Financial Management

The Committee consisted of the following Members:

Chair: Mr Gary Streeter 

Doran, Mr Frank (Aberdeen North) (Lab) 

Elliott, Julie (Sunderland Central) (Lab) 

Hands, Greg (Chelsea and Fulham) (Con) 

Hemming, John (Birmingham, Yardley) (LD) 

Hoban, Mr Mark (Financial Secretary to the Treasury)  

Jones, Susan Elan (Clwyd South) (Lab) 

Leslie, Chris (Nottingham East) (Lab/Co-op) 

McFadden, Mr Pat (Wolverhampton South East) (Lab) 

Mordaunt, Penny (Portsmouth North) (Con) 

Ruffley, Mr David (Bury St Edmunds) (Con) 

Sharma, Alok (Reading West) (Con) 

Stewart, Rory (Penrith and The Border) (Con) 

Wilson, Sammy (East Antrim) (DUP) 

Marek Kubala, Committee Clerk

† attended the Committee

The following also attended ( Standing Order No. 119(6) ) :

Heaton-Harris, Chris (Daventry) (Con) 

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European Committee B 

Wednesday 27 June 2012  

[Mr Gary Streeter in the Chair] 

Financial Management 

8.55 am 

Chris Leslie (Nottingham East) (Lab/Co-op):  On a point of order, Mr Streeter. Today’s documents consist of 805 pages, so they constitute one of the lighter, easier-to-read sets of background information for European Committee B meetings. Yet again, the lack of legibility and clarity makes the documentation impenetrable, I suspect partly because of the quality of the copying. For example, pages 602 and 603 have some insightful tables that are not particularly easy to discern. Would you consider making representations, either through the Panel of Chairs or another appropriate body, for some electronic links to be sent to members of the Committee, perhaps ahead of meetings so that we can at least have the option of seeing the documents online? This is at least the fourth or fifth time we have had the problem. I do not want to belabour the point, but I would be grateful for your assistance. 

The Financial Secretary to the Treasury (Mr Mark Hoban):  Further to that point of order, Mr Streeter. Although I do not disagree with the proposal of the hon. Member for Nottingham East, that is obviously a matter for the House. The reproduction of the documents is the Treasury’s responsibility and, in this age of austerity, we have run out of toner or something like that. However, I will ensure that, for future Committees when the Treasury supplies the documents, we provide copies that people can read. 

John Hemming (Birmingham, Yardley) (LD):  Further to that point of order, Mr Streeter. I think that the problem arises because the original documents are in colour and they are photocopied in black and white. 

The Chair:  I thank all three colleagues for those points of order. I am grateful to the Minister for suggesting that he will have a word with his officials about the matter. I think that Mr Leslie’s suggestion is excellent and I undertake to raise it with the Panel of Chairs. 

8.57 am 

Mr Hoban:  It is a pleasure to serve under your chairmanship, Mr Streeter. 

I am pleased to have the opportunity to discuss the European Court of Auditors report on the implementation of the EU budget for 2010. During such austere times, good management of public money has never been so important. That is why it is disappointing that the European Court of Auditors has, for the 17th year in a row, failed to sign off the legality and regularity of EU transactions in 2010. United Kingdom taxpayers contribute more to the EU budget than they receive back, so they

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are particularly sensitive to waste in the budget. That is why the Government have taken the report’s findings so seriously. 

On the report, I will begin on a relatively positive note—perhaps the only one I shall strike in my speech. For the fourth year in a row, the European Court of Auditors found that the accounts presented fairly, in all material respects, the financial position of the EU at the end of 2010. However, the Court’s main findings regarding the legality and regularity of the accounts were of grave concern. They estimated that 3.7% of transactions in 2010 did not comply with the rules. That marks a deterioration from 2009, when the error rate was 3.3% The Government and taxpayers expect, at the very least, year on year improvements in the Commission’s bookkeeping. The Government have always believed that the answer to more effective public spending is to spend more smartly, not to spend more. The Court definitely agrees with us about that, as reflected in a new section in this year’s report, “Getting Results from the EU Budget”. The Court concludes that the Commission has plenty of room for improvement. I am sure that we would all endorse that. 

Each year, the European Parliament has responsibility of signing off the EU’s accounts, a decision that it takes on advice from the European Council. In February, the member states met in Council to discuss the European Court of Auditors reports. The Government were robust in their criticism of the management of EU funds in 2010, drawing out in particular the increased error rate. Although the Council agreed by a qualified majority to recommend sign-off, the Government were not satisfied with that. That is why the UK, together with Sweden and the Netherlands, voted against that decision. That is the first time the UK has voted against signing off the EU’s accounts. It sends the strongest message yet that the management of EU funds is not good enough and must improve. The UK, the Dutch and the Swedes issued a joint statement calling for immediate action from the Commission and member states. 

