Documents considered by the Committee on 4 February 2015 - European Scrutiny Contents

10 Protecting the EU's financial interests

Committee's assessment Legally and politically important
Committee's decisionNot cleared from scrutiny; further information requested
Document detailsDraft Directive on the fight against fraud to the Union's financial interests by means of criminal law
Legal baseArticle 83(2) TFEU; co-decision; QMV

Document numbers

HM Treasury

(34091), 12683/12 + ADDs 1-4, COM(12) 363

Summary and Committee's conclusions

10.1 EU institutions and Member States share responsibility for countering fraud affecting the financial interests of the EU. The proposed Directive (commonly known as the PIF[54] Directive) aims to enforce these responsibilities by harmonising fraud related criminal offences and sanctions.

10.2 The original text of the proposal contained provisions on minimum custodial sentences, VAT and extraterritorial jurisdiction to which the Government was opposed. It was also based on Article 325 TFEU but, since the agreement of a General Approach in June 2013 it has been replaced in the text by a JHA legal base, Article 83(2) TFEU. Also at that General Approach, the provisions on minimum custodial sentences and VAT were removed from the text (though extraterritorial provisions remained).

10.3 One of the scrutiny issues resulting from the General Approach was the Government's ongoing failure to clarify whether it agreed with the Council Legal Service that the three month opt-in period provided by JHA Protocol 21 was triggered by the change to a JHA legal base or whether it asserted that the process was triggered by the original publication of the proposal.

10.4 Instead the Government told us that it did not intend to opt into the proposal prior to adoption but would ensure that we were able to scrutinise any post-adoption opt-in. Since the General Approach, the Government has updated us on the first reading position of the European Parliament. This supported the change to a JHA Title V legal base and the removal of provisions relating to minimum terms of imprisonment, but, contrary to the Government's view, also supported inclusion of VAT fraud provisions. The Government continues to regard the latter as a matter for national competence.

10.5 The Government now updates us on developments in trilogue negotiations since they began in September. It also provides some clarity on the application of the JHA Protocol to the proposal, though not enough on the question of when the three month opt-in period was actually triggered.

10.6 We thank the Minister for this helpful update which has clarified most of the issues which we raised for his attention in our last Report of 3 September 2014. We look forward to receiving further updates on developments as trilogues progress during the Latvian Presidency.

10.7 We note that the Minister has confirmed that, applying the Government's policy set out in the letter of 3 June 2014 from the Home and Justice Secretaries:

i)   the Government considers that the PIF Directive is a "whole JHA measure" to which Protocol 21 applies; and

ii)  in relation to legislative measures containing JHA content but not citing a Title V legal base, Government policy is to assert the opt-in and seek a formal change to the legal base.

10.8 However, the Minister does not specifically address the question which we have been asking of his department ever since there was a change to a Title V JHA legal basis at the agreement of a General Approach on this proposal: does the Government agree with the Council Legal Service that the three month opt-in period was triggered at that point? We refer the Minister to the letter of 25 July 2014 from the Home and Justice Secretaries in which they stated:

    "You note that the Council Legal Service has expressed the view that the three month period for the exercise of the opt-in begins when the Council decide to inform the European Parliament of a proposed new Title V legal basis. We do not agree. The Government considers that the JHA opt-in is triggered on the basis of JHA content and therefore we consider that the three month period for asserting the opt-in begins on the date of publication of the last-language version of a proposal that contains such content. At most, we would consider reiterating an earlier opt-in decision at the point where the legal base is formally changed. The 8 week period for Parliament to consider whether the UK should opt-in to the measure also begins on the date of publication of the last language version."

10.9 Although the period for opting into the negotiations on this particular measure has, in any view, passed, could the Minister now clarify, for future reference, when the Government considers a change in legal base to be formal and how this might apply in the case of the current proposal? Does the Government consider that a legal base only becomes formal upon the adoption of a measure? In which case, what is the difference between this and a post adoption-opt in?

10.10 We continue to retain the document under scrutiny.

Full details of the document: Draft Directive on the fight against fraud to the Union's financial interests by means of criminal law: 34091, 12683/12, + ADDs 1-4, COM(12) 363.

