Select Committee on European Communities Second Report


Letter from Lord Tordoff, Chairman of the Committee, to Melanie Johnson MP, Economic Secretary to the Treasury

  At its meeting on 1 February, Sub-Committee A considered the Commission's tenth annual report (1998) on protecting the Communities' financial interests and the fight against fraud, together with your helpful Explanatory Memorandum. The Sub-Committee decided that the document should be cleared from scrutiny, while noting that it would of course be relevant to any future inquiry into combating fraud.

  In the meanwhile, however, the Sub-Committee has asked me to raise the following points with you:

    (1)  You expected the report to be considered by ECOFIN on 31 January. If this happened, what was the general reaction to the report? Did other Member States share the Government's view on the importance of this work?

    (2)  The report deals (paragraph with the case of a college in the United Kingdom which received ESF funding for a course which turned out not to exist. Have the relevant UK Departmental Internal Audit team and/or the National Audit Office been involved in investigating this case and the possible similar irregularities in other colleges to which the report refers? Will the matter be reported to the Public Accounts Committee? More generally, the report says that this case "illustrates the need for thorough national checks at the different stages of the projects financed by the Structural Funds": what has been done to improve these checks in the UK?

    (3)  The report mentions (paragraph 2.3) that UK officials were involved during 1998 in a co-ordinated operation on fraud in respect of VAT on mobile telephones, and that investigations were continuing. What further progress has been made on this investigation, and have UK officials been involved in other similar exercises?

    (4)  According to the report, the UK had not ratified either the Convention on the protection of financial interests or the first Protocol on corruption. You note in your Explanatory Memorandum that the UK has in fact recently ratified the Convention; when was this done, and why had it not been done earlier? Has the UK also now ratified the first Protocol, and if not why not?

    (5)  The "training table" annexed to the report suggests that the UK organised fewer training events than some other Member States. Is the Government satisfied that the right sort of training is taking place, and that the UK is participating appropriately?

3 February 2000

Letter from Melanie Johnson MP, Economic Secretary to the Treasury, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 3 February 2000 advising that the European Commission's Fight Against Fraud Report had been cleared from scrutiny and asking for further information on a number of points.

  In reference to the first question concerning the general reaction to the report at ECOFIN, I am pleased to state that other Member States shared the Government's view of the importance of this report. In particular, ECOFIN was concerned about the delay in presentation of this report and requested that the Commission keep to the established timetable in the future.

  Your second question refers to the case involving ESF funding to a UK college. This problem was first identified by the Department for Education and Employment (DfEE)'s ESF Unit's Verification and Audit Section (VAS) during a planned inspection visit. The case involved a college in Scotland, which was unable to produce sufficient records to justify payment of grant in respect of a number of ESF supported projects between 1994 and 1996. The European Commission (EC) has therefore initiated procedures for grant recovery of £1.4m. These proceedings are yet to be completed.

  VAS inspection reports are available to both DfEE's and the Scottish Executive's (SE) Internal Audit as well as the National Audit Office (NAO) on request. The NAO for Scotland have seen the relevant papers and files maintained by SE concerning the reported case. The joint VAS/OLAF investigation concluded that the irregularity was not a systematic error but confined to the one Scottish college. However, after consultation with the Commission, SE issued further guidance to the Scottish Further Education colleges in 1999 aimed at improving checks.

  The new Agenda 2000 ESF Programme (2000-2006) will have a greatly increased programme for the monitoring and evaluation of all ESF projects. This will include a requirement for regular returns to be provided by all ESF applicants to the relevant Government Departments detailing financial spend against profile and the quality outputs achieved by the project. DfEE is currently considering the implementation of new monitoring, inspection and audit arrangements for ESF.

  The third question referred to the progress made on an operation in respect of VAT on mobile phones. The operation mentioned in the EC report is still ongoing, it is estimated that fraud uncovered to date is worth in the region of £20 million. As part of the operation, a number of co-ordinated arrests were made in the UK, Spain, Belgium, Germany and Denmark on 11 November 1998. UK Customs are continuing to work with colleagues in other EC countries with the aim of achieving international arrest warrants and extraditions to allow a number of the chief perpetrators of this fraud to be tried in this country. This was one of 25 such operations by UK Customs officials which have taken place over the last three years to combat fraud in the telecommunications and computer parts industry, which face similar risks.

