Select Committee on European Scrutiny First Report


6 Fraud and other illegal activities

(a)

(25996)

12993/04

COM(04) 509

(b)

(27810)

12854/06

COM(06) 473


Draft Regulation on mutual administrative assistance for the protection of the financial interests of the Community against fraud and any other illegal activities

Amended draft Regulation on mutual administrative assistance for the protection of the financial interests of the Community against fraud and any other illegal activities

Legal baseArticle 280 EC; co-decision; QMV
Document originated(b) 14 September 2006
Deposited in Parliament(b) 22 September 2006
DepartmentHM Treasury
Basis of consideration(a) Minister's letter of 1 November 2006

(b) EM of 5 October 2006

Previous Committee Reports(a) HC 42- xxxiii (2003-04), para 8 (20 October 2004), HC 42-xxxvii (2003-04), para 8 (17 November 2004), HC 38- iii (2004-05), para 7 (12 January 2005) and HC 38-xi (2004-05), para 5 (15 March 2005)

(b) None

To be discussed in CouncilNot known
Committee's assessmentLegally and politically important
Committee's decision(a) Cleared

(b) Not cleared, further information requested

Background

6.1 Article 280 EC requires the Community and the Member States to counter fraud and any other illegal activities affecting the financial interests of the Community through measures adopted under that Article. Article 280(2) EC requires member States to "take the same measures to counter fraud affecting the financial interests of the Community as they take to counter fraud affecting their own financial interests". Article 280(3) EC provides for "close and regular" cooperation between their competent authorities. Article 280(4) EC provides for the adoption of measures which are necessary to prevent and fight against fraud affecting the financial interests of the Community, but such measures "shall not concern the application of national criminal law or the national administration of justice".

6.2 Important elements in countering fraud and other illegal activities include the Financial Regulation,[18] which governs the preparation of budgets and the management of the financial resources of the Community, relevant legislation of Member States, the Commission's European Anti-Fraud Office (OLAF), the European Court of Auditors and the relevant authorities of Member States. Also relevant is EC legislation on VAT fraud and money laundering, including Regulation 1798/2003 EC on administrative cooperation on VAT matters and Directives 91/308/EEC and 2001/97/EC on money laundering.

6.3 Present legislation does not give a legal basis for the Commission to play an active role in protecting the financial interests of the Community through supporting and coordinating Member States' activities, particularly in the fields of VAT fraud and money laundering. The Commission believes that cooperation and the exchange of information concerning fraudulent activities in a single market of 25 Member States will become increasingly difficult, and that there is a need for it to take a more active role in supporting and coordinating Member States' activities. So in July 2004 the Commission presented a draft Regulation (document (a)), which is designed to give it such a role. The Commission stressed that the Regulation would not give it or OLAF any additional investigative powers. It said the proposal would provide "the basis and tools for multidisciplinary co-operation between the relevant competent authorities of different Member States and between them and the Commission".

6.4 The draft Regulation:

  • would require competent authorities (Member States and the Commission) to respond to requests for information and assistance, require some defined information to be supplied to the Commission without a request and allow the Commission to access the VAT databases of Member States (the VIES system — the VAT information exchange system);
  • covers the use of information, including admissibility as evidence in administrative and judicial proceedings and confidentiality; and
  • would provide a comitology[19] procedure for detailed rules for implementing the proposal.

6.5 The previous Committee considered this document on a number of occasions. During this consideration the Government was able to satisfy our predecessors as to concerns about taxpayer confidentiality and, saving one instance, about unnecessary or inappropriate provisions in the draft Regulation. This instance related to the previous Committee's concern about the lawfulness of Article 15 of the draft Regulation and about the related Recital 9. Article 15, which was entitled "Use as evidence", provided that "findings, certificates, information, documents, certified true copies and any intelligence communicated to a competent authority [in the course of providing assistance] shall constitute admissible evidence in administrative or judicial proceedings in any Member State, in the same way as if they had been obtained in the Member State where the proceedings take place". This appeared to our predecessors to impose a uniform rule of admissibility of evidence, including in criminal proceedings, and we asked the Government to what extent this was consistent with Article 280(4) EC, which prevents the adoption of measures which concern the application of national criminal law or the national administration of justice.

