18 Protecting the EU's financial interests
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12683/12
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COM(12) 363
(b)
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17670/12
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Draft Directive on the fight against fraud to the Union's financial interests by means of criminal law
Opinion No. 8/2012 (pursuant to Article 325 TFEU) on the draft Directive on the fight against fraud to the Union's financial interests by means of criminal law
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| Legal base | (a)Article 325 TFEU; co-decision; QMV
(b)Article 325 TFEU; —
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| Department | HM Treasury
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| Basis of consideration | Minister's letters of 24 May and 23 July 2013
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| Previous Committee Reports | (a) HC86-xii (2012-13), chapter 10 (12 September 2012); (b) HC86-xxxvii(2012-13), chapter 9 (26 March 2013)
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| Discussion in Council | Date of next discussion not known; currently in trilogue
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| Committee's assessment | Legally and politically important
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| Committee's decision | (a)Not cleared; further information requested
(b) Cleared (decision reported 26 March 2013); further information now provided
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Background and previous scrutiny
18.1 The background to both of the current documents, a detailed
summary of provisions of the draft Directive (document (a)) and
corresponding analysis of the Court of Auditors (document (b))
appear in our previous Reports on these documents,[63]
together with an account of the Government's view.
THE DRAFT DIRECTIVE
18.2 The proposed Directive aims to enforce the shared responsibilities
of EU institutions and Member States to prevent fraud against
the EU budget by harmonising fraud related criminal offences and
sanctions. The Commission asserts that this will reduce crime
against the budget, thus saving money (potentially €500 million).
18.3 Key proposals in the original text of the draft
Directive are:
- providing and extending common
definitions for fraud and associated offences;
- expanding the rules on jurisdiction and making
it easier for prosecutors to work across borders and freeze criminal
assets in other EU countries;
- setting 'minimum-minimum' (mandatory minimum)
prison sentences of six months for offences involving an advantage
or damage to EU finances of at least €30,000 and 'minimum-maxima'
sentences of five years for €30,000 or more and ten years
for €100,000 or more; and
- establishing harmonised time limits within which
prosecution and conviction must take place.
18.4 In its Explanatory Memorandum (and subsequent
letter) in July and August of last year, the Government questioned
whether Article 325 TFEU was the correct legal base for the proposal
given that a criminal law base under Article 83(2) TFEU seemed
more appropriate and would attract the UK's JHA opt-in. Also,
although it supported the creation of an effective framework to
protect the financial interests of the EU as this would ultimately
protect UK taxpayers as well, it was concerned about the need
for proportionality, respect for the diversity of national legal
systems and the mandatory minimum sentences.
18.5 In our Report of 12 September 2012, we held
the document under scrutiny pending a response from the Government
on questions concerning the Commission's assessment of the extent
of fraud in the EU, the correct legal base for the proposal, the
application of the opt-in without a Title V legal base, the proportionality
of the proposal and changes to UK law (for example, in relation
to the Theft Act, the liability of companies and extraterritorial
jurisdiction).
18.6 Since no response had been received from the
Government by 6 March 2013, we wrote to the Financial Secretary
to the Treasury (Greg Clark), asking for a response and requesting
(with reference to the letter received from Miss Chloe Smith as
Duty Minister in August) an update on the Government's position
on the opt-in. We reminded the Government of our view (shared
by other Member States and the EU institutions) that the UK's
opt-in does not apply in the absence of a Title V legal base.
If, however, the Government were asserting that the opt-in did
apply, then we said we expected the enhanced Parliamentary scrutiny
procedures to be followed within an eight-week deadline. We also
noted from correspondence between the Government and the House
of Lords EU Select Committee that officials were seeking to add
a Title V legal base to the proposal, which suggested a change
in the Government position.
THE COURT OF AUDITORS' OPINION
18.7 On 26 March, we reported on a related document,
a Court of Auditors' Opinion on the draft Directive, clearing
it from scrutiny but requesting the Government to give its view
on two of the Court's recommendations. The first, to include VAT
fraud in the draft Directive (which we considered unwelcome as
it is a Member State competence) and the second, to clarify the
definition of "financial interests" in the Directive.
The Minister's letter of 24 May
18.8 In this lengthy letter of 24 May the Minister
responds to our questions on both documents.