The statement made a number of demands for improvement. It called for significant improvements in the quality of spending across the EU, it called on other member states to step up to their responsibility to manage EU money properly, it demanded that the Commission get tougher with those that do not do so and it called on member states to follow the example of the UK and publish annual, transparent data on their use of EU funds. It also called on the Commission to simplify the bureaucratic mess of rules that makes accessing and using EU money so problematic, and to imbed modern management techniques into programmes. 

In addition to pushing for urgent improvements to the quality of financial management, the Government have been working with the Commission to deliver reforms. For example, the Government have worked with the Commission on revising EU financial regulation, which sets out the overarching rules on the use of EU money. There have been two guiding principles to our approach: greater simplicity of rules and ensuring financial propriety. So we will see simpler forms of grants and reductions in red tape, while maintaining systems that will ensure good management of money. Greater simplicity of rules brings double benefits. Not only does it encourage

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smaller beneficiaries, such as small businesses, to take advantage of EU funds, it also reduces the probability of mistakes being made. 

The Government’s message is clearly getting through: the Commission now has its own simplification agenda, which it wants to put in place by the beginning of the next financial perspective. The Government are also working hard to shape the debate on EU financial management through leading by example. The UK is leading the debate in the EU when it comes to transparency in public spending. The Government are determined to have the most ambitious open data agenda of any Government in the world and these commitments demonstrate our ambition to make public services more transparent. 

In the context of EU spending, we are one of only four EU member states to produce a document setting out our use of EU funds. We want to improve the accuracy of that data so that the public can clearly see where EU money has been spent in this country. The Government consider this to be a minimum standard of transparency for EU expenditure. 

So I must reiterate the Government’s disappointment. It cannot be right that, during times of such severe austerity, the management of EU funds is getting worse, not better. That is why we took the unprecedented step of voting against signing off the 2010 budget; the strongest signal we have sent so far that things are not good enough and must improve. However, we cannot simply make lists of demands. We must lead by example and that is why we have set a high standard for financial transparency in the EU. We are working with the EU on ways to simplify rules that ensure that Britain’s interests are protected. I hope that, in the 2011 report by the European Court of Auditors, we will see an improvement in this area. 

The Chair:  I am grateful to the Minister. We now have until 9.55 am to ask the Minister questions. I remind colleagues that questions should be brief. It is open to any Member, subject to my discretion, to ask a related, supplementary question. Of course, I shall begin with the Opposition spokesman, Mr Chris Leslie. 

Chris Leslie:  I reiterate my appreciation to the Minister for his comments about the logistics of these debates: given that we are talking about transparency and accountability, the prerequisite of having transparent documentation is eminently important. 

It is a shame that we are talking about arrangements relating to the 2010 budget. This is a very slow process, but I appreciate that there are lots of discussions—I hope that there are lots of discussions—between the UK Government and the Commission and the European Union about these things. Can the Minister tell the Committee, when a Treasury Minister last met Commissioner Šemeta, the European Commissioner for Taxation and Customs Union, Audit and Anti-Fraud? 

Mr Hoban:  That is a very good question. Ministers meet regularly with their opposite numbers in the Commission. So, for instance, I met the Commissioner responsible for the budget and I am sure that my hon. Friend the Exchequer Secretary will meet the Commissioner responsible for taxation, but we do not just pursue these

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issues at a ministerial level; we also deal with UKRep officials. The last time we met Commissioner Šemeta was in September last year. 

Chris Leslie:  Given the need radically to change the EU’s attention to fraud and waste in the EU budget, will the Minister consider being in the Commissioner’s face a little more frequently? They met in September; I know that, perhaps annually, these issues get in the diary and the meetings can range quite widely, but I am anxious that Ministers send a strong message to Commission officials that that much fraud and poor performance is unacceptable. How will he improve the strength and frequency of the representations made by the Treasury and Ministers to the Commissioner and his officials? 

Mr Hoban:  The hon. Gentleman takes a narrow view of what interactions should be. When this country voted against the discharge of the EU accounts at ECOFIN in February, those points were made, and my right hon. Friend the Chancellor and his Dutch and Swedish counterparts wrote to the Commission. We regularly meet Commission officials through the budget negotiation process and make those points. At the November ECOFIN meeting that signed off the 2012 budget, points were made about the need to improve waste in EU spending. A budget ECOFIN is scheduled for the end of July, which if it proceeds will provide yet another opportunity for us to send the same message. 