  On 1 March 2000 UK Customs commenced legal proceedings in two further cases which involved an estimated combined fraud of over £10 million. Those frauds stretched over the UK, Denmark, Holland, Germany and Luxembourg. These types of fraud by their very nature are complex and require cooperation between UK Customs and their EC colleagues to counter them. Customs has also established a Eurofraud Action Group which is developing a strategy specifically in this sector by tightening controls, using better intelligence to identify potential fraudsters as early as it is possible. Customs are also working with manufacturers to establish a Mobile Phone Industry Group which will create a forum where manufacturers and Customs can co-operate to prevent this sort of fraud.

  Question four asks about UK ratification of the Convention on the protection of financial interests of the EU and the first Protocol on corruption. The Foreign Secretary signed the necessary Instruments of Adoption in September. These have been deposited with the Secretary General of the Council of the European Union in order to complete the ratification process for mainland UK. The convention could not be ratified earlier because the UK does not ratify international instruments unless or until domestic legislation is in place to enable compliance.

  The final question refers to UK participation in training course organised on the Commission's initiative. I can confirm that the UK participates fully in appropriate Commission training initiatives. However, the number of courses being carried out will naturally vary from year to year and between Member States. In 1997 for instance, three training events were organised by the Commission in the UK whereas there were no training events in Austria, Greece, Ireland, the Netherlands or Spain.

8 March 2000

Letter from Lord Tordoff, Chairman of the Committee, to Melanie Johnson MP, Economic Secretary to the Treasury

  Thank you for your letter of 8 March, replying to the questions which Sub-Committee A had raised when it considered the Commission's 1998 report on the Fight against Fraud. The Sub-Committee has asked me to thank you for your helpful responses, and to say that it will be returning to the issues raised by the report in its next inquiry.

  Meanwhile, however, there is one point on which it would welcome further information now. You say that DfEE is "currently considering the implementation of new monitoring, inspection and audit arrangements for ESF". Sub-Committee A would be glad to know what the current arrangements for ESF are, what changes are proposed, and when they are expected to be introduced.

22 March 2000

Letter from Melanie Johnson MP, Economic Secretary to the Treasury, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 22 March 2000 regarding the issues raised by Sub-Committee A on the Commission's Fight against Fraud Report.

  The Sub-Committee requested further information on the current arrangements and future developments of monitoring, inspection and audit of European Social Funds.

  From 1997, Article 23 of Council Regulation 4253/88, as amended by Regulation (EEC) 2082/93 placed the responsibility on the UK Government to take the necessary measures to verify on a regular basis that operations financed by the Community had been properly carried out. To meet this responsibility, in addition to routine management checks carried out during the various ESF administrative processes, from 1992 DfEE's European Social Fund Unit (ESFU)'s Verification and Audit Section (VAS) carried out a programme of inspection visits to ESF applicant. The Department's Internal Audit Division also included the scope of ESFU's activities as part of their five-year audit plan, as agreed with the DfEE's Internal Audit Committee.

  A new EC Regulation on Financial Control, Commission Regulation (EC) No. 2064/97, came into effect in 1998. The new regulation sets out detailed arrangements for the minimal level of financial control acceptable throughout the EC for management of the Structural Funds, including ESF. The regulation includes a requirement to carry out inspection visits to ESF applicants to cover 5 per cent of the total eligible declared expenditure during the life of each ESF programme.

  The new Regulation coincided with further changes in the way in which ESF is administered in England. With effect from 1 January 1999 all Government Offices (GOs) assumed delegated responsibility from DfEE's ESFU for administration of all mainstream ESF Projects.

  To assess the Accounting Officer risks presented by ESF projects and payment processes, a pilot exercise ran from 1 January 2000 to 31 March 2000 in four GOs. Each of the four GOs began a payments and projects inspection programme of 12 visits based on VAS methodologies, previously recognised by the Commission as meeting the quality standards for inspection visits. This has now been extended to all other GOs. It is intended that the evaluation of the pilot exercise will inform proposals for future work in carrying out ESF monitoring and inspection, and also meeting the 5 per cent target for Article 2064 coverage. ESFU's VAS continued to carry out Article 23 inspection visits.

8 April 2000

Letter from Lord Tordoff, Chairman of the Committee, to Melanie Johnson MP, Economic Secretary to the Treasury

  Thank you for your letter of 8 April answering the queries raised in mine of 22 March. Sub-Committee A is grateful for the information which you provided, and is not pursuing the issues further at the moment (though it may of course return to them in its next inquiry, on fraud and financial management).

19 April 2000

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