European Standing Committee B
Wednesday 24 February 1999
[Mr. George Stevenson in the Chair]
Court of Auditors Report
[Relevant Documents: European Union Documents
No. 10786/98, relating to VAT fraud in intra-Community
trade, No. 14031/98, relating to the Independent Fraud
Office, and OJ No. C349: Court of Auditors annual report
for 1997.]
10.30 am
Mr. William Cash (Stone): On a point of order,
Mr. Stevenson. I have been a member of the Select
Committee on European Legislation for many years. As a
former member, Mr. Stevenson, you will be familiar with
my point concerning this matter being discussed today in
Committee, rather than on the Floor of the House.
The Select Committee, which is now called the
European Scrutiny Committee, produced a report making
it clear that important matters should automatically be
referred to the Floor of the House. The fisheries debate,
by historical precedent, has been taken on the Floor for
many years. We know its importance, but nothing is more
important than the budget, its relationship with the
common agricultural policy and matters of fraud, which
we are considering today. I have said many times that the
Court of Auditors report should be heard on the Floor of
the House, notwithstanding the fact that that decision was
taken by the Select Committee.
I could say much more about what went on in that
Committee, but there is no need. The report should be
debated on the Floor, and I believe that there would be
much support for that if the matter were put to hon.
Members. I want to make the strongest remonstrance
against the fact that the debate is taking place in Standing
Committee, notwithstanding the eminence and distinction
that this Committee represents under your chairmanship,
Mr. Stevenson.
The Chairman: I am sure that the hon. Gentleman's
comments will be noted, but it is not a point of order for
the Chair.
10.31 am
The Economic Secretary to the Treasury (Ms Patricia Hewitt): I welcome the opportunity to attend the debate this morning, especially under your
chairmanship, Mr. Stevenson, in view of your long
involvement in European matters.
The Chairman: I have just been reminded of that.
Ms Hewitt: Indeed. It is a pleasure for all of us.
I welcome this debate which covers the annual report
of the European Court of Auditors for 1997, the European
Commission's proposal for a European fraud investigation
office and the European Court of Auditors' special report
9/98 on VAT on intra-Community trade. The debate,
therefore, has as its theme better financial management
and the fight against fraud. It may be helpful if I make a
few comments by way of introduction before I answer
questions.
Dealing first with the annual report for the year 1997,
the court selects particular areas each year and
investigates these in detail, commenting on general
financial management and value for money issues. This
year the annual report, although fairly thick, is
considerably smaller than it has been in the past. The
reason for this is that the court has decided that it would
be better to focus its work on the special reports that it
produces throughout the year on selected topics and which
are not limited to one financial year, but can follow the
progress of an expenditure programme over several years.
Many of the special reports are summarised in the annual
report, which has a list of all the special reports in the
annex. I think that this is helpful because it ensures that
all the special reports are given due consideration,
although we need to bear in mind that errors highlighted
in the special reports may refer to previous years and do
not all relate to 1997. There have also been some
problems this year because many of the special reports
were published at about the time of, or even after
publication of, the annual report that refers to them.
The statement of assurance is published for the fourth
time, and this year has been published as one document
with the annual report. Once again, the court has once
more certified the accuracy of the accounts but has been
unable to certify the legality and regularity of payment
transactions. This year the court has not published its
estimate of the most likely rate of substantive errors, but
has told us that it is similar to last year. I believe that this
is because the court does not want readers to focus on a
seemingly precise figure which in reality is a statistical
extrapolation from the results of a relatively small sample
of transactions. Despite that, the court is clear in putting
across its message the level of errors is, once again,
too high.
I know that all hon. Members understand that not all
those errors represent deliberate fraud. In fact, the vast
majority do not relate to fraud, in the criminal sense, but
to general misunderstandings and confusion about what
expenditure is eligible. We can draw some comfort from
the fact that errors on agricultural expenditure are less
than the average, reflecting some improvements resulting
from the 1992 reforms. But the level of errors on
structural funds expenditure remains above average and
the overall level is too high.
The report details many specific problems, errors and
irregularities, but overall themes are clean: poor objective
setting; inappropriate programmes; inadequate evaluation;
administrative inefficiency; over-compensation of
farmers; and, payment for non-existent services. If we are
to make real progress we need to focus on the big issues.
The SEM 2000 the sound and efficient management
programme, which was launched in 1995 aimed to
identify the reasons for financial management problems
and to put measures in place to deal with them. One of
the papers that the Committee has received in preparation
for this debate is the Commission's report on the progress
of that initiative, which the Government have always
strongly supported.
Phase III of SEM 2000 involves co-operation between
the Commission and member states. Through this
co-operation, we were able to influence the proposals that
the Commission brought forward for the new structural
funds regulations, to ensure that those included simpler,
but more effective, financial management requirements,
and clearer responsibilities for financial control and the
correction of irregularities.
The Government are also working with the
Commission on preventing and detecting fraud in the area
of intra-community trade, discussed in the court's special
report 9/98, which is also the subject of today's debate.
The court's report highlights the growing concerns about
the impact of VAT fraud on the Community's own
resources budget. Almost half the EU budget is financed
by member states, paying an agreed percentage of a
common VAT base. Any shortfall in contributions results
in the need for member states, including the UK, to pay
an increased amount of their gross national product-based
own resource. In other words, any incidence of VAT fraud
in one member state has a direct financial impact on all
the others. That is why the Government take very
seriously the views expressed by the Court of Auditors in
its report.
Over the years, customs and excise has been at the
forefront of developing and using risk assessment tools
and techniques for identifying and countering VAT fraud.
It has also been an active and keen participation in all the
Community's initiatives.
The Government feel that it is through such initiatives,
working together with the Commission, and through
focusing on better policies, that real improvements in
reducing the level of fraud and irregularity can be made.
The financial management of the EC budget is not simply
the responsibility of the Commission; it is, crucially, the
responsibility of member states themselves.
The Council recognised last year, when it considered
the Court of Auditors' Report, that there were significant
problems but it supported the steps being taken by the
Commission to remedy them and acknowledged a shared
responsibility for achieving these improvements. For that
reason, the Council Recommended discharge of the 1996
budget. At the same time, it set out a large number of
recommendations for improving financial management, to
reduce the risk that such problems would recur.
The European Parliament is still refusing to grant the
Commission discharge for the 1996 account sand, indeed,
voted on a motion in January to censure the Commission,
although the motion was defeated. The Council is
extremely concerned about fraud and the fact that it
recommended discharge of the 1996 budget does not
weaken the Council's zero tolerance for fraud and
irregularities. Most of the cases were already under
investigation and were not directly relevant to the
discharge decision on the 1996 accounts.
The November Economic and Finance Council
declared a policy of zero tolerance on fraud, called for
immediate and substantial improvements in the level of
Community fraud and is pressing the Commission for
strengthened proposals on a European fraud investigation
office. I am sure that we will return to that issue in our
debate.
In our view, the key to combating fraud through such
an investigation office is ensuring operational
independence so that the body can function without
interference or undue pressure. The Government are
playing a full part in the discussions on the fraud
proposals. At the January ECOFIN, the Chancellor called
for a strong, independent head of fraud investigation who
would have not only the power, but the responsibility to
act.
The Committee has before it a large number of
documents, which we shall address. I stress the
Government's determination to adopting the Prime
Minister's phrase be tough on fraud and irregularity and
tough on the causes of fraud and irregularity. I am sure
that our debate will confirm that aim.
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