Memorandum by Ashley Mote MEP, European
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 fieldPaul 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
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 downstreamimportant through
it is in its own rightappears 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
I enclose my statement as requested, with some
ideas about finally resolving this huge problem.
THE PROBLEMS WITH EU FINANCIAL MANAGEMENT
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 admittedin answer to my direct questionthat
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 laterlittle
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
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
11. Which brings us to the biggest questionwho
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 themlike all other EC expenditurevia
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 recordsreports 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 panaceathe 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 saynext yearsorry
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
Cash and TaxMore 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
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
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 stateswhich 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"
resourcesthe hallmark of an emerging independent state;
(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 accountsthe 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 inescapableopaqueness 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
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
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 EUa point the Commission routinely forgets. This
is not EC moneyit 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 governmentsespecially
the unaccountable EU.
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 stateacademics, 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 paymastersthe
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