Select Committee on European Union Minutes of Evidence

Memorandum by Ashley Mote MEP, European Parliament

  The House of Lords Select Committee on the European Union has set up a sub-committee to enquire "into the mechanisms and audit of the revenue and expenditure of the European Communities". This is my written submission to the Committee. It omits references to the revenue side of the EC's accounts since that is directly controlled by the governments of the member states.

  As an active member of the European Parliament's Budget Control Committee since my election in June 2004, I have made a close study of the EU's lax financial management. I have had the invaluable assistance of a highly experienced British forensic accountant, Christopher Arkell, who has freely given of his time.

  I have also worked closely with two other MEPs with a track-record in this field—Paul van Buitenen, a former whistle-blower himself and now a green MEP from the Netherlands, and the Austrian socialist MEP Hans-Peter Martin. Both were elected on financial transparency mandates.

  We have all had the benefit of advice, information and guidance from Marta Andreasen, the European Commission's former chief accountant who was dismissed by vice-president, Neil Kinnock, for whistle-blow!ng on financial mismanagement within the commission itself.

  Mrs Andreasen sacrificed her career following several incidents when she was "told" to authorise substantial payments without any information as to the purpose, probity or budget line on which to base each authorization. Being ultimately responsible, she refused and paid a heavy price.

  It was and is Mrs Andreasen's view, to which we MEPs now concur, that the core of the EU's financial mismanagement problem lies within the commission and its opaque structure. All the public focus on what happens downstream—important through it is in its own right—appears a calculated distraction.

  My office is now stocked with many files of original documentation. This includes numerous reports by commission officials and others (some leaked), and several lengthy submissions to the Serious Fraud Office in London. I also hold much correspondence with the president of the commission, Jose Manuel Barroso; the commissioner responsible for the fight against fraud and corruption Siim Kallas of Estonia; Dalia Grybauskaite from Lithuania who is the budget commissioner; Hebert Weber, the president, and other members of the EU's Court of Auditors; the president of OLAF, Dr F-H Bruner; Douglas Alexander MP and his predecessor as minister for Europe Denis McShane MP; the CEO and senior staff at the National Audit Office in London; and Stephen Timms MP, junior minister at the Treasury who answers for the Chancellor on these matters.

  In addition I have reports, documents, letters and records of meetings with individuals and organisations who have had to cope with the EU's financial mismanagement, sometimes with catastrophic personal consequences.

  Should the sub-committee so decide, I would be more than willing to provide copies of any of this material. And, of course, I am more than willing to give oral evidence if the sub-committee wishes. Were this to occur, I ask that Mr Arkell be invited to accompany me. His expert knowledge will be of far greater assistance to the sub-committee than any of my layman's comments.

  I enclose my statement as requested, with some ideas about finally resolving this huge problem.



Basic Enforcement Weaknesses

  1.  The Court of Auditors (CoA) admits that 80 per cent of all taxpayers money is never properly accounted for. Some estimates put the figure as high as 95 per cent, based on the CoA's admission that only administrative expenses (5 per cent of the total) are fully audited and signed off. One CoA member freely admitted—in answer to my direct question—that the EU was already too big ever to be audited properly.

  2.  At a meeting of the Budget Control Committee (Cocobu) last year, the president of the Court of Auditors said that responsibility for combating fraud was a matter for the commission, not the court. The commission's representative at the meeting then directly contradicted him and said that control of fraud was a matter for the member states. The president did not respond.

  3.  The EU admits to having 662 bank accounts in 45 different countries. It admits some of them are offshore, but refuses to say how many, where they are, or why they are there. It also admits to having "dealings with" another 214,000 bank accounts across the globe.

  4.  And 416 of its accounts are imprest accounts, which means the recipients of public funds can draw down the money on their own signatures. According to Mr Barroso, the president of the commission, all imprest accounts can be and are audited by the EC's own Court of Auditors. The CoA is adamant they are not audited because the funds are then outside its remit. Do they ever talk to each other?

  5.  If fraud is suspected, the EC's financial investigation team known by its French acronym as OLAF is toothless. It has to rely on action by the member state. In 2004, some 9400 cases of fraud were reported. Yet in the seven years of OLAF's existence there has been no successful conviction of any major wrongdoer and funds recovered. Indeed, recovery of public money from scams is derisory.

  6.  One of the EU's financial regulations (2342/2002, Article 87(4)) says there is no need to attempt recovery of any sum less than a million euros. There is clear evidence of this loophole being ruthlessly exploited. OLAF knows, the commission knows. Nothing has been done.

  7.  The loophole can best be described as "separation of financial responsibilities". The commission prefers to say "shared responsibilities". The net effect is that no-one is ever to blame. Let me explain.

  8.  The EC makes a payment on a project to a "responsible" local public authority which is expected to release funds to those running the project. They may be co-signatories on the account, but not necessarily. If suspicions arise, the cash is now beyond the reach of the CoA. The member state's own auditors may decide not to act—"not our problem, it's EU money". In such cases, there is no enforcement of accountability on local officials. When money disappears, everyone involved blames everyone else. Much argument, investigations and reports later—little or nothing is likely to happen.