THE DRAFT DIRECTIVE
18.9 On the Directive the Minister first updates
us generally on progress and timing, saying that:
- the Presidency would like to
agree a General Approach on the Directive at the JHA Council on
6 June;
- he will send a copy of the final text forming
the General Approach when issued; and
- he hoped that the Committee would be able to
clear the draft Directive from scrutiny on the basis of the information
provided to enable the Government to support the General Approach
if "in our interests".
18.10 Responding to our question on legal base,
the Minister says that:
- Article 325 TFEU is not the
correct legal base for the Directive and that given the Directive
is concerned with criminal offences and sanctions, an Article
83 base is appropriate;
- the change to an Article 83(2)TFEU
legal base now seems likely as securing the support of the Presidency
and other Member States has been a negotiating priority for the
Government, but that this would need to be confirmed in the General
Approach;
- accordingly, the Government would like us to
lift our scrutiny reserve to enable the Government to support
a change in legal base; and
- it has long been Government policy to seek the
addition of a Title V legal base to proposals containing JHA obligations
and this does not represent a change in the Government's position.
18.11 On the question of mandatory minimum sentences,
the Minister:
- shares our concerns about such
sentences infringing the principle of proportionality and undermining
judicial discretion;
- confirms that minimum terms of imprisonment in
the UK are rare and reserved for exceptionally serious offences
of particular public concern (for example, offences related to
firearms and dangerous weapons); and
- reports that, in any case, due to the support
of a majority of other concerned Member States, minimum terms
of imprisonment have been deleted from the current version of
the Presidency text.
18.12 Addressing our question about the extent
of legislative changes required by the draft Directive, the
Minister says that:
- the overall strategy of the
Government (and in particular in respect of the Article 4(1) offence
relating to the tender process in EU procurement exercises) has
been to ensure that the draft Directive is compatible with existing
UK law and offences;
- Article 11 would require extraterritorial jurisdiction
to be asserted over offences committed by nationals anywhere in
the world which does not reflect the current UK jurisdictional
approach;
- provisions relating to jurisdiction have not
been amended during Council negotiations; and
- other changes made during negotiations to the
text include the removal of VAT revenue from scope (VAT and rules
relating to VAT being, in the Government's view, a matter for
national competence), clarification of provisions on freezing
and confiscation (to make clear they apply only to Member States
participating in the "Directive on the Freezing and Confiscation
of Proceeds of Crime") and an update of limitation periods
for offences (linking them to "serious offences").
18.13 As regards other questions raised in the our
Report on the draft Directive, the Minister says that:
- he regards the Commission's
claims about reduction in fraud in the EU "with great reservation";
- the reliability of the claims
are undermined by variations in national practices of reporting
"suspected fraud" and "irregularities" (particularly,
their timeliness and completeness) and in interpreting and distinguishing
between those terms as they appear in the relevant Regulations;[64]
- the Government plans to fully engage with the
Commission discussions on the reporting system in the Advisory
Committee for the Coordination of Fraud Prevention;
- the Government would prefer information in the
Commission's annual report on fraud to be "more detailed
in providing a country-by country analysis per budget sector so
that action at both EU and national levels" can be properly
targeted; and
- complex rules and regulations governing budget
sectors need to be simplified so that more funds "can be
absorbed by Member States" resulting in fewer errors, fraud
and improved financial management.
THE COURT OF AUDITORS' OPINION
18.14 On the Court's Opinion, which the Minister
says has not been specifically raised in Council negotiations,
the Government:
- notes the Court's recommendation for a broader
definition of "financial interests" (essentially to
include all assets and liabilities managed by the EU and all its
financial operations, including borrowing and lending) but needs
to see a stronger case for redefinition and the need to include
listed bodies and activities in the definition;
- would want to ensure that the recommended redefinition
of "corruption" would be compatible with the Bribery
Act 2010;
- is not able accurately to predict the extent
to which the proposed recommendations would be covered by domestic
criminal legislation as they have not yet been formulated into
precise revisions of the Directive; and
- agrees that there is a risk that the Union's
"financial interests" could be deemed to cover "own
resources", particularly Traditional Own Resources but, related
to this, its principal concern has been to exclude VAT fraud from
the Directive's scope (see above).
Our letter of 3 July
18.15 We responded to the Minister in a letter of
3 July. In that letter we said that we were dismayed at how Parliamentary
scrutiny of this file had been handled as was reflected by a chronology
of the scrutiny to date:
- we first reported on this proposal
seeking a considerable amount of further information, on 12 September
last year;
we sent a letter chasing a response to the above
Report and an explanation for the delay on 6 March;
we reported on the Court of Auditors' Opinion,
again seeking further information from the Government, on 26 March;
and
the Government's letter of 24 May purported to
reply to all three of our requests and as a consequence, therefore,
the Committee had had to wait for eight-and-a-half months to receive
a response to its first Report; two-and-a-half months to receive
a reply to its letter; and two months to receive a response to
its second Report.