I do not think that anyone in Brussels, from José Manuel Barroso downwards, is ignorant of our concerns about spending. More importantly, by working with our partners and other member states, we have got the Commission to move. That is why its agenda on simplification is helpful. It is a sign that the Commission is taking our representations seriously. 

The Chair:  One more intervention from Mr Leslie for the time being, and then we will spread it more widely. 

Chris Leslie:  Thank you, Mr Streeter. My next question concerns the representations being made between the UK National Audit Office, the UK police authorities— the Serious Fraud Office, the Metropolitan police or the City of London police—and the European Union on these particular fraud issues. Can the Minister assure me that the expertise well known and developed within UK authorities in rooting out and chasing fraudulence and irregularities is also being shared with those European Union bodies, which clearly need to improve their work on that matter? 

Mr Hoban:  The hon. Gentleman makes an important point. We are happy to share our expertise with OLAF, the body responsible for addressing those issues. If my recollection serves me, we have discussed that before in this Committee. We must also take our own responsibility for tackling fraud and the misspending of EU funds in the UK, and we do. We are supporting work with OLAF to improve the efficiency and effectiveness of its investigations. The last time that we discussed the matter, we talked about the possibility of a much more targeted approach by OLAF to tackling fraud. Those issues are

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important. We are working with OLAF to suggest best practice and encourage it to be more effective in its fight against fraud. 

Chris Heaton-Harris (Daventry) (Con):  It is a pleasure to serve under your chairmanship yet again, Mr Streeter. I have a couple of questions about other meetings, and about the practice of meetings. When the Minister entered office, was it a regular practice for Ministers to meet the Commissioners responsible for budget, taxation and cutting fraud? What other meetings would have been in the schedule, or possibly discussed with the UK representative on the Court of Auditors? 

Mr Hoban:  I cannot comment on the practice of the previous Government and the frequency with which they held meetings with Commissioners and others. My sense, from the feedback from Commission officials and the Parliament, is that the pace of engagement generally between the UK and the Commission has increased since we came into office, perhaps confounding the critics. 

Chris Heaton-Harris:  To discuss another couple of institutions involved in the European budget, the Committee of the Regions and the Economic and Social Committee, do the Government have any communication with the UK or any representatives of those two bodies? 

Mr Hoban:  That falls outside my sphere of knowledge, but I will come back to my hon. Friend and let him and the Committee know what the level of contact is. 

Chris Leslie:  I would be grateful if the Minister could share that with the whole of the Committee. Paragraph 35 of his memorandum to the European Scrutiny Committee talks about this irregularity management system. It says that it has had persistent problems—it has had teething problems and difficulties getting off the ground and so on—in tracking what has been happening with some of the expenditure of the various programmes of the European Union. Will the Minister give us a sense of what those technical difficulties were? Have they now been overcome and has the backlog that accumulated been fully addressed? 

Mr Hoban:  The hon. Gentleman makes an important point. One of our concerns is that there is insufficient emphasis on the infrastructure that is required to identify irregularities and then to pursue them. We want to see much more effort put into that and an attempt by the Court of Auditors to tackle that. That does also require some effort from other member states. We need to ensure that there is proper discussion between member states and the Commission about tackling such irregularities. Often, irregularities happen in the way in which member states spend the funds that are delegated to them by the European Union. 

Chris Leslie:  Is the Minister happy with the level of resources that the European Union is committing to combating fraud? 

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Mr Hoban:  That is one of those areas where one should be careful what one wishes for. Clearly, our approach in agreeing a budget and a multi-annual financial framework is to work for restraint in spending, and that does require some prioritisation about where resources are spent and used. My first priority would be to ensure that the resources that OLAF and the Court of Auditors have are used effectively and in a targeted way. One of the conclusions of a debate about fighting fraud some months ago was that fraud was not tackled in a targeted and focused way and that resources were not focused on risk. Rather than succumb to suggestions that would increase expenditure, we should focus the money that is spent on this and ensure that it is spent more wisely. That has always been the approach that this Government have taken. 

Chris Heaton-Harris:  On that subject, in the “Fight against Fraud” paper, there are a few lines about the reform of OLAF. Have the Government got a position on how OLAF should be reformed? 