6.6 The Government was unable to persuade the previous Committee of the validity of the provisions of Article 15 and was asked to reconsider that question, since our predecessors maintained their view that these provisions plainly disregarded the limits imposed by Article 280(4) EC. The previous Committee also commented on what appeared to be misquotation or distortion of its views by the Government and sought clarification of a confusion about the correct text of Recital 9. The document remained (and remains) uncleared.[20]

The new document

6.7 The amended draft Regulation in document (b) replaces document (a). The Commission presents this revised proposal in the light of amendments made by the European Parliament and suggestions made by Member States. The changes to the original text:

  • amend the recitals so as to stress the right of Member States to a degree of discretion, to update references to relevant legislation and to include references to OLAF and data protection;
  • stress that the proposed Regulation would not affect co-operation between Member States on VAT matters under Regulation 1798/2003 EC;
  • add new definitions;
  • require Member States to provide information about their competent authorities to the Commission and designated competent officials, competent authorities and the Commission to co-operate with regard to irregularities;
  • permit Member States to exercise discretion as to the appropriate form and method of co-operation;
  • provide for an applicant competent authority to include a brief statement of facts in requests for assistance and for the applicant authority to be informed if a request is transferred to another (correct) competent authority;
  • delete requirements for a competent authority to keep, with or without a request, a "special watch" in relation to suspected irregularities;
  • provide that the Commission may, rather than shall, be granted access to the VAT databases of Member States;
  • make minor changes to the provisions on "spontaneous", that is unrequested, assistance;
  • give the Commission a co-ordinating role in the exchange of information between Member States and third countries;
  • state that the Commission's use of information is in order to "facilitate…the work of the competent authorities in the Member States";
  • cover the provision of information, respecting confidentiality, concerning money laundering;
  • require Member States, on request, to freeze, seize and confiscate proceeds of money laundering from natural or legal persons; and
  • permit Member States to withhold co-operation if it would be contrary to their sovereignty, security, public policy or other fundamental interests. In such cases the Member State would be required to inform the Commission of its reasons.

6.8 Recital 9 and Article 15 of the original proposal, which concerned our predecessors, although renumbered — Recital 11 and Article 14 — remain unamended in the revised proposal. Recital 11 states that "information gathered or transferred by the Commission should therefore be admissible as evidence in administrative and judicial proceedings". Article 14, entitled "Use as evidence" provides that "findings, certificates, information, documents, certified true copies and any intelligence communicated to a competent authority in the course of assistance provided for in Articles 6, 7, 8 and 13 shall constitute admissible evidence in administrative or judicial proceedings in any Member State, in the same way as if they had been obtained in the Member State where the proceedings take place".

The Government's view

6.9 In relation to the amended draft Regulation, document (b), the Financial Secretary to the Treasury (John Healey) tells us that the Government is pleased that the Commission has revised the proposal, going some way towards meeting its concerns with the original proposal. He says:

  • the main changes concern the degree of flexibility now offered to Member States, allowing each Member State to decide how it will co-operate with the provision of assistance and information. But the Government is seeking to clarify the extent of such flexibility;
  • since the original draft Regulation was proposed Directive 2005/60/EC and Regulation 1889/2005, both concerning money laundering, have come into force, and the Government is still concerned that the need for further measures in this field is unclear; and
  • the Government notes that the Commission holds that the revised proposal does not affect administrative co-operation in the field of VAT under Regulation 1798/2003 EC, but remains concerned about the remaining references in the proposal to assistance in this area.

6.10 The Minister does not address in this Explanatory Memorandum the outstanding issues on the original draft Regulation, document (a), raised by our predecessors. However, in his letter of 1 November 2006 the Economic Secretary to the Treasury (Ed Balls) seeks to address those points.

6.11 First, the Minister apologises for the absence of any earlier response to the previous Committee's last report on this matter, and for the fact that the matter was not dealt with in the Explanatory Memorandum on the new document. He explains and apologises for the confusion over the correct text of Recital 9, and regrets if the previous Committee considered that his predecessor's letter[21] appeared to distort the Committee's views or attribute to it other views which it did not express.

6.12 Turning to the substance, the Minister states that he shares the view of his predecessor that "Article 15 of the draft does not impose a uniform rule on the admissibility of evidence" and that the European Court of Justice would "in all probability conclude that this provision would not exceed the powers conferred by Article 280(4)EC". In support of this view, the Minister refers to the provisions of Article 15 and suggests that it does not provide for "automatic admissibility" which the Minister believed to be the concern of our predecessors. The Minister argues that the provisions of Article 15, which provide for findings, certificates and information to constitute admissible evidence "in the same way as if they had been obtained in the Member State where the proceedings take place" are quite different in their objective from those of section 3(2) European Communities Act 1972 which provide that the Official Journal "shall be admissible as evidence".

6.13 The Minister goes on to state:

"I do not share the Committee's view that the words in the proposal create a rule about the admissibility of evidence and not a rule about the availability of information which may, depending on national law, become admissible in proceedings, or not".

6.14 In the second limb of his argument, the Minister recalls the view of the previous Committee that it seemed to be "plain" that "the rules which determine what evidence may be put before a civil or criminal court are rules which concern the administration of justice". In reply, the Minister notes that although the term "administration of justice" is not defined, "it could refer widely to matters relating to the working of the courts and tribunals". The Minister explains that he has considered the text of Article 280(4)EC in the different language versions and notes that there are "some small but surprising differences in the texts" but considers that "the European Court is likely to take the view that 'the national administration of justice', however phrased, refers to its practical application and not to a rule about the availability of information".