  9.  How can there be real improvement when each EU institution or department, and each national audit office, works to different standards and criteria, and they all pass the buck? Is the UK's NAO's "liaison" with the CoA and OLAF over fraud cases in the UK anything more than an exchange of information? The NAO's March 2006 report talks of numerous British government departments reporting suspected fraud, and passing the information to OLAF. But OLAF says the investigation, prosecution and recovery of funds is a matter for the member states. If each department in Brussels, and each NAO or equivalent in the member states, takes such a narrow view of its responsibilities where, exactly, does final accountability lie? Nowhere. Such a structure must be deliberate.

  10.  OLAF can only advise member states, and the CoA can only advise the commission. Both are answerable to the commission. Neither have genuine independence or powers of enforcement. This is a merry-go-round of Alice in Wonderland proportions. It is also deeply offensive to millions of British tax-payers.

  11.  Which brings us to the biggest question—who is watching Brussels, where the real problems are?

The Heart of the Problem

  12.  With the help of expert forensic accounting analysis, we now know much more about the way the EC manages its finances. Massive annual cash surpluses, which were supposed to be returned to the member states, have routinely been hidden by the use of three unlawful accounting strategies.

  13.  The first involves retrospective adjustments of the annual accounts anything up to two years later. Example: 750 million euros-worth of sundry debtors simply disappeared off the accounts between 2002 and 2003, of which 663 million were cash advances to "financial intermediaries".

  14.  The second entails making and later amending unspecified "provisions" on the balance sheet. The third involves recording billions of euros-worth of pension liabilities on both sides of the balance sheet. This grossly distorts the accounts. It also means the member states are liable to fund the generous pensions of 39,000 past and present Eurocrats twice over, having already paid for them—like all other EC expenditure—via the UK's normal "club subscription".

  15.  All three of these financial devices are specifically prohibited by all recognised international accounting standards. Two other routine practices of the EC are also highly irregular. Advances are treated as expenditure, and loans which disappear are written off.

  16.  So what are the structural weaknesses at the centre? There is no paper trail recording transactions, agreements, commitments, payments, receipts or evidence of delivery of the goods or services paid for. Inconvenient information is deleted from the records—reports simply disappear.

  17.  None of which is helped by a lack of effective security controls over access to accounting systems and records. Certainly up to 2005 there was no way for management or auditors to trace when, why and by whom changes had been made to the records. Post January 2005 procedures are cloaked in secrecy, doubtless to give the impression all is now well.

  18.  The introduction of double-entry accounting on 1 January 2005 has been presented by the EC to the outside world as a panacea—the answer to all their problems. It is nothing of the sort. There are still no official accounting records. There is still no consolidation of accounts or central control. There is still no effective transactional accounting. The commission's accounts are merely the sum of the numbers proved by the directorates, most of whom might say—next year—sorry we got some numbers wrong last year. Hence the retrospective amendment of accounts published for the year before.

  19.  Each directorate has its own financial staff who answer to one of 37 Directors General, not to the commission's chief accountant. The internal departmental auditors are administrative rather than investigative. They control rather than check. There is no effective departmental separation of functions. The authorizing officer, who is responsible to the treasury, is also the authorizing officer who originates a payment order, without having to check supporting documentation. He then records the transaction in that department's accounts. These insecure procedures were introduced by Neil Kinnock when vice-president of the Commission, following the Santer scandal.

  20.  According to Marta Andreasen, this structure enables senior officials to use the system for their own purposes, knowing they are unlikely ever to be held fully accountable. That is why loans suddenly disappear between one year and the next, or suddenly reappear as expenditure. That is why pre-payments, loans and expenditure keep turning one into the other in a perpetual merry-go-round. To make matters worse, two sources have confirmed that DG's are not averse to demanding changes in their annual accounts, and deleting written criticism from their internal auditor's reports.

Cash and Tax—More Serious Problems

  21.  Difficult though it might be to believe, the potential and actual mismanagement of cash is even more serious than the problems addressed above.

  22.  There is no central check on the authority of officials making payment orders. There is no central list of authorised officials entitled to make payments from the commission's bank accounts. Nor are any security checks made on counter-signatories either concerning their level of authority or even their physical existence.

  23.  This lack of security and suspect integrity of the banking function was heavily criticized in 2004 by the European parliament. To date no evidence has emerged suggesting that either banking security or the segregation of duties has been addressed.

  24.  Never in the last 14 years has the Treasury department of the EC been subjected to an independent audit by professional accountants. Yet it is at the heart of financial operations. The same individual was in charge throughout, until he quietly retired immediately after questions about the non-auditing of his crucial function were first raised in Cocobu in 2004.

  25.  A Treasury operation with 21 billion euros-worth of cash in hand at the balance sheet date would be externally audited two or three times a year, as well as at year end, as a matter of routine.

  26.  Little of the EC's annual expenditure of some 100 million euros is paid in advance. So to retain 21 billion euros in cash on its balance sheet is extraordinary, especially as its debtors are the member states—which do not go bust. The maintenance of such huge cash and near-cash balances suggests:

    (a)  the deliberate retention of member states' surpluses against EU rules;

    (b)  the establishment of "own-state" resources—the hallmark of an emerging independent state; and

    (c)  no justification for the EC asking member states to make substantial increases in funding from 2007.

