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Draft European Communities (Definition of Treaties) (Cooperation Agreement between the European Community and its Member States and the Swiss Confederation to Combat Fraud) Order 2006

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Second Standing Committee on Delegated Legislation

The Committee consisted of the following Members:


Mr. David Marshall

†Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
†Austin, Mr. Ian (Dudley, North) (Lab)
Binley, Mr. Brian (Northampton, South) (Con)
†Cable, Dr. Vincent (Twickenham) (LD)
†Chaytor, Mr. David (Bury, North) (Lab)
Clegg, Mr. Nick (Sheffield, Hallam) (LD)
†Francois, Mr. Mark (Rayleigh) (Con)
†Marsden, Mr. Gordon (Blackpool, South) (Lab)
†Owen, Albert (Ynys Môn) (Lab)
†Primarolo, Dawn (Paymaster General)
†Reed, Mr. Andy (Loughborough) (Lab/Co-op)
†Scott, Mr. Lee (Ilford, North) (Con)
†Selous, Andrew (South-West Bedfordshire) (Con)
†Short, Clare (Birmingham, Ladywood) (Lab)
†Spellar, Mr. John (Warley) (Lab)
Viggers, Peter (Gosport) (Con)
†Watson, Mr. Tom (Lord Commissioner of Her Majesty’s Treasury)
Libby Davidson, Committee Clerk

† attended the Committee

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Tuesday 31 January 2006

[Mr. David Marshall in the Chair]

Draft European Communities (Definition of Treaties) (Cooperation Agreement between the European Community and its Member States and the Swiss Confederation to Combat Fraud) Order 2006

10.30 am

The Paymaster General (Dawn Primarolo): I beg to move,

    That the Committee has considered the draft European Communities (Definition of Treaties) (Cooperation Agreement between the European Community and its Member States and the Swiss Confederation to Combat Fraud) Order 2006.

Good morning, Mr. Marshall. May I say that it is delightful to see you in the Chair, looking so well? Long may that continue. I know that you will keep us in order this morning.

It might help the Committee if I briefly outline the background to the draft order and explain why the Government consider it important that the UK ratify the European Union-Swiss anti-fraud agreement at an early date. The agreement’s purpose is to put in place judicial and administrative co-operation arrangements, including those for the exchange of information between European Union members and the Swiss Confederation. That will enable both parties more effectively to combat fraud and other illegal activities in a number of areas, including the trade in goods and services, the charging and retention of structural funds, public procurement and money laundering. Critically, the agreement will enable the United Kingdom to co-operate with the Swiss in dealing with trade and illegal activities contrary to VAT and excise legislation. It does not apply to direct tax, which in the UK is covered by separate bilateral co-operation and information exchange provisions.

When ratified and adopted, the agreement will substantially improve existing administrative co-operation arrangements between the United Kingdom and the Swiss authorities, bringing them up to the level of co-operation that the UK enjoys with European member states. It will also introduce a European Union standard of judicial co-operation with Switzerland, enabling us more successfully to investigate and prosecute major indirect tax fraud. The Government led the way in seeking an EU-negotiated agreement with the Swiss. By working with our European partners, we have been able to secure a much better agreement than might have been the case.

I wish to draw your attention, Mr. Marshall, and that of the Committee, to the reason why I welcome the agreement and consider that its ratification would be of benefit and value to the United Kingdom. Hon.
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Members will know that the UK has suffered considerable attacks on the VAT system through what is known as carousel fraud—missing trader intra-Community fraud—in high-value goods such as mobile phones and computer chips. As a result of the multi-dimensional aspects of that type of fraud, we need effective arrangements for the exchange of information, and judicial co-operation between countries is essential. There is evidence that criminals are now targeting their efforts towards non-European Community countries because improved intervention and co-operation strategies within the EU are now working effectively. Switzerland, with its central location and restrictive banking regulations, is seen by fraudsters as an ideal country to use as a base for their operations and through which to divert goods.

A key aspect of the agreement is that Revenue and Customs will be able to request information, including details of banking transactions, on individuals who are behind fraud but not necessarily named as the owner of the goods in a fraud carousel. Such evidence will enable substantial amounts of VAT to be withheld from the fraudsters involved. It is believed that a number of Swiss-based individuals are involved in VAT missing trader fraud relating to losses in the UK. If Revenue and Customs is able to use the same investigative and intelligence tools as are currently available to tackle intra-European Community fraud, that could have a significant impact on the links in the Swiss fraud chain.

Once ratified and introduced, the agreement will significantly improve the UK authorities’ ability to use information held by the Swiss authorities and so enable them more effectively to fight fraud as well as other indirect tax and customs frauds that cost the UK large sums of revenue. The draft order fulfils all the legal requirements necessary for the UK formally to ratify this important agreement, so I commend it to the Committee.