18.16 We found these delays to be wholly unsatisfactory.
18.17 We pointed out that the effect of the Government
delaying its letter until the Whitsun Recess was to leave us with
one meeting on 5 June, to consider its request for scrutiny clearance
— the day before the JHA Council on 6-7 June in which the
General Approach was to be adopted. Additionally, the Minister
said in his letter that he would send the General Approach text
when it became available; this was never sent.
18.18 We said that consideration in one Committee
meeting without sight of the General Approach text was hardly
a persuasive basis on which to seek scrutiny clearance, and not
consistent with effective Parliamentary scrutiny. This is particularly
so of a proposal with important consequences for national criminal
law and procedure, and whose legal base would have required an
Act of Parliament before the Government could consent to its adoption.
We said we were left with the impression that Parliamentary scrutiny
of this file was handled incompetently, or with disregard for
Parliament's role in scrutinising EU proposals, or both. We considered
that this also required an urgent explanation from the Minister.
18.19 We then asked the Minister to follow-up his
letter of 24 May by depositing the General Approach text, with
an Explanatory Memorandum or letter outlining the contents, how
they had changed from the original proposal, and the basis on
which they were acceptable (or not, for example in relation to
extra-territorial jurisdiction) to the UK. We also asked for a
read-out of the Council discussion on the proposal, and to know
how the Government voted.
18.20 Finally, now that the Commission had agreed
to a change of legal base to one in Title V, we asked the Minister
to confirm how the JHA opt-in Protocol, and Parliamentary procedures
for enhanced scrutiny of opt-in decisions, will apply to this
proposal, including clarification of the deadlines for both the
Committee to express its view on the opt-in and the Government
to make its decision.
18.21 Given the delay in Government responses to
previous requests for information, and the fact that there were
only two Committee meetings remaining before the Summer Recess,
we asked the Minister to respond to these requests in time for
the Committee's next meeting, which was Wednesday 10 July. Given
the level of our concern, we also invited the Minister to explain
himself in person before us as soon as possible.
The Minister's letter of 23 July
18.22 The Minister responded to our letter of 3 July
as follows:
"Further to your letter of 3 July, this
update is to inform you that the Justice Secretary attended the
Justice and Home Affairs Council on 6 June, at which a General
Approach was agreed on the draft Directive. The Justice
Secretary supported this General Approach since there are a number
of elements included in this text which have been objectives for
the UK in these negotiations; notably the approach is firmly based
on an Article 83(2) legal base, deletes the requirement for minimum
terms of imprisonment, and removes VAT from the scope of the draft
Directive. The General Approach was supported by the overwhelming
majority of Member States. However, the Commission position continues
to propose broader criminal offences and an Article 325 legal
base.
"The text of the General Approach was adopted
without a formal vote, although certain delegations, as well as
the Commission, signalled that they did not support. The Justice
Secretary considered that, in the circumstances, he would not
object to the Presidency concluding the General Approach so as
to help secure these key positive amendments to the text, in particular
the change of legal base which he supported. The dynamics of
the negotiation were such that, if Council had opposed the text,
it was likely to be delayed into the Lithuanian Presidency and
the conditions for securing a positive outcome for the UK from
the Council negotiation would not have improved. The Government
regrets that this Proposal was not given adequate time to pass
through national Parliamentary scrutiny prior to agreement at
Council. Please find attached a copy of the General Approach text,
as requested.
"The General Approach includes the following
elements, all of which are acceptable to the UK:
- A change in the legal base from Article
325 to Article 83(2);
The deletion of an article introducing mandatory
minimum prison sentences;
The deletion of VAT from the scope of
the Directive;
The inclusion of language which clarifies that
the UK will be exempt from the provisions on freezing and confiscation
in the Directive;
The amendment of provisions on limitation
periods to take into consideration serious offences;
"The requirement for Member States to "establish
jurisdiction" over offences committed by their nationals
anywhere in the world remains in the text.
"The Presidency, the Commission and European
Parliament have now proceeded to trilogue on the basis of the
General Approach. The UK will continue to push for the removal
of the provision on extra-territorial jurisdiction.