  27.  Even more extraordinary was the Court of Auditors' reaction when asked if- given the huge cash sums sitting in the EC's bank accounts—the overnight money markets were used to maximise the value of public funds. No-one present knew what we were talking about! Eventually a few mumblings about "risk" confirmed it.

  28.  Of course the EC's own accounts are not subject to tax. Because they are never fully signed off EC accounts live in a sort of legal limbo-land. However, the EC "trades" with taxable bodies. By implication, this must directly encourage tax fraud, since the tax authorities in each member state must find it almost impossible to establish with certainty what was paid to whom, when and on what basis.

  29.  At one time the EC established a Contracts Committee to oversee the issuance of contracts and to call for and analyse tenders. That committee has been disbanded. The implications are inescapable—opaqueness is preferred to transparency.


  30.  No. The doubtless well-intentioned "road map" towards an "Integrated Internal Control Framework", championed by Commissioner Kallas, is regarded in Brussels as little more than a rearrangement of the deckchairs on the Titanic. Fundamental flaws will remain, as indicated above.


  31.  No. The Court of Auditors has openly admitted it cannot enforce change. It could not even oblige the commission to reconcile closing and opening balances when the computer system switched from cash to double-entry accrual accounting at end 2004. Previous annual bulk entries on the accounting records attempted to reach a year-end balance of sorts. As a result, the opening 2005 position on the new system cannot be trusted. Thus future accounts can never be signed off as a "true and fair view".


Credit Rating

  32.  The EC's triple AAA credit rating in the financial markets must depend on "true and fair" annual accounting statements. The credit rating agencies might reasonably be asked to explain their inertia over the last 11 years. They might also be reminded that the EU is a regulator, expected to observe the International Financial Accounting Standards it enforces on others. It plainly has not done so.

  33.  Failure to meet these standards opens it to the risk of challenges by EU citizens in the ECJ or via the EU Ombudsman, or possibly via the courts in member states where financial probity is demanded of the government by force of law. A successful challenge via any one of these routes would finally oblige the EC to prepare audited accounts or risk a collapse in confidence.

Urgent Action on Fundamentals

  34.  All the major weaknesses identified above should be addressed as a matter of urgency and on behalf of the millions of hard-working, long-suffering taxpayers who fund the EU—a point the Commission routinely forgets. This is not EC money—it is taxpayers' money.

  35.  In addition, an injection of commercial reality is needed. The treaties do not require any cost:benefit analysis of any project or proposal. No official ever seems to stop and ask "do we need to do this? What will it cost to implement, what will it cost the target group to comply, what will member states enforcement cost, and will the perceived benefits outweigh those costs by a worthwhile margin?"

  36.  Such questions are not difficult. Every commercial organization asks itself its own versions of these questions every day of the week. So should governments—especially the unaccountable EU.

Specific Proposal

  37.  On a more pro-active and fundamental level, there is much the British government could do to improve EC financial management. It could all have been addressed during the British presidency. A golden opportunity was lost.

  38.  The British government is required by law to produce accounts which provide a "true and fair view" of its financial affairs. Where in British law is exemption given to the funds sent to Brussels?

  39.  The UK government could unilaterally set a time limit to complete basic reform of the EC's accounting structures and procedures so that they comply fully with International Financial Reporting Standards.

  40.  Meanwhile, all British contributions to EU funds could be halted or diverted into an escrow account, pending the introduction and enforcement of proper IFRS auditing on the commission.

  41.  The legality of such action was established by Nigel Lawson when he was chancellor. Mrs Thatcher's government planned exactly such a move during negotiations over the original British rebate. A Bill was drafted. So the present British government knows it can take such action.

  42.  To add pressure, the UK government could invoke, or threaten to invoke, Article 49 of the 1969 Vienna Convention on Treaties. This says that "If a state has been induced to conclude a treaty by the fraudulent conduct of another negotiating state, that state may invoke the fraud as invalidating its consent to be bound by the treaty."


  43.  New Zealand routinely produces fully audited and signed off annual accounts, usually within three months of the end of its financial year. It has done so by creating a financial infrastructure that uses exactly the same accounting criteria demanded of any large company.


  44.  No. At present, the Court of Auditors (CoA) is a creature of the EU system. At the end of the annual EC "audit", the court answers to the commission and reports to parliament. The CoA's membership is 25 placemen and women, each nominated by their member state—academics, civil servants, former politicians. Only a few are experienced accountants used to working to international standards.

  45.  The EC's relationship with the CoA needs to be completely reversed. The CoA should be fully independent and answerable directly and only to its ultimate paymasters—the member states.

  46.  The court should consist entirely of senior professionals in the relevant fields of accountancy, financial management and the law. It should have full powers to investigate and audit the EC's financial activities at every level, with the authority to enforce change and compliance.

  47.  Only then will the EU be directly and fully accountable to the member states and their taxpayers.

11 April 2006

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