You are here: Parliament home page > Parliamentary business > Publications and Records > Committee Publications > All Select Committee Publications > Commons Select Committees > European Scrutiny > European Scrutiny
Documents considered by the Committee on 5 June 2019 Contents

9EU anti-fraud body OLAF: new powers

Background and Committee’s conclusions

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny, but scrutiny waiver granted; further information requested; drawn to the attention of the Northern Ireland Affairs Committee

Document details

Proposal for a Regulation amending Regulation 883/2013 concerning investigations conducted by the European Anti-Fraud Office (OLAF) as regards cooperation with the European Public Prosecutor’s Office and the effectiveness of OLAF investigations

Legal base

Article 325 TFEU and Article 106a Euratom Treaty; ordinary legislative procedure; QMV

Department

HM Treasury

Document Number

(39775), 9313/18 + ADD 1, COM(18) 338

9.1The EU’s finances can be affected by misconduct on the expenditure side, like wrongful claims for agricultural subsidies, but also on the revenue side (such as fraud related to customs duty, since 80 per cent such duties collected by EU Member States on imports automatically belong to the EU as an ‘own resource’).45

9.2Since 1999, the EU’s anti-fraud body (called OLAF)46 has been responsible for investigating fraud and irregularities that affect the EU ‘financial interests’ in this way, as well as corruption within the European institutions.47 It has the power to carry out investigations, including on-site inspections, in individual EU Member States (in which national authorities can participate). For example, OLAF was closely involved in the recent investigation that uncovered an alleged evasion of €2.5 billion of customs duties on Chinese imports at UK ports, for which the British taxpayer may yet have to compensate the EU. The Office also has more limited, but still significant, jurisdiction in ‘third countries’ that participate in EU funding programmes, like Norway and Switzerland.

9.3OLAF’s original legal framework48 was comprehensively reviewed in 2006. The new Regulation (Regulation 883/2013), adopted in 2013 after seven years of negotiations, aimed to improve the Office’s effectiveness; protect the rights of those subject to investigations; and strengthen OLAF’s cooperation with Member States and other stakeholders. In 2017, the European Commission published another evaluation of OLAF’s functioning, focusing on the impact of the changes to its legal framework adopted in 2013.49 It found that there had been a “clear improvement” in the effective conduct of investigations, but also concluded that OLAF still suffered from a number of shortcomings, including:

9.4In addition, OLAF’s functioning will also be affected by the new European Public Prosecutor’s Office (EPPO), established by a large majority of Member States in 2017.51 This is a new EU body that will have the power to investigate, and where necessary prosecute through national courts, crimes that affect the EU budget. The UK has chosen not to participate in this new institution.52 However, the EPPO’s responsibilities overlap to some extent with those of OLAF, requiring further amendments to the latter’s legal framework.

9.5Based on the 2017 evaluation and the establishment of the EPPO, the European Commission tabled draft legislation in May 2018 further fine-tune the OLAF Regulation. This would reinforce the Office’s ability to conduct on-site inspections in all EU Member States, provide it with statutory access to bank account information, and—most controversially—give it the right to carry out independent investigations into VAT fraud, since this has a potential impact on the revenue side of the EU budget.53 It would also require OLAF to provide assistance to the new European Public Prosecutor’s Office where required.

9.6The Chief Secretary to the Treasury (Rt Hon. Elizabeth Truss MP) submitted an Explanatory Memorandum on the proposal in October 2018, with considerable delay (five months after the original Commission proposal was published).54 It contained no substantive assessment of the proposed amendments to the OLAF Regulation.

9.7Despite the initial difficulties we encountered in extracting information from the Treasury about the proposal, we described the proposed changes to OLAF’s powers in some detail in our Report of 31 October 2018. At that point, we also assessed the potential implications of the changes to OLAF’s legal framework.55 We noted in particular that the Regulation could still have a direct impact in the UK despite its scheduled withdrawal from the European Union, for a number of reasons:

9.8On 14 November 2018, two weeks after we published our last Report on the proposal, the full draft Withdrawal Agreement on the proposed terms of the UK’s departure from the European Union was published. This added a fourth reason as to why the amendments to the OLAF Regulation could remain relevant for the UK after Brexit: the controversial Protocol on Ireland and Northern Ireland. Known more widely as the ‘backstop’, the draft Protocol would see Northern Ireland remain subject to a wide range of EU legislation indefinitely, beyond the transition period. The stated aim is to avoid the need for a “hard border” in Ireland, including “any physical infrastructure or related checks and controls”.62

