situation continues to be difficult because of other issues, such as the closing of the structural fund programme and the accounts for 1994 to 1999 producing more irregularities because of their intensive auditing.

Our view is that there is a downward pressure on fraud, but I am not in a position to give the hon. Gentleman a statement on every area. The fight against fraud report sets out the data for each country, but we still have to disentangle irregularities from actual fraud. Some irregularities will become fraud, but as I told him earlier, some 20 per cent. of our estimated total number of reported irregularities could be fraud. We need to reach that figure in a more consistent way, and the financial reforms provide for us to do so.

Dr. Francis: OLAF seems to be focusing a great deal of its attention on the enlargement countries. Does the Minister infer from that that there is a real risk of EU funds being squandered when those countries join the EU later this year?

Dawn Primarolo: My hon. Friend should not be surprised that OLAF is concentrating on the new member states. It is concerned with bringing their controls on the financial management of funds up to the levels required by the acquis. He should not think anything of that, as it is exactly what we would expect to happen. Not only is it important that the financial reforms and regulations are in place, but we must recognise that —as the EU has clearly stated and the Government agree—it is better that money remains unspent than that it is spent in an unaccountable way. The concentration is part of the financial reforms and

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ensuring that the accession countries are moving in the same direction as member states. If we do not have comparable accounting systems, we will not be able to answer the questions posed by the hon. Member for Chichester about how to measure fraud.

Mr. Robert Walter (North Dorset) (Con): I am delighted that the Minister has reassured us that fraud in agriculture is decreasing. However, we are about to embark on reform of the common agricultural policy in which the money involved will not decrease but the method of distribution will change. What discussions has she had with the Secretary of State for Environment, Food and Rural Affairs on the hybrid, transitional system of agricultural subsidies? Does not the Paymaster General believe that the changes will lead to inadvertent fraud by farmers who are confused by the system's complicated nature?

Dawn Primarolo: I have not had the detailed discussions that the hon. Gentleman asks about, but he makes an important point about the reform process and the complicated rules and operation of some of the funds. One problem is that when a genuine error is made but corrected, it can still appear as an irregularity and be equated to fraud. The Government say that that is not the best way to look at it. The complexity of the rules and effective accounting for all funds are part of the discussion. The hon. Gentleman's point is well made, but I have to disappoint him on the particular debate that he asked about. I will read the Hansard report to ensure that there is nothing that I should have picked up and passed on to my ministerial colleagues.

Mr. Tyrie: Do the Government believe that OLAF should be permitted to operate in the Community's second pillar—the home affairs pillar?

Dawn Primarolo: It is appropriate that OLAF gets on with the work that it has been set as part of the reform agenda for accounting in the European Union. I will reflect on the hon. Gentleman's point about the second pillar and may return to it during the debate.

Mr. Tyrie: I did not get much change from my question of whether fraud and/or irregularity is increasing or decreasing in the UK or the EU. Will the Minister arrive at a considered view on that and respond to me in writing? We have had four exchanges in different forms on the subject, but not made much progress. I have a related question: does the right hon. Lady believe that enlargement is likely to increase or decrease the scope for irregularity and fraud in the EU budget?

Dawn Primarolo: As I said in answer to an earlier question about the accession countries and the importance of ensuring that all the rules are properly administered, the rule that we should follow is that when there is doubt, it is better to have an unspent fund than to have one that has been spent incorrectly. As such, there is now a concentration on making sure that

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the accession countries follow the correct regulations and accounting procedures, so that all members of the European Union follow the same rules.

The Chairman: If no more Members want to ask questions, we shall proceed to the debate on the motion.

Motion made, and Question proposed,

    That the Committee takes note of European Union Documents No. OJ C286, Vol. 46, the European Court of Auditors' 2002 Annual Report; No. 11954/03 and ADD 1, Commission Report evaluating the activates of the European Anti-Fraud Office; No. 11993/03, Commission Annual Report 2003: protection of the financial interests of the Communities; Third activity report of the European Anti-Fraud Office for the year ended June 2002; and Fourth activity report of the European Anti-Fraud Office for the year ended June 2003; and supports the Government's continuing efforts to promote measures to improve financial management and combat fraud against the European Community's financial interests.—[Dawn Primarolo.]