10.35 am

Mr. Mark Francois (Rayleigh) (Con): May I, too, welcome you to the Chair, Mr. Marshall? It will be a pleasure to serve under you, and I, too, hope that you will remain in robust health for a long time to come.

It is a pleasure, also, to appear opposite the Paymaster General. Over the last year or so that I have been a shadow Treasury spokesperson, we have crossed swords on a number of statutory instruments, but this is the first time that I have done so as her direct shadow. I am looking forward to that experience. I hear that there is a Government reshuffle in the air; in fact, that appears to have been the case for some time. I genuinely wish her all the best for the reshuffle and I hope that she emerges well.

I say confidently that the order will not receive a nomination for the most snappily entitled piece of secondary legislation ever to come before the House. In many ways the order is a formality; paragraph 4.1 of the helpful explanatory memorandum makes that clear when it states:

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    “The purpose of this instrument is to specify the Agreement as a Community Treaty for the purposes of the European Communities Act 1972. The Agreement is entered into by the United Kingdom as well as the European Community. Therefore, in accordance with section 1(3) of the 1972 Act it cannot be considered as a Community Treaty in the absence of the declaration made by this Order.”

That is nice and clear. Nevertheless, given that the order effectively specifies the agreement as a treaty between states, including our own, it should not go through simply on the nod. It is right that we ask at least a few questions about how we envisage the agreement working in practice, once it is fully ratified.

On that basis, I have a few points that I should like the Paymaster General to clarify. First, as I understand it, the order applies not to direct, but indirect taxation. The rationale is that that will help to combat specific tax fraud. Does she have an estimate of the scale of the fraud involved between Switzerland and the European Union as a whole, and more specifically between Switzerland and the United Kingdom? It would be helpful to have an idea of the size of the problem that the agreement is designed to address and what estimate, if any, the Government have made of the extent to which the agreement will reduce the problem.

Secondly, in paragraph 4.4, the explanatory memorandum states that inter alia the agreement covers the

    “charging or retention of funds from the budgets of the parties to the Agreement or budgets managed by them or on their behalf.”

Read literally, that slightly complex language suggests that the agreement is designed to protect against fraud in the public sector, but it is not specific. Will the Minister give an example of exactly what is meant by that provision? For instance, does it have something to do with the safeguarding of structural funds? Will she flesh that out for us?

Thirdly, paragraph 7.1 of the memorandum states:

    “Without this Agreement existing Conventions and protocols have limited impact.”

I appreciate what that means in principle, but will the Minister explain in practical terms what some of the constraints are and how the agreement will help to overcome them? With what additional capabilities will the agreement provide us? Fourthly, paragraph 7.3 relates to the investigation of bank accounts and the conditions under which such investigations might be permitted. As Swiss bank accounts are traditionally among the most impenetrable in the world, what specific powers does the agreement provide for the examination of such accounts to combat indirect fraud? As it would allow the Swiss to do the same in the United Kingdom, will the agreement confer any additional powers on other EU member states to make inquiries about UK citizens? The Swiss will be able to do it, but will the EU as a whole be party to the agreement? Will other EU states have powers to inquire into the bank accounts of UK citizens beyond those in the current protocols? We genuinely want clarification on that.

Fifthly, in such circumstances, if I read the details correctly, some investigations could be carried out without the individual concerned being informed. I understand that there may sometimes be very good law
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enforcement reasons for that, but Her Majesty’s Revenue and Customs has a general duty to safeguard the confidentiality of the affairs of those with whom it deals. That rule should be broken only with good reason—I heard the Paymaster General herself make that point during debate on a Finance Bill. What safeguards are in place to strike the right balance between combating fraud and preventing what might be termed fishing expeditions against UK citizens by foreign tax authorities? How will the Government strike that difficult balance?

Finally, on a personal note, the explanatory memorandum states that no regulatory impact assessment has

    “been prepared for this instrument as it has no impact on business, charities or voluntary bodies.”

In a recent Delegated Legislation Committee, the Financial Secretary and I debated the exact de minimis level at which RIAs would apply. There seemed to be some temporary confusion on the day, and he offered to write to me to clarify it. I recently received a letter from him saying that the de minimis level for RIAs is now effectively £3 million, which cleared up the matter nicely. As a simple courtesy, will the Paymaster General pass on my thanks to him for dealing with that question so promptly? I take this opportunity to place my gratitude on the record.

I shall not detain the Committee longer with more questions, but I look forward to hearing what the Paymaster General says in reply, particularly on those points about additional powers, how they will operate and what safeguards are in place to protect the confidentiality of UK citizens.

10.42 am

Dr. Vincent Cable (Twickenham) (LD): I, too, welcome you to the Chair, Mr. Marshall.