9.9It is important in the context of this Report that the backstop includes the OLAF Regulation among the EU laws which would continue to apply in Northern Ireland “unless and until they are superseded, in whole or in part, by a subsequent agreement” between the UK and the EU.63 Moreover, the Irish Protocol provides that any reference in it to EU legislation “shall be read as referring to it as amended or replaced”. This appears to mean that the proposed changes to OLAF’s powers described above could apply in Northern Ireland, even if they did not take effect until after the post-Brexit transition period had already ended. Although the UK would no longer have to transfer the majority of customs duties collected to the EU under the backstop, including those on goods imported into Northern Ireland, the Protocol also states that “the proper collection of customs duties by the United Kingdom in respect of Northern Ireland shall be considered as part of the protection of the financial interests of the Union”.64

9.10Given the continued importance of OLAF during the transitional period after Brexit and, possibly, under the UK’s new partnership with the EU afterwards, we considered the proposal politically important when we considered it last October. As such, we retained it under scrutiny and asked the Chief Secretary to the Treasury to keep the Committee informed of developments in the legislative process.

Developments since October 2018

9.11Between the EU’s Member States, negotiations on the proposal have been undertaken on a monthly basis for the past year in the Council’s Working Party on Combatting Fraud. The European Parliament, which must also approve the new legislation, set out its proposed amendments to the new OLAF Regulation in April 2019.65

9.12On 14 May 2019, the Chief Secretary provided a further update on the status of the negotiations in Brussels.66 Although she acknowledges that the UK has an “ongoing interest in the development of the Regulation” for the reasons described in paragraph 6 above, her letter did not refer to the continued—and potentially indefinite—application of OLAF’s powers in Northern Ireland under the backstop. With respect to the substance of the draft legislation, the Minister goes on to note that “progress has been slow so far” due to “stark divisions between Member States regarding the Commission’s initial proposal”, particularly on the matter of OLAF’s competence to investigate VAT fraud.

9.13As noted, a very small percentage—typically 0.3%67—of the VAT base of every Member State constitutes an ‘own resource’ of the European Union, and an equivalent amount must therefore be transferred to the EU budget by each Member State each year. The European Commission, supported by some Member States, argues OLAF’s current powers already allow it to investigate any instance of VAT fraud (however small), because such fraud could theoretically affect the VAT base and therefore reduce the EU’s revenues. This is disputed by many Member States, who argue that Regulation 883/2013 limits OLAF’s powers to conduct on the-spot checks and inspections only to “revenue collected directly on behalf of the EU”68 (which is interpreted by many EU countries as encompassing customs duties, but not VAT). In its legislative proposal, the Commission proposed a clarification to the description of the Office’s powers, which would extend its ability to conduct ‘external investigations’ (i.e. in the Member States) to “all areas of its mandate”, therefore including cases of VAT fraud of any size.

9.14However, the negotiations to date have revealed that many Member States in the Council—including the UK, Germany and the Netherlands—believe OLAF’s powers in such cases should be restricted. As a result, within the Council Working Party 16 Member States have informally agreed a potential compromise where the Office’s ability to investigate VAT fraud would only extend to larger cases where the suspected damage is at least €10 million (£8.7 million).69 It would also require OLAF to notify national authorities of any such investigations and invite them to carry it out jointly, and ensure that no similar investigations are already being carried out domestically.70 According to the Minister, this proposed amendment to the draft Regulation is opposed by the remaining 12 Member States, who support more extensive powers for OLAF in relation to VAT fraud.

9.15The Chief Secretary also informed us there were other “outstanding issues [in the negotiations] that do not affect UK interests” related to the precise terms of cooperation between OLAF and the EPPO,71 as well constitutional issues raised in a number of EU countries—notably Austria—about the compatibility of the OLAF’s expanded investigatory powers with national law. The Minister’s latest letter does not refer to any of the other elements of the Commission proposal (see paragraph 4 above) as being particularly contentious in the negotiations to date.

9.16A revised legal text for the Regulation, incorporating the abovementioned compromise on OLAF’s powers in relation to VAT fraud, is expected to be submitted for approval by the Member States’ Permanent Representatives in Brussels (COREPER) in June 2019, which would give the Romanian Presidency of the Council and its Finnish successor72 a formal mandate to negotiate the final text of the Regulation with the European Parliament. In advance of this, the Minister says, the Presidency are “pushing Member States to lift any outstanding scrutiny reserves”.