Mr. Hopkins rose—

4.39 pm

Mr. Tyrie: The hon. Member for Luton, North (Mr. Hopkins) will have to defer his speech for a few moments—quite a few moments, in view of some of the comments that I have just heard.

We are lucky to have the Select Committee on European Scrutiny, which does a pretty good job of scrutinising an extremely difficult area. It is probably one of the best systems of scrutiny in any member state, although the Danes also have a good system. Even so, it is worth bearing in mind that the Select Committee has only been able to start to get to grips with the matter. That is clear from the reports and notes that it attached to the reports that we are debating today. It is worth first asking some simple questions, some of which I tried to ask the Minister in the question and answer session. What is the level of fraud and irregularity? Is it increasing or decreasing?

The third activity report of OLAF, the fraud-buster created in 1999, gives us a clear answer to that question: reported fraud and irregularity is increasing dramatically. Last year, it increased by 80 per cent. from 5,617 reported cases to 10,224. Those figures are cited in paragraph 1.4 of the European Scrutiny Committee report on OLAF's third activity report.

There is a powerful chart entitled, ''Irregularities communicated by Member States in the year 2002'', on page 44 of the 2002 Commission report, ''Protection of the Financial Interests of the Communities and Fight Against Fraud''. It is a pity that we are not yet able to show graphics in House of Commons' Committees, but the Chairman will be able to see that a line runs roughly straight across the page before rocketing up, representing the period that was most recently scrutinised. What does that tell us? It might not tell us much. There may simply have been an increase in the reporting of fraud, while the underlying level has not increased at all.

How much fraud is still going undetected? We do not know, but we do have the National Audit Office's general assessment of that in its annual report on the

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reports that we are considering, which was published on 12 June 2003. That assessment is cautious, as the NAO always is. The report states:

    ''By their nature, the reported statistics include only identified fraud and irregularity and cannot take account of other frauds which might exist but which have not been identified. The extent to which the figures reported by the Commission equate to actual levels of fraud against the General Budget is therefore unclear.''

Therefore, the NAO does not know whether fraud is increasing or decreasing. I suspect that the Minister does not know, either. What we do know is that reported fraud is increasing very quickly.

There are many examples of fraud. Those who doubt that should consider the electricity company in Kosovo that managed to siphon a huge amount of its funds into a bank in Gibraltar. The Minister will find that case in the fraud reports, where she will also find reference to the grants that went to Croatia to grow sugar cane, even though it cannot be grown in a climate as temperate as that in Croatia. We might next discover that there is an EU grant for mango-growing in Dorset, or something equally absurd. That is the extraordinary April fool sort of world that we are living in. I do not share the Minister's complacency about the level of fraud. She may not like that word, but she deprecated the deep concerns expressed following the publication of the Court of Auditors' report. If anything, we do not take the report seriously enough.

A second way of assessing the seriousness of the problem is to examine the effectiveness of the spending and the care with which the funds have been used—something that the Court of Auditors is only just beginning to consider. It does not carry out value-for-money studies as a matter of course. Most of its work is still based on trying to establish that the money is at least spent where it is supposed to be spent. It is a long way from giving us comprehensive answers to the questions that it is standard practice to answer in value-for-money studies conducted by the National Audit Office, which end up being laid before the Public Accounts Committee. That is another major weakness of the EU budgetary system, and I should like the Court of Auditors to conduct more such work.