In most respects, the statutory instrument is not wildly controversial. When it went through the European Parliament, the vote was 54 to nil, so there was not a great deal of ideological or cross-national controversy about it. On reading the documents, however, it seems to me that important principles are at stake. Perhaps they are not central to the instrument with which we are dealing, but they raise awkward questions in my mind. For example, when the explanatory note was attached for the EU Parliament, it referred to discussions in the European Parliament, saying that the European parliamentarians recommended that the

    “Council should approve the proposal for a European evidence warrant as soon as possible and provisions introducing a system of mutual recognition of evidence”.

That is quite a profound point. It may be good or bad, but I am interested to know whether the Government share that view.

The principle of the mutual recognition of evidence in criminal trials was tested to destruction in the case of the Greek plane spotters, which I remember because I was a constituency MP involved. Difficulties arise when one country’s evidence-gathering and evidence-testing systems are not accepted by the rest of the European Union. Do the Government subscribe fully
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to the principle of mutual recognition of evidence? Have they absorbed all its potential legal implications in respect of this document and others?

My second question partly reflects one asked by the hon. Member for Rayleigh (Mr. Francois) about how far the instrument goes in breaking down the barriers of secrecy and opaqueness surrounding the Swiss banking system. I see the Paymaster General shake her head, so I take it that the answer is “Not very far.” Much of the language surrounding the instrument relates to the fact that Switzerland is at the centre of the Union geographically and therefore we are dealing essentially with cross-border fraud issues, which in the case of Switzerland are probably not massively important. Switzerland is important because it is a financial centre and financial centres have nothing to do with geography. Things can be switched around regardless of the location of countries.

The question was asked—the Paymaster General partly answered it by shaking her head—about the implications for the Swiss system of banking and its transparency in the wider scheme of things. My third question relates to that. Many of the anxieties about money laundering and the misuse of the Swiss banking system as it relates to the UK have involved third parties. For example, the gangsters who were running Nigeria and disappeared with £x billion-worth of assets possibly used the London system, but finally deposited their money in Switzerland. If someone wants to take action in a London court against them for the retrieval of their assets, they run up against a major barrier surrounding Switzerland.

Does the order make it any easier for such cases to proceed or are we dealing with something that is much narrower in focus? The narrower the order, the less controversial it is and the greater our ease in passing it. It would be interesting to have the Government’s evaluation of how far it opens up greater transparency in financial markets more generally and particularly as it affects Switzerland.

10.46 am

Dawn Primarolo: Direct tax is a matter that we negotiate directly. The reason why this is a European agreement and why we were happy to be party to it—we have a better agreement on that basis—is because it deals with the indirect tax that is within the remit. Separately, following on from developments on the taxation of savings, Her Majesty’s Customs and Revenue has been negotiating at an official level with the Swiss authorities on a protocol to add to the 1977 UK-Switzerland double taxation agreement, which covers income tax, capital gains and corporation tax. I hope that it will be signed shortly and then published. It builds on Switzerland’s commitment to the savings directive agreement on exchange of information, particularly with regard to tax fraud or the like.

The protocol will not be on the same level as this agreement, by virtue of the Swiss banking system, its secrecy and what I politely described as restrictive regulations, which the Swiss are determined to
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maintain. Hon. Members touched on that. As a result of the particular definitions that the Swiss use to protect their banking secrecy, tax fraud is one of the things dealt with in the order. Their definitions and those of the rest of the EU are slightly different.

The first question was about public funds and whether that was a reference to structural funds. Other member states felt that that was important. It concerns cases in which structural funds for large capital contracts might be in Swiss bank accounts when perhaps they should not be. Those member states wanted the ability to seek that information. That has never been the case in the UK. It reflects the wider concerns and goes back to the point that the issue is not only the geographical location of Switzerland, but Swiss banking practices in terms of access to bank accounts.

Mr. Francois: I am grateful to the Paymaster General for clarifying the background to that slightly opaque language. We are debating an instrument that is designed to combat fraud, and it is appropriate to remind the Committee that one of our problems is that for 11 years the Court of Auditors has refused to sign off the accounts of the European Union. The example of structural funds is one of the reasons: in several instances it has been difficult to trace what has happened to structural fund money. It is important to note that that is part of the reason for the order. We hope that eventually we shall not be in the same situation, but it seems to happen every year with depressing regularity.

Dawn Primarolo: Indeed, the hon. Gentleman is quite correct, and what he says is raised time and again when we discuss the report of the Court of Auditors in other Committees. However, it is not the only factor. There are many complications in the sphere of accounting and procedures, and that fact has figured in European Union debate in the past year.