"At the June Council, the Council Legal
Service also noted their view that agreement of this General Approach
triggered the three-month period during which the UK and Ireland
must exercise an opt-in decision. The Justice Secretary made a
minute statement which noted that the UK reserved its position
as to whether the General Approach agreed did in fact trigger
the opt-in decision process. With regards to the change in legal
base to Article 83(2), the Government is still considering its
position in relation to the opt-in and is not in a position to
update you further on this point at present.
"I regret that the Committee finds the Government's handling
of Parliamentary scrutiny on this dossier to be unsatisfactory.
The delays in responding were due to a number of reasons. Firstly,
this is a complex, cross-departmental dossier on which the views
of a number of Government departments were required to be considered
and agreed. Secondly, the way in which the negotiations progressed
meant that for much of the period running up to the General Approach
there were considerable issues still to be resolved which made
it difficult to fully answer your Committee's questions; and lastly,
when the negotiations began to speed-up, we wanted to ensure that
your Committee and the Lords Committee had up-to-date information
in what became a very fast-moving dossier towards the end of the
process."
Conclusion
18.23 As regards the Court of Auditors' Opinion
which we have already cleared, we note the additional views provided
by the Minister in his letter of 24 May.
18.24 In relation to the draft Directive:
a) on the question of the mishandling of Parliamentary
scrutiny, the Minister was unable to appear before us prior to
the Summer Recess when we wished to question him fully about these
serious shortcomings. Nor did we receive his written explanation
in time to report it before the Recess. This is highly unsatisfactory
and we trust that the Minister will be able to explain himself
to us in person as soon as possible after the Conference Recess;
b) as it now appears that a scrutiny override
occurred when the Secretary of State for Justice supported the
General Approach at the June JHA Council meeting, we shall also
look forward to a full explanation from the Minister of the Government's
approach to the Council vote when he appears before us;
c) on the question of the triggering of the
opt-in period, the lack of clarity as to whether the Government
has or has not accepted the Council Legal Service view that time
is now running is seriously hampering enhanced Parliamentary scrutiny
of this measure. We request that the position be clarified in
time for our Committee meeting on Wednesday 11 September so that
we can consider whether we should now recommend a debate on this
aspect of the proposal. We would suggest, with reference to the
wording of the JHA opt-in Protocol 21, that the determining factor
for triggering the opt-in period is whether the Commission has
presented the re-worked (and re-published) proposal to the Council.
We would like to know whether the Council Legal Advice accords
with this view and how it differs from the Government's view;
d) even if, as the Minister says, the Government
is not in a position to indicate its position on the opt-in, we
expect the Minister to inform us, as soon as possible, of the
factors that will be considered in coming to a decision and to
confirm whether those factors include:
i) the sufficiency of existing UK law to tackle
fraud on the EU's finances at a national level;
ii) the possibility of non-mandated cross-border
co-operation, independent of participation in the Directive;
iii) the jurisdiction of the Court of Justice
over aspects of UK criminal law covered by the proposed Directive;
iv) the interconnection between this proposal
and the draft Regulation on European Public Prosecutor's Office;
and
v) and the relevance of the Government's
recent announcement of its intention not to opt into the pre-Lisbon
measures on the protection of the European Communities' financial
interests[65]
in its recent EM on the JHA block opt-out.[66]
e) turning to particular provisions in the
Directive, we welcome the removal of mandatory minimum sentences
and VAT from the text and agree that the Government should continue
its opposition to the extraterritorial jurisdiction proposals.
18.25 We request that the Minister provides us
with timely updates in future on the draft Directive, which remains
under scrutiny.
63 See head note. Back
64
This seems to be reference to Regulation No 2988/95 of 18 December
1995 on the protection of the European Communities financial interests. Back
65
Using the Government's numbering of the 130 plus JHA measures:
(1) Council Act of 26 July 1995 drawing up the Convention on the
protection of the European Communities financial interests; (8)
Council Act of 27 September 1996 drawing up a Protocol to the
Convention on the protection of the European Communities financial
interests; (12) Council Act of 19 June 1997 drawing up the Second
Protocol of the Convention on the protection of the European Communities. Back
66
Command Paper, Decision pursuant to Article 10 of Protocol 36
to The Treaty on the Functioning of the European Union (Cm 8671)
published by the Government on 9 July: http://www.official-documents.gov.uk/document/cm86/8671/8671.pdf Back
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