The best way to illustrate the problem—I believe that most people reading these documents would believe there is a problem—is to indicate the nature and scale of it at various levels. Do we, for instance, see clear examples of mismanagement and irregularity at EU level in the relationship between the Commission and member states? The examples are legion. One example is the major underspend in the awarding of funds. In 2002, the total underspend was 13.4 billion—most of which, the Court of Auditors noted, was the result of a major underspend on structural measures. Paragraph 2.46 notes that this was caused by member states overestimating the cost of implementing those policies. Why would they want to overestimate them? The answer, of course, is that they want to secure as much money as possible, but then find that they do not need so much money, or that they cannot allocate so much over the period set for whatever the project might be.

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It may seem bizarre to complain about underspend, but such an underspend is likely, at best, to generate great waste. Anyone who has bid for a certain amount of money for a project but who has not been able to get rid of a given proportion of it in years 1 and 2 will find any way possible of getting rid of it, rather than underspending for a third year. That leads, at best, to terrible waste, irregularity, or, worst of all, fraud.

The problems of the EU budget are deep-seated and structural, and manifest themselves most often in the relationship between member states and the Commission and in the incentives for each member state during the budgetary process. There is no easy solution to what I have described, unless the Commission is given the power to withhold money altogether and to penalise members states. Member states will not want to give the Commission that power.

A second way of illustrating the weakness of the budgetary system is to examine the Commission's accounts and what I consider to be a worrying complacency about them. The document is replete with examples of what most people would consider, at best, to be complacency. We could open it almost anywhere and find one such example. I will not try to do so now, in case I do not hit the jackpot and waste the Committee's time. The description of the Galileo project is significant. It is a worrying story. Members of the Committee will find that the called-up part—that is, the amount allocated from the Commission's 500 million project—has not even appeared on the asset side of the Commission's balance sheet. If this were a domestic matter that involved, say, the budget for the Department of Trade and Industry, the amount would appear in the annual public expenditure statement, the Red Book and the resource accounts. The ECA's worries are absolutely stark and clear. It says bluntly that, as has been the case in the past, the origins of its observations lie in the Community accounting system, which was not designed to ensure that assets are fully recorded.

In that context, the Court notes that on 17 December 2002 the Commission adopted an action plan for modernisation of the European Community accounting system. However, a hint of cynicism creeps into its report, which states that the action plan is supposed to become fully effective as from the 2005 financial year. It is deeply worried about the composition of the assets in the EU budget.

The report goes on and on in that manner. If hon. Members want a further example, they could turn to page 20, which describes a rather curious programme called the European Community investment partners programme, or ECIP. It was created more than 20 years ago to support joint ventures but has now been completely written off; in other words, the lot has been lost. The ECA report states that

    ''in spite of the commitments it made in 2002, investments in joint undertakings''—

that is, some 23 million—

    ''have still not been evaluated by the Commission, which has not made the necessary effort to acquaint itself with the true situation.''

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It is worth reading the Commission's reply to that. This very interesting document has the Court's observations on one side and, for some items, the Commission's response on the other side. In response, the Commission stated:

    ''The 100 per cent. reduction in value''

—I love that phrase—

    ''was applied because the information required to calculate the exact value of the participations and loans granted under the ECIP was not available.''

In other words, the amount was written off because the Commission did not even know how to value it.

We move on and find the Commission's response to the very critical comment about its not having made the necessary effort to acquaint itself with what is really happening. The response states:

    ''The Commission is presently establishing a coherent approach for valuation and is collecting data from the 15 different financial institutions concerned.''

Few member states—certainly not Britain—would be prepared to accept such astonishing complacency.

The third way of addressing the scale of the problem is to examine operational failings. The document is replete with examples of such failures. Indeed, it goes from one programme to the next, damning them. I shall not laboriously list them all, but those who have any doubt might consider the example on page 248, which describes the food to Russia programme. The Court severely damns the whole programme. In a nutshell, it says that the programme should not have been set up, but, as it had been set up, measures should have been put in place to ensure that the assistance went to the right place. In fact, there was no scrutiny at all as to where the money went. The document states clearly that the Commission is not even equipped to run a food to Russia programme such as the one on which it embarked. It should never have got involved in anything like that.

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