Mr Hoban:  We should see much more focus on risk. We should identify those areas where funds are more susceptible to irregularity or fraud. At the moment, the approach has not kept pace with modern auditing techniques. It does not identify where the risk is. If OLAF was much more focused on identifying the risk, we would see a more efficient use of resources for programmes that are perhaps more susceptible to fraud. That is the kind of reform that OLAF needs. 

Chris Heaton-Harris:  From 1999, when OLAF was set up, to 2009, I was in the European Parliament and on the Committee that looked after this. In fact, I was OLAF’s rapporteur for most of that period. In that time, if I remember correctly, the OLAF investigations led to, I think, less than a handful of arrests. Does the Minister know whether that position has improved? 

Mr Hoban:  I do not know the precise statistics, but there have been problems in pursuing this. There is a responsibility also on member states to pursue fraud. There is a too casual attitude to irregularity and fraud with EU funds, and we need to tackle that. Demonstrating that member states are taking action and using criminal sanctions to tackle the matter would be a positive signal. 

Chris Leslie:  I am grateful to the hon. Member for Daventry for raising the efficacy of the European institutions in tracking down fraud and holding budget holders to account within the European Union. What is the Minister’s opinion of the capability of the European Parliament, for example, to track down some of the fraud? Does he have a high opinion of its ability to conduct that work? 

Mr Hoban:  This is a sensitive area, and my hon. Friend the Member for Daventry might want to comment on it in a question or speech later. Since 2004, the Parliament and OLAF have been in negotiations about how the Commission manages OLAF and, although there has been considerable progress, the Parliament and the Commission have come to divergent conclusions and hold different views on a number of subjects,

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especially on OLAF’s access to offices of Members of the European Parliament, on which a decision needs to be agreed in the co-decision process. I do not think that there is as high a degree of co-operation as one would like, but I am sure that all parliamentarians, in national Parliaments and the European Parliament, would want to ensure that EU money was spent wisely, and to see OLAF’s effectiveness increase. 

Chris Leslie:  On a slightly different point, it would be useful to put the proportion of European Union expenditure that could be characterised as fraudulent or irregular into context, by comparing it with UK public expenditure, by Departments and local authorities, that falls in those two categories. In other words, how does the European Union compare with the UK on fraudulence? Would it be possible to get a benchmark? 

Mr Hoban:  It is difficult to provide a like-for-like comparison, but there is one area in which I can do that, and that is the rate of irregularity in the spending of EU money. In my opening remarks, I said that the 2010 error rate in the EU was something like 3.7%. The level of irregularities in spending in the UK for that year was well below 2%. We should be careful not to assume that irregularities are the equivalent of fraud—they could be an inadvertent breach of rules—but that percentage is a testament to the high standards of financial probity in public office in the UK. 

Chris Heaton-Harris:  I think that the figure the Minister just gave is from the Department for Work and Pensions. Might he wish to compare the millions upon millions of transactions that that Department deals with every week, with the number of transactions that the European Commission deals with annually? 

Mr Hoban:  I was comparing like with like, and was therefore using figures for the disbursement of EU funds in the UK. That tells its own story. We need to recognise that member states have a responsibility to ensure the correct use of the funds. Often, they are not the ones disbursing the funds, but they monitor compliance with EU rules. The fact that the UK’s irregularities rate is significantly lower than that across the EU as a whole, is a testament to the strength of our accounting systems. 

Chris Heaton-Harris:  Our Department for Work and Pensions, which has the worst error rate in the UK Government, deals with millions of transactions each week, while the European Commission deals with a fraction of that number in its annual budget but has many more problems. My question to the Minister was: does that not suggest that it should be easier to cut down on the problems with the Commission’s accounting practices? 

Mr Hoban:  A lot of progress needs to be made on tackling irregularities. By definition, if the average is 3.7%, and our irregularity rate is below 2%, some member states’ irregularity rates must be way in excess of 3.7%. That demonstrates a need not only to improve processes in those countries and to target work, but to consider the regulations surrounding the spending of EU money, which are complex and bureaucratic. A simpler, clearer system will aid compliance. 

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Chris Leslie:  Obviously, our constituents, hearing about fraud, waste and irregularities, become sceptical about the amounts of money being set aside for the European Union budget. There is a spending review process and a multi-annual financial framework, as well as the EU annual budget round, which we are in the middle of. For the financial year that is currently under negotiation, will the Minister update the Committee on the Government’s red line. What will they accept? A cash freeze for the EU budget? A real terms increase? I have seen some comments about not wanting to see “large” increases in the EU budget. What is the Government’s position on the latest negotiations? 