Background and previous scrutiny

10.11 The background to the proposal, an outline of its provisions and the Government's view of it, are set out in our Twelfth Report of 2012-13.[55]

10.12 The history of the negotiation of this proposal and of scrutiny issues (including the scrutiny override at General Approach and the application of the JHA opt-in Protocol to the proposal) is long and complicated. Only those aspects directly relevant to the issues addressed by our last Report and the response that the Minister now writes are outlined here: greater detail is set out at paragraphs 14.10-14.21 of our Ninth Report of 3 September.

The Minister's letter of 2 February 2015

10.13 The Financial Secretary to the Treasury (Mr David Gauke) first sets out an update on EU discussions of the proposal:

    "Trilogue discussions under the Italian Presidency began in September 2014 and reached a concluded position in December 2014. These discussions focussed on the scope of the directive, the definition and scope of offences covered by the directive and extra-territorial provisions.

    "Throughout these discussions, the UK has remained focussed on eliminating the unacceptable elements of the draft directive. I am pleased to report that many Member States continue to support the UK's stance on a number of issues, including the approach to defining "serious offences" and our views on reporting obligations. Most importantly, Member States have sought to stick closely to Council's General Approach which the Committee may recall the UK was able to support.

    "The Latvian Presidency has indicated their intention to push for adoption of the PIF directive during their term. Trilogue discussions are scheduled to restart in February and will focus on outstanding issues, including VAT. As the Committee is aware, the UK remains firmly opposed to the inclusion of VAT within the PIF directive's scope and will work with other Member States to avoid its inclusion.

10.14 He then addresses specific provisions in the original proposal on which we requested further information in our last Report. He says that:

·  the removal of provisions on extra-territorial jurisdiction "remains an important negotiating objective for the UK";

·  the Government agrees with the view stated in the ECA Opinion 8/2012 that "[VAT] fraud cannot be tackled at national level alone. An effective fight against VAT fraud thus requires efficient cooperation between Member States" since HMRC continues to work closely with other Member States and international agencies to combat fraud, including cross border fraud; but

·  the Government maintains that while "VAT fraud has an indirect impact on Member States' contributions to the EU budget, the consequences of VAT fraud are overwhelmingly felt by Member States". In the UK, 97% of VAT revenue is retained by the Exchequer making this first and foremost a fraud against UK tax revenues. This is why the Government remains opposed to the inclusion of VAT in the proposal.

10.15 On the question of the application of the JHA opt-in Protocol to the proposal, the Minister says:

    "I would like to apologise to the Committee for the circumstances that have led to the unfortunate delay in providing a definitive response on this issue. As set out by the then Economic Secretary in her letter of 28 October 2013, the PIF dossier has raised complex questions which have now been resolved.

    "The joint letter from the Home Secretary and the Secretary of State for Justice of 3 June 2014 confirms that the Government's policy on legislative measures containing JHA content but not citing a Title V legal base is to assert the opt-in and seek a formal change to the legal base. In light of this position, I can confirm that the UK does consider the draft PIF directive to be a whole JHA measure which falls within the scope of Protocol 21 of the Lisbon Treaty. As the Committee is aware, Protocol 21 allows the UK to choose whether to opt into proposed JHA legislation.

    "Given the Government's reservations concerning elements of the draft PIF directive, the UK therefore did not opt in to the PIF directive during the initial three month period allowed for in Protocol 21 but will consider the case for a post-adoption opt-in should our concerns with the draft text be addressed. We have been clear during negotiations that this is the case and will continue to work towards securing a formal change to the PIF directive's legal base. The Committee may recall that Council supported a change of legal base and that the European Parliament endorsed this element of Council's General Approach in their first reading position."

Previous Committee Reports

Ninth Report HC 219-ix (2014-15), chapter 14 (3 September 2014); Twenty-second Report HC 83-xx (2013-14), chapter 13 (6 November 2013); Thirteenth Report HC 83-xiii (2013-14), chapter 18 (4 September 2013); Twelfth Report, HC 86-xii (2012-13) chapter 10 (12 September 2012); Also see (34549) 17670/12: Thirty-eighth Report HC 86-xxxvii (2012-13), chapter 9 (26 March 2013).

54   The PIF acronym is derived from the French for protecting financial interests. Back

55   Twelfth Report HC 86-xii (2012-13), chapter 10 (12 September 2012). Back

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Prepared 13 February 2015