9.17As noted, the new legislation on OLAF’s powers can only be formally amended if both a qualified majority of Member States and the European Parliament agree on its legal text. The Minister notes in her latest letter that the Parliament and the European Commission do not agree with the thrust of the discussions in the Council, and want to give OLAF more expansive powers to investigate VAT fraud in line with the original proposal. As a result, she says, the final ‘trilogue’ negotiations on the Regulation between the EU institutions are “therefore set to be even more difficult and prolonged”. In any event, these discussions will not begin until autumn at the earliest due to the dissolution of the European Parliament in advance of the EU elections in May 2019.

9.18Consequently, at this stage it is not yet possible to predict what the final substance of the new OLAF Regulation might be, or when it could take effect.

Our conclusions

9.19We thank the Chief Secretary for her helpful update on the status of these difficult negotiations, especially in relation to OLAF’s potential new powers to investigate instances of VAT fraud. We note that the Government believes the current compromise at Council Working Party level is the best that can be achieved in terms of alignment with the UK’s position, which was to limit any new powers for OLAF in this area as much as possible. The strength of opposition in at least 12 Member States to the proposal to limit OLAF’s powers to VAT fraud cases involving damages of €10 million or more means, in the Minister’s words, that “there is no scope […] to bring the text closer to the UK position and instead a risk that it moves further away”.

9.20Although not directly related to the substance of the current negotiations, we note with some concern that the OLAF Regulation is included in the list of EU laws that would continue to apply in Northern Ireland, potentially indefinitely, under the ‘backstop’ in the draft Withdrawal Agreement. Given the persistent uncertainty about the exact implications of many parts of the Irish Protocol, we ask the Minister to:

9.21We look forward to receiving the Minister’s reply by 28 June 2019. Given the continued uncertainty about the final substance of the new OLAF Regulation, and the many ‘known unknowns’ about the role of the EU’s anti-fraud body in the UK beyond our scheduled date of withdrawal from the EU on 31 October this year, we retain the document under scrutiny.

9.22However, we are content to grant the Minister a scrutiny waiver to support the adoption of a Presidency mandate for negotiations with the European Parliament, if this should prove necessary. We do so on the condition that any such mandate reflects the compromise on investigations of VAT fraud set out in the Minister’s letter of 14 May 2019. If there are substantial changes to the Council’s position before a trilogue mandate is adopted, we ask the Chief Secretary to inform us of them as soon as possible. We also look forward to receiving further updates in due course about any significant developments in the future negotiations between the European Parliament and the Council on the final text of the Regulation.

9.23We draw these developments to the attention of the Northern Ireland Affairs Committee, given the potential applicability of the OLAF Regulation in Northern Ireland under the Brexit ‘backstop’.

Full details of the documents

Proposal for a Regulation amending Regulation 883/2013 concerning investigations conducted by the European Anti-Fraud Office (OLAF) as regards cooperation with the European Public Prosecutor’s Office and the effectiveness of OLAF investigations: (39775), 9313/18 + ADD 1, COM(18) 338.

Previous Committee Reports

See (39775), 9313/18 + ADD 1, COM(18) 338: Forty-third Report HC 301–xlii (2017–19), chapter 5 (31 October 2018).

45 See for more information on the revenue side of the EU budget our Report on the EU’s Multiannual Financial Framework for 2021–27.

46 OLAF is its French acronym, from Office européen de lutte antifraude.

47 The OLAF legal framework is primarily set out in Regulation 883/2013.

48 Regulation 1073/1999.

49 See Commission document COM(2017) 589.

50 The Commission concluded OLAF was unable to undertake such investigations effectively, because its on-site inspection powers were limited by statute to “revenue collected directly on behalf of the EU”, which could be interpreted as excluding VAT. Under the Own Resources Decision, the EU’s Own Resource related to VAT is a ‘call rate’ applied to each Member State’s VAT base and not the actual amount of VAT collected. VAT itself could therefore not necessarily be seen as ‘revenue collected directly on behalf of the EU’.

51 See Council Regulation 2017/1939. As it was adopted under ‘enhanced cooperation’, the EPPO will only have jurisdiction in those EU countries that have explicitly accepted this. The UK, along with Ireland, Denmark, Sweden, Poland and Hungary, has chosen not to participate in this new institution.