Mr Hoban:  The situation is that the Commission and European Parliament have proposed a budget increase of just under 6%, which we believe is unacceptable. At a time of financial austerity, the Commission and the EU should be playing their part in ensuring restraint. The process that is going on at the moment is about agreeing the 2013 budget, which is done by qualified majority voting—we do not have a veto on the annual budget. We are working with member states to ensure a good settlement for the UK, and that is our objective. We are clear that the proposals made are simply unacceptable. 

Greg Hands (Chelsea and Fulham) (Con):  Better than a Blair surrender. 

The Chair:  Order. If no more colleagues wish to question the Minister, we will proceed to the debate on the motion. 

Motion made, and Question proposed,  

That the Committee takes note of European Union Documents No. 14879/11 and Addenda 1 to 3, relating to the Commission Report on the Protection of the European Union's financial interests: Fight against fraud—Annual Report 2010, together with two unnumbered Reports from the European Court of Auditors dated 10 November 2011, relating to the Annual Report on the Activities Funded by the Eighth, Ninth and Tenth European Development Funds in the financial year 2010, and the Annual Report on the implementation of the budget concerning the financial year 2010; regrets that the EU budget has been given a qualified audit by the EU oversight body the Court of Auditors every year for the past 17 years; agrees that, in these challenging economic times, the same high standards applied to national budgets should be applied to the EU budget, especially as national taxpayers fund the EU budget; supports the Government’s decision to, for the first time, oppose signing off the EU budget earlier this year; and encourages the Government to continue to call for important and urgent improvements to the quality of EU financial management.—(Mr Hoban.)  

9.22 am 

Chris Leslie:  I do not want to make long-winded comments. I know that many Government Members will be keen on that. I am looking forward to the Government Whip’s comments on these matters, however, as he obviously has strong views, and it would be a shame for the Committee to be deprived of his strength of feeling on these questions, particularly on the European Union budget. I remember from the rankings chart of what is going on in the Treasury that he is quite a senior fellow, and often regarded as higher-ranking than Ministers. Perhaps he is party to decisions day by day, on tax U-turns or whatever they might be. 

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On the EU budget, however, it is not good enough for the Minister simply to say that the Government will be arguing for a good settlement. I appreciate that the process is done by qualified majority voting, but that is a test of his negotiating strength. The UK already has few friends and allies in trying to influence the EU budget, so we will watch closely what he achieves. Aiming for a good settlement does not sound like a particularly strong negotiating stance to start with. Nevertheless, we hope for the best and wish him well in the negotiations. We will see where they end up. 

The debate is an important one. We know that this is the 17th year in a row that the Court of Auditors has failed to be able to sign off the EU budget. It is simply not good enough that the process rolls on year after year. We seem almost to have settled into a lazy habit of raising questions, with partial answers coming back from the European Union, yet the steamroller rides forward with little change to the high levels of fraud and irregularities that are occurring. Is the Minister going to step up his action, because I think the time has come for some serious decisions? Perhaps we need the extra Minister that the Conservatives promised at the last general election, when they said that there would be a permanent full-time ministerial appointment in Brussels. 

Chris Heaton-Harris:  No. Poor man. 

Chris Leslie:  The hon. Gentleman may well be a candidate for that role. However, I think the Government Whip should take it, because the Government need someone with strong feelings and who has that irritant capability—the grit in the oyster—to get under the skin of the Commission and make sure that it gives far more serious attention to such questions. I have to say to the Minister that I know one of his colleagues met Commissioner Šemeta last September, but the Government should be far more proactive in pressing the Commission. I do not want to have to repeat, in the same debate next year, exactly the same epithets and aspirations without our having received feedback from the Commission that it is stepping up its attention. 

The report has some particularly interesting aspects. The special report on cohesion policy, which was this year’s focus, has illustrations of structural funds and other areas where there are real difficulties. I agree with the Minister that it is right to start talking about prevention and not only about detection. He rightly spoke about reforming OLAF—the EU anti-fraud office—but he must reiterate that the UK has a risk-focused, risk-based approach to irregularities, rather than a generalised scattergun approach of random accounting and testing, which does not fully do the job. 

I support the Government in firmly pressing that point to the Commission. We need far more serious attention to be paid to those particular questions. We will not oppose the motion; there is a sense that we are upping the ante a little now and beginning to take this to a more senior level. I want the Chancellor of the Exchequer to talk about it to the current Commissioners and other Finance Ministers. I want to see ECOFIN reports about it—cameras are sometimes allowed into its meetings, when the Chancellor finds it convenient to show that he is banging the table—and I want to see

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action from the Chancellor. [ Interruption. ] I do not think that this is a laughing matter; I think that there are serious questions about the misuse of public money, fraud and irregularities. The Opposition take such questions extremely seriously, and I hope that Government Members will wake up and do the same. 