The hon. Gentleman also asked about estimates of indirect tax lost between the European Union and Switzerland and the UK and Switzerland. I am afraid that I do not have the figures, but I will mention those that I do have. He will have seen in the pre-Budget report the scale of loss associated with missing trader fraud for the UK. That was estimated as in the region of between £1.2 billion and £1.9 billion for 2004-05. We have in recent months seen transactions—I have to be careful what I say—for which the route through has been hundreds of millions of pounds as part of missing trader fraud.

The amount is not significant, but in fairness to the Committee, I should also mention that action used to be taken intra-EU, and that as we improved our action among ourselves as European members, it moved outwards—to Switzerland, at present. However, there will be a constant movement towards getting what the Chancellor has always said we need, and what the UK has continually argued for and fought for in international discussions: proper exchange of information about transactions that take place in the name of our taxpayers. If I can obtain more detailed figures, I shall provide them to members of the
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Committee. However, I am sure that all hon. Members will appreciate that fraud and, in the case that we are discussing, evasion, are by their nature illegal, so it is difficult to put an exact price on them.

The hon. Gentleman asked how the agreement would work. There are arrangements in the European Union mutual agreement, which we have discussed in Statutory Instrument Committees and in the context of the Finance Bill. The agreement that we are considering goes no further. It does not establish any new arrangements between current European Union members. All the relevant matters remain within a remit that has been discussed. In fact, we are trying to reach the level of the mutual exchange and assistance directives that are already operating.

The hon. Gentleman probably knows that we have mutual assistance agreements with the Swiss under what is known as Naples II. However, that is severely constrained at the level of co-operation on fraud inquiries. That ties back into the relevant definition. The agreement provides for a substantial improvement in the existing co-operation on exchange of information. In particular, UK officials will be able to request a much broader range of information about Swiss-registered businesses or those that trade with the UK, as well as actively engaging in investigation activity, in close collaboration with the Swiss authorities.

A further step, to touch on the point that the hon. Member for Twickenham (Dr. Cable) made, is that under the judicial co-operation arrangements, it will for the first time be possible to use any information obtained in legal proceedings. That would mean, for example, that if potential benefits to the UK were demonstrated, and the destination of UK exports, such as mobile phones and computer chips, shifted to another country—that is, Switzerland—we would be able to get that information.

I will check on interpretation and the mutual recognition of evidence and write to the hon. Gentleman. My understanding is that the agreement clarifies what we define as fraud, as set out in the mutual directives and assistance directives fraud, and clarifies the negotiation of agreement with Switzerland that under these narrow bands—that is, the pursuit of indirect tax—it will pursue information on that basis, not on its domestic interpretations of fraud. That is important. It does not have to be a fraud under Swiss law to be established as a fraud under European Union law with regard to direct taxes.

I was asked whether the proposal will give us greater access to Swiss banking information, and the answer is yes. It means that the UK can gain access to information on Swiss bank accounts through intelligence and evidential requirements in most indirect cases, and that is an important step forward.
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That led the hon. Member for Rayleigh to ask about fishing trips and safeguards, which of course also apply the other way round, to the Swiss. All the agreements are within the standard procedures, which we have discussed many times, in respect of the circumstances in which evidence can be exchanged. There are safeguards in the agreement that will ensure that only proper and appropriate inquiries or requests will be considered. That applies both ways.

We will have to demonstrate that we want the information. For example, visiting traders’ premises can be done only with the agreement of the UK officials who will control and manage the inspection. That runs parallel to the agreements we already have with other member states. People cannot come to this country without our knowledge, participation or control and conduct an inquiry. Having produced the information, they must ask us to do that. If we agree to do so, they can ask to be alongside the investigating officers. There is no question of fishing trips and there are many ways to ensure that they do not happen. Any inspection carried out under the agreement will, of course, be safeguarded by the Human Rights Act 1998 in the same way as investigations carried out in the UK.

I was asked how many times in the past few years the Swiss had requested assistance from the UK compared with our requests to the Swiss for information. It is very rare indeed for the Swiss to make such requests. Switzerland made no mutual legal assistance requests and only two mutual administrative requests to Customs in respect of fraud matters covered by the agreement. However, we asked the Swiss for quite a lot of information, and will be asking them for more.

I think that I have answered all the questions. Banking secrecy remains an issue. The Swiss will continue to use their definitions, but we now have access to information, having established that we need it, on the basis of our definitions and Community definitions of fraud. There is no extension of rights to any other countries; all the directives are working at present.

I hope that the Committee agrees to the proposal. It will need to be ratified by all member states before it comes into force, but it is possible for us to start discussions with the Swiss now on a bilateral basis while we wait for the final ratification by other member states. I intend to start those discussions on behalf of the Government so that we can make progress.

Question put and agreed to.


    That the Committee has considered the draft European Communities (Definition of Treaties) (Cooperation Agreement between the European Community and its Member States and the Swiss Confederation to Combat Fraud) Order 2006.

Committee rose at Eleven o’clock.


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