6.15 The Minister adds that he finds it "difficult to see how the Community's financial interests are to be afforded protection if the courts cannot be asked to take cognizance of evidence collected in another Member State" and asks us to clear the original proposal from scrutiny.

Our assessment of the Minister's reply

6.16 As did the previous Committee, we think it necessary to analyse the Minister's reply in detail. On the Minister's first point, we remain of the view that the provisions of Article 15 (now 14) do introduce a rule on the admissibility of evidence. The scope and effect of that rule is, in our view, ambiguous and this is a matter particularly to be criticised in a directly applicable Regulation. According to the Minister, the provision does not impose a uniform rule on the admissibility of evidence, but provides for "findings, certificates, information, documents, certified true copies and any intelligence communicated to a competent authority" to constitute admissible evidence "in the same way as if they had been obtained" in the Member State where the proceedings take place.

6.17 It is apparent from the Minister's reference to section 3(2) European Communities Act 1972 that he does not consider the provisions to have the effect, in all cases, of making the "findings, certificates, information, documents, certified true copies and intelligence" originating in another Member State admissible in proceedings here. Instead the Minister appears to take the view that such material is to be admissible as evidence in proceedings to the same extent ("in the same way") as the like material would be if it had been obtained here. Assuming that the Minister is right in this narrower interpretation of the provisions of Article 15 (now 14), it seem to us that the provision remains one about the admissibility of evidence, even if it is confined to securing some form of equivalence between foreign material and that obtained here. Even if (which we doubt), the rule were confined to providing that the foreign material is admissible if the like material, collected in the same way, would be admissible in proceedings here, the rule remains one about the admissibility of evidence. The Regulation, if adopted, would appear to have the effect, for example, of displacing the discretion of the court under Part 11 of the Criminal Justice Act 2003 to exclude hearsay evidence in criminal proceedings, since the directly applicable Regulation would be equivalent to a "statutory provision" making the evidence admissible under section114(1)(a), making it unnecessary for the court to examine under section 114(1)(d) whether it is in the interests of justice for the evidence to be admitted.

6.18 Moreover, we recall that in his letter of 9 December 2004 the then Financial Secretary to the Treasury described the provisions of Article 15 as "in a sense a negative rule because it excludes any argument that evidence is not admissible because it came from a non-UK source". If the provision is such a "negative rule", having the effects suggested by the then Minister, it remains a rule about the admissibility of evidence.

6.19 As for the second limb of the Minister's argument, we do not see that the expression "national administration of justice" in Article 280(4)EC (or the corresponding provisions in the French[22] and German[23] texts of the EC Treaty) can be read as excluding the rules of a Member State on the admissibility of evidence. Such rules go to the heart of the administration of justice, and we do not understand the distinction the Minister appears to make between "practical application" (which would be included in the "national administration of justice") and rules "about the availability of information" (which would not be included).

Conclusion

6.20 Since the original draft Regulation, document (a), is overtaken we now clear it from scrutiny. As for the amended draft regulation, document (b), we note that the Government finds this a more satisfactory proposal but still requires satisfaction on a number of points. We wish to be kept informed of developments in relation to these — that is the extent of flexibility for Member States in response to the Regulations requirements, any real necessity for further measures on money laundering and the affect of the proposal on co-operation in the field of VAT.

6.21 However, like the previous Committee, we are unconvinced by the Government's arguments in relation to Recital 11 and Article 14 in the amended draft Regulation (previously Recital 9 and Article 15). We adhere to the view of our predecessors that the provisions of Article 15 (now 14) exceed the scope of what may lawfully be done under Article 280(4) EC. Article 280(4) EC specifically provides that measures adopted "shall not concern" the application of national criminal law or the national administration of justice. Demonstrably, the measures in this case do "concern" the national administration of justice and exceed the powers conferred on the Community.

6.22 Given all this we think it would be helpful if we were to take evidence from the Minister as to what seems to us clearly an ultra vires proposal, before reporting on the new proposal again.

6.23 Meanwhile the amended draft Regulation, document (b), remains uncleared.





18   Council Regulation (EC, Euratom) No. 1605/2002 Back

19   Comitology is the system of committees which oversees the exercise by the Commission of legislative powers delegated to it by the Council and the European Parliament. Back

20   See headnote. Back

21   The then Financial Secretary to the Treasury (Mr Stephen Timms)'s letter of 28 February 2005. Back

22   'l'administration de la justice' Back

23   'Die Anwendung des Strafrechts der Mitgliedstaaten und ihre Strafrechtspflege' Back


 
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