9.27 am 

John Hemming:  Every so often, I like to read the work of art that is the EU budget. I look at out-turns and budgeted figures, because that shows what is really going on. Every time, I turn to the common agricultural policy subsidy for tobacco. The EU decides that it does not want to subsidise tobacco, but somehow it always ends up doing so, which gives a sense of the lack of financial management within the Commission. A quiet nod is given and, although it has not budgeted to subsidise tobacco, it ends up doing so on a large scale, and that obviously happens in several areas. When we look at issues of financial management, there is a question about viring between budgets and whether that is acceptable or should be brought more into the open. Will the Government look at the controls on, and the reporting of, viring between budgets, which is a form of institutional fraud? 

9.28 am 

Chris Heaton-Harris:  I will not speak for too long—in case that role in Brussels turns up, which is the last thing I want. In “Harry Potter”, when people do something terribly wrong they are sent to Azkaban, where Dementors fly around and suck the life out of them, and being a Member of the European Parliament for 10 years was very much like that experience. I pity the poor Minister who has to experience the joy of negotiations there. 

I do not really need the Minister to respond to my handful of points, but perhaps he will acknowledge that there might be issues about the budget and the fight against fraud, some of which have been picked by the European Court of Auditors, some by the “Fight against Fraud” report and some by other Commission documents that are occasionally issued on such subjects. 

The Minister mentioned the figure of 3.7% as a general error rate. That contains all sorts of exciting things; but is he comfortable that it is the correct figure? For a long time no figures at all came out of the Court of Auditors, when it came to benchmarking errors or problems in the European accounts. In fact, a former British member of the Court from the 1990s used to be most helpful in providing the figures, by wading through its reports and other Commission documents, and gradually telling his story to The Times—I think that was his favourite newspaper—which would try to produce a benchmarking error rate based on that. The importance of getting the figure right is that if the benchmark is right a proper judgment can be made on whether things are improving sector by sector. That was completely lacking from Court of Auditors reports and, indeed, Commission accounts, for a long time. 

I do not want to talk about the language that the Commission and, indeed, the Court of Auditors use; I completely understand the need to play down the fact that there is a sizeable chunk of material error in a very big budget. It is quite embarrassing. No Department likes it. The Department for Work and Pensions does

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not like when its accounts are qualified. I sit on the Public Accounts Committee, and when permanent secretaries sit before us having to answer points about the qualification of their accounts, they really do not like it. 

Unfortunately, in Brussels, the comparable committee, the Budgetary Control Committee, does not do exactly the same thing with the different directorates-general of the European Commission. There is no real follow-up to either of the two reports. There is one committee meeting, and a discussion in the European Parliament’s plenary for the signing off of the accounts. It occasionally gets a bit exciting, but one cannot say much more than that. Rarely do more than a dozen people try to speak in the debate on the “Fight against Fraud”. Yet I suggest that in those two areas we could do a much better job of scrutinising how UK taxpayers’ money—because we are the fourth or perhaps fifth largest contributor in net terms, at the moment—gets spent. 

As to the language of the reports, every time I have read a Court of Auditors report, it always starts by saying, “Everything’s fine”. That is the headline that the Commission spins. Then it continues, not with small print, but with the next 300 pages, which say “apart from all this.” There is a great example in the statement of assurance by the European Court of Auditors. It concludes that 

“the policy group External aid, development and enlargement was free from material error and that the supervisory and control systems were partially effective in ensuring the regularity of payments—however, interim and final payments were subject to material error”. 

I just wonder which bit of that the Government get to hear. I can quite imagine that, when one is dealing with the European Commission and others, the good first part of the sentence is the highlight—not the bulk of it, which distinguishes where the problems lie. 

I would be keen to hear about the people in the Treasury, or whichever Department is responsible—perhaps the Foreign Office—who go through such things, and look at them regularly. I really do not expect it to be the Minister, or even an elected representative. In my 10 years as a Member of the European Parliament there was a distinct lack of attempts to brief us. It would be interesting to see whether, having got into Government, and given that we care about such issues, we have come to terms with the reports we are given. 