52 The Government, by means of Regulations passed under the European Union (Withdrawal) Act 2018, has now repealed most of the European Union Act 2011. This means that any decision by the Government to join the European Public Prosecutor’s Office while the UK is still an EU Member State is no longer subject to approval by both Act of Parliament and a public referendum, as it was while the 2011 Act was still in force. However, the Government has repeatedly provided assurance to both us and our predecessor Committees that it has no intention of exercising its opt-in right in this area. The House of Commons, on our predecessors’ recommendation, issued a subsidiarity Reasoned Opinion with respect to the Commission’s proposal for an EPPO Regulation. In conjunction with Reasoned Opinions submitted by other national parliaments, the “Yellow Card” threshold was reached, meaning that the Commission was forced to review its original proposal.

53 OLAF would also be able to obtain VAT data from Eurofisc, a network of tax officials from all EU Member States who cooperate to tackle cross-border VAT fraud.

54 The proposed Regulation was deposited in Parliament for scrutiny by the end of May 2018, meaning that under normal procedure an Explanatory Memorandum should have been submitted by 12 June. In the event, we did not receive it until 17 October 2018.

55 At that point, we also wrote to the Chief Secretary to complain about the unacceptably long delay in the submission of the Explanatory Memorandum, which meant the Committee did not have a chance to scrutinise the Government’s position on the legislative proposal until five months of negotiations on its substance had already taken place in Brussels.

56 Under the Withdrawal Agreement published in November 2018, the transitional period would last until 31 December 2020 with a possibility of a one-off extension until 31 December 2022.

57 The Withdrawal Agreement would also keep OLAF’s powers in respect of the UK in place for four years after the end of the transitional period in respect of “facts that occurred before the end of the transition period” and certain types of customs debt.

58 For example, the EU-Switzerland Agreement on scientific cooperation provides that “within the framework of this Agreement, the Commission (OLAF) may carry out investigations, including on-the-spot checks and inspections, on Swiss territory, in accordance with the terms and conditions laid down in Council Regulation 2185/96 and Regulation 883/2013”.

59 However, even if this were the case, whether to pursue its findings through the criminal justice system would remain an autonomous decision for British law enforcement agencies. Naturally, a failure to follow up on any such irregularities could jeopardise UK participation in EU funding programmes more generally.

60 Department for Exiting the EU, “The future relationship between the United Kingdom and the European Union“ (12 July 2018), also known as the “Chequers White Paper”. See in particular pages 16–18.

61 See our Report of 4 July 2018 on the Multiannual Financial Framework for more information on the way customs duty and VAT fund the EU budget.

62 See the Joint UK-EU Report of 17 December 2017, in particular paragraph 43.

63 Article 6(2) of the Irish Protocol provides that “the provisions of Union law listed in Annex 5 to this Protocol shall also apply, under the conditions set out therein, to and in the United Kingdom in respect of Northern Ireland”. Annex 5 lists, among other things, “Regulation (EU, Euratom) No 883/2013” (the OLAF Regulation).

64 This provision was presumably included because evasion of customs duty on imports into Northern Ireland (which could then circulate freely in the entire European Union under the terms of the backstop), could lead to trade diversion away from Member State points of entry and therefore reduce customs duties collected by them, and by extension affect the EU’s own resources.

65 European Parliament document P8_TA(2019)0383 (16 April 2019).

66 Letter from Rt Hon. Elizabeth Truss MP to Sir William Cash MP (14 May 2019).

67 Under the Own Resources Decision, which is the legal basis for Member States’ contributions to the EU budget, most EU countries have to pay an amount equal to 0.3 per cent of their domestic VAT base into the EU budget. The exceptions are Germany, the Netherlands and Sweden, where the ‘call rate’ is 0.15 per cent instead.

68 The limits of OLAF’s powers of inspection are set out in Regulations 2185/96 and 2988/95.

69 This is the threshold for the application of the EU’s 2017 Directive on the use of criminal sanctions to prevent the EU’s financial interests to cases of VAT fraud. See article 2(2) of Directive 2017/1371, which does not apply to and in the UK.

70 Because the new Regulation would cross-reference existing EU law on OLAF’s powers (Regulations 2185/96 and 2988/95), the Office would also have to take into account the findings of previous investigations by national authorities into similar matters.

71 The link between OLAF and the EPPO is not directly relevant to the UK as it has not opted in to participation in the European Public Prosecutor’s Office.

72 The Romanian Presidency will end on 30 June 2019, meaning in practice the negotiations on the OLAF Regulation with the European Parliament will be the responsibility of the incoming Finnish Presidency (July—December 2019).



Published: 11 June 2019