European Standing
Committee B
Wednesday 26 February 2003
[MR. ROGER GALE in the Chair]
Protecting the Community's
Financial Interests
[Relevant documents: European Union Documents No. OJ C295, Vol 45, European Court of Auditors' 2001 Annual Report, and No. 10625/1/02, the Commission's 2001 Annual Report on protecting the financial interests of the Communities; and European Union Documents No. 5298/03, Commission Action Plan pursuant to recommendations in the Court of Auditors' Annual Report of 2001, No. 5092/03, Commission follow-up Report on the Council's comments on a Resolution on discharge for the general budget 2000, No. 15715/02, Commission follow-up Report on the European Parliament's resolution on discharge for the 2000 general budget, No. 15872/02, Modernising of the Accounting system of the EC, No. 11288/02, Commission Report on Member States' replies to the Court of Auditors' 2000 Annual Report, and No. 13133/02, Commission Report: Thirteenth Annual Report on Structural Funds (2001).]
2 pm
The Chairman: Before we start, I am sure that hon. Members are familiar with the procedures, but in case any have forgotten, we start with a ministerial statement, then have up to an hour of questions, and finally, at 3 pm, we move into formal mode and debate the motion.
The Financial Secretary to the Treasury (Ruth Kelly): Thank you, Mr. Gale, and may I say how pleased I am that you are chairing this sitting?
We are discussing two reports concerned with EU fraud and financial management—the European Court of Auditors' report for the financial year 2001, and the European Commission's ''Fight against Fraud'' report, also of 2001. These documents cover an important area of work, so I am pleased that the Committee has shown the priority that it attaches to tackling fraud and waste against the EC budget by once again holding a debate on these documents. I would like to make a few introductory comments before answering questions.
The past year saw a great deal of progress on reform. The highlight was the adoption and implementation of the new budgetary rulebook, the financial regulation. The Commission introduced reform proposals on staff terms and conditions in the new staff regulation and developed an action plan for a new accounting framework and IT system, about which I shall say more later.
In 2002, we also had the first shadow run for activity-based budgeting, which will replace the current input-focused budgeting system by 2005 and when fully in place will improve the match between outputs and resources. Although in previous years hon. Members may have questioned the pace of
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reform, I hope that they will agree this year that the Commission, working with member states, has made significant progress.
The first document under discussion today—the ECA annual report—plays a useful part in maintaining the pressure for reform. This year I am sure that all hon. Members will welcome one particular reform: that this report is more than 100 pages shorter than the 2000 report. Of course, one key aspect has not changed: for 2001, as for 2000 and every year since 1994, the ECA was unable to give a positive statement of assurance. Although this was expected, it remains disappointing, but the very fact that the ECA continues to seek out irregularities and to point to inadequacies in the financial management of EU funds, gives us confidence that close scrutiny is taking place and that the Commission's attention will remain focused on the need for reform.
Once again, the level of detected irregularities is the reason that the ECA has been unable to give a positive statement of assurance, but let me remind hon. Members that we must not equate error and irregularity with fraud. Indeed, in the majority of cases, discrepancies are not frauds, but administrative errors such as using the wrong exchange rate, making small overpayments or not fully complying with complex Community regulations—the sort of errors that are easily, swiftly and regularly corrected.
Another point to remember is that the ECA report helps to deliver improvements. For example, it was an ECA report that recommended the establishment of the anti-fraud office, OLAF, and in 1997 the ECA argued for the recasting of the financial regulation. Many other improvements have been made as a result of ECA reports, including, as recommended, the setting up of OLAF, the new Member of the European Parliament's statute currently being negotiated, the vineyard register and improved evaluation for the PHARE and TACIS programmes.
We should all recognise, however, that we have a long way to go before we can expect a positive statement of assurance. Several significant criticisms remain. One of the key criticisms made by the ECA was, for the second year running, the significant surplus of revenue over expenditure. The UK Government have also been concerned about this and fully support the ECA view that action should be taken within-year to adjust the budget. We have also argued that the Commission needs to improve its expenditure forecasting, including getting regular revisions to forecasts made by individual member states.
Mr. Mark Prisk (Hertford and Stortford): Will the Minister give way?
Ruth Kelly: No.
The Chairman: Order. The Minister is making her opening statement. When that has been completed, I shall invite hon. Members to ask questions.
Mr. Prisk: Thank you, Mr. Gale.
Ruth Kelly: The task of recasting the financial regulation was initiated at the behest of the European
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Court of Auditors. It is a radical reform and was achieved in a very quick time by EU standards.
Revision of the financial regulation—the Commission's budgetary rulebook—has long been seen as a crucial part of the whole Commission reform package. The previous legislation was introduced in 1977 and had gone through several amendments since then, all of which tended to add complexity to the system. The task for reformers, therefore, was to produce a coherent document that enshrined clear principles of budgetary control, but avoided the minute details that had led only to confusion and unintentional non-compliance. That has been achieved. The document was backed by all the institutions and member states and came into force at the start of January this year.
I am sure that hon. Members will have noticed, however, that the ECA does not wholeheartedly support the new regulation in the 2001 report. Indeed, it argues that the reform does not go far enough. Although we share its ambition for even more radical reform, the reform brings in big changes: the abolition of the financial controller and devolution of responsibility and accountability to authorising officials, which means no more passing the buck; the introduction of accruals accounting by 2005, which is a huge step for any public sector body that has only ever used cash accounting; an independent internal auditor written into the legislation; and the integration of objectives, indicators and evaluation into the budgeting process. Not only will funds have to be spent legally, the officials will have to demonstrate that they have delivered. For many member states the reforms already went very far indeed and the main criticism was that the new regulation was too Anglo-Saxon.
I now turn specifically to the accounting system. In its comments on the Statement of Assurance the ECA notes:
''To a large extent the weaknesses highlighted are due to the nature of the Community accounting, which was not designed to provide a complete record of assets''.
As I mentioned, the new financial regulation provides for the introduction of accruals accounting by 2005, but does not set out an action plan for the implementation of the reform, which has been a recurrent criticism of the Commission.
In January this year, however, the Commission introduced its proposals, which set out in detail its plans for the new accounting framework and the new IT system that will be needed to support it. The Community will adopt a dual system—accounts will be on an accruals basis but the budgeting will remain on a cash basis. We ran such a system in the UK as an interim measure, and we fully support the Commission's decision. The reform of the time scale is already very ambitious, and trying to introduce accruals budgeting at the same time would be too much.
The proposals for the new IT system also respond to previous criticisms made by the ECA. The new system will allow much better data sharing and fully capture assets and liabilities as well as providing the
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data on an accruals basis. The proposals are a big step in the right direction and I can inform hon. Members that the Commission has agreed to provide us with updates on their progress every six months.
The other