I have raised some questions about the reform of OLAF, about which I have great concerns. Once in the European Parliament, everyone gets a job. Being the most junior of the juniors when I got elected at the age of 31, completely by accident, in June 1999, I was stuck on the Budgetary Control Committee, which is the worst of the lot. No one wants to go on it. Everyone in the European Parliament also gets a responsibility, and no one wanted responsibility for the new anti-fraud office—so I was given budgetary responsibility for that. That shows how high up the pecking order someone had to be to get such an important role. 

The first European negotiation I had to be involved in was using budgetary measures. In 1999 the Commission fell due to a huge number of issues. There was a whistleblower called van Buitenen; it is all very well documented. A committee of wise men was set up that recommended a brand new anti-fraud office. The old one called UCLAF disappeared; all the staff went into

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the Commission. I do not think anybody was fired from that body, even though there were unbelievable problems within it. The European Commission, in 15 of the most senior roles in OLAF, put 13 of the previous officials from UCLAF, who had not been doing their job as well as they should have. The budget was used to remove those people from their roles and they went back into the Commission. 

I am very wary about the relationship between the European Commission and the anti-fraud office. The anti-fraud office does lots of things. It is meant to protect the European budget as a whole, but it is also meant to police it. A big chunk of the wise men’s report in setting it up was for it to check on what the European Commission did internally. That is not something that OLAF concentrates on. Perhaps that is because OLAF is a part of the directorate-general for budgets. It is a wholly owned subsidiary that reports to the Commissioner for budgets. If there is to be a reform of OLAF, it should, if anything, become more independent not, as it seems to be heading, more under the control of the European Commission. We want to see people who are not afraid to challenge those who at the moment are their paymasters. That is an uncomfortable position for those investigators. 

I was pleased to hear the Minister say that we had not signed off the accounts in Council. That is a huge step forward. With the greatest respect to the previous Government, as much as I lobbied Ministers who came across, there was never any interest in not signing off the accounts. They just wanted no hassle on the issue. There was the euro preparation unit in the Treasury and everything was heading that way. They did not want to upset their European partners. There was a very bad record. The first thing I can remember that Government doing was the fantastic Minister for Europe, the right hon. Member for Rotherham (Mr MacShane), having won a battle against the French in the courts over banning British beef, allowing the fine to be written off because we did not want to upset our French partners. There was the great battle over the rebate when Tony Blair went out, heard the trumpets sounding and then gave away a huge chunk of our money. 

Our negotiating position, which I always perceive to be strong in budgetary terms, has always been given away. I am very reassured by the Minister’s comments on what we are trying to achieve because, if one reads the treaties literally, if we veto the multi-annual financial framework, theoretically it goes back to an annual budget based on qualified majority voting based on the previous budget, and can go up by 2% a year. In other words, if we veto it, we could end up in a worse position than if we had negotiated a good position within the multi-annual financial framework, using the threat of a veto just as a threat. I am pleased to hear that what we are aiming for is realistic and not over the top. I always think we could try a bit harder, but that is very good to hear. 

Is the Minister worried about the duplication of work, that projects we pay for in the UK are also paid for by the European Commission? Has anybody in the Treasury or Foreign Office gone through those things? 

Relatively finally, in the UK we are heading towards more transparent budgets, which is a thoroughly good thing. In the EU, as the hon. Member for Birmingham, Yardley said, one can go through the budget line by line

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and there is a reasonable amount of detail. However, the fact that there are more than 1,000 pages to go through stops people reading it in the first place. Within each budget line there is a host of different spending options that the European Commission and institutions can choose. According to one environmental budget line, the Commission funds 75 environmental NGOs, which is a bit of an aberration. A very Conservative Government Back-Bencher—me—would say, “I agree with Greenpeace completely on that. If somebody is taking money from an institution that they are trying to lobby, it changes the relationship with that institution, because they become a paid-up lackey, in some cases doing what the Commission might like. Greenpeace says that it will not take any Government money, because it wants to remain independent to be able to criticise properly. Such funding does democracy no good at all. I notice things that we are trying to eliminate from the UK budget, but we should spend as much time and energy trying to eliminate them from the European budget as we possibly can. 

Does the Minister have any comments on the growth of the European quango—the Euro-quango? A chap writing as a keen, young thing for the Adam Smith Institute coined the phrase “Euro-quango” in the early ’70s. The hon. Member for Nottingham East might recall him; his name is Michael Fallon—I do not know what he is doing now. There is an unbelievable number of such quangos. I have a list, if the Committee would like me to read it out, but we could be here for the next 40-odd minutes with their budgetary responsibilities. Is the Minister concerned about the growth of the Euro-quango? What are the British Government doing about it? In the multiannual financial framework, I believe that there is an opportunity to stem the flow of money, including to the Committee of the Regions and the Economic and Social Council. 

9.42 am 

Mr Hoban:  It has been a helpful debate. I say to the hon. Member for Nottingham East that tackling fraud and ensuring value for money in EU spending are important. However, given that our contribution to the EU budget is higher than it would have been if Tony Blair had not given away part of our rebate in return for a review of common agricultural policy that never happened, I will not be lectured by the hon. Gentleman on our policy. 

For the hon. Gentleman to comment on engagement is unbelievable. We know that the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) rarely graced the Council chambers of Brussels when he was Chancellor. On one occasion, he went so that the now Deputy Speaker—the right hon. Member for Bristol South (Dawn Primarolo)—could answer a statement in the House on child tax credits, rather than him. I was not there so I cannot vouch for their validity, but there are stories that the right hon. Gentleman’s favourite focus in Council meetings was on reading the paper, not the papers for the meeting. There was a wholesale lack of engagement by the Labour Government, which the current Government seek to tackle through engagement to tackle fraud, the budget and the multiannual financial framework. 

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My hon. Friend the Member for Daventry, using his experience of how Brussels works, highlighted interesting points in his remarks. The challenge we face in agreeing the multiannual financial framework and what happens when agreement is not reached is worth bearing in mind. He also raised the issue of the error rate. As a former auditor, I know that it is very difficult to be completely certain on error rates. There are always undetected errors. The figure of 3.7% is determined on the basis of a 95% confidence interval. We are reasonably confident the figure is right, but there is scope for error in detecting errors—if that does not sound too tortuous. 

My hon. Friend touched briefly on structural and cohesion funds, which comprise the second largest area of the EU budget and have the highest rate of error. It is important that we continue to expose areas where there are fraud and financial mismanagement. It reflects poorly on member states, since 80% of EU funds are jointly managed by the Commission and member states, and all must do more to improve the systems of controls there. We are seeing an improvement in the way in which that money is spent. The 2010 report indicates that structural and cohesion fund expenditure was subject to errors in 49% of payments audited, down from 54% in 2008, but still unacceptably high, and that is a point that we continue to make. We need to continue the fight against fraud. 

My hon. Friend made an important point about the independence of OLAF. In our own auditing arrangements, whether for product money or businesses, independence of auditors is vital in ensuring integrity in the way in which the audit process is conducted. We need to see co-operation between member states and OLAF. We do that very well in the UK, although I am not sure that the same degree of co-operation is there elsewhere. We need to focus on those areas where there are high levels of error. We are also looking carefully at the anti-fraud legislation that is part of the review of financial regulation to ensure that that is right as well. 

There was a question earlier about criminal prosecutions resulting from fraud. Since 1999, 3,000 cases have been opened for criminal prosecution, and 300 individuals have been sentenced by criminal courts as a result of OLAF’s investigations, which have led to the recovery of in excess of €1 billion of taxpayers’ money since 1989, with the estimated financial impact on closed cases amounting to €6.2 billion. 

Chris Heaton-Harris:  The Minister will not have these figures to hand, but will he write to the Committee about how many of those cases involved cigarette fraud—an OLAF rep stands on the speedboat that chases around with customs officials—and how many were internal fraud? 

Mr Hoban:  It is one of the few figures that I do not have to hand, but I will write to the Committee to advise it on that. 

My hon. Friend also asked about the aid spending annual report. He will be pleased to know that in the Council recommendation on the discharge of the 2010 budget, in chapter 5 on external aid and development, the issue he raised was mentioned. The Council is concerned about the significant levels of error found in interim and final payments. They have not been detected by the Commission’s controls and the Council is concerned that the supervisory and control systems of the policy

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group were only partially effective. So there is engagement at ministerial level in ensuring that the right levels of controls are in place, and the Council asked the Commission to take the necessary measures to correct the shortcomings identified by the Court, in matters such as tendering procedures and dealing with ex ante controls. That has been dealt with at a very senior level, which is what taxpayers expect. 

This is the first time in 17 years of the accounts not being satisfactory that the UK Government have voted against discharge of the budget, which sends a clear

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signal that we want to see improvements in financial management. It is important that taxpayers’ money is spent wisely whether it is spent here or elsewhere, and we will continue to press the Commission and others to ensure that we get value for money and reduce the unacceptably high level of errors in EU spending. 

Question put and agreed to.  

9.49 am 

Committee rose.  

Prepared 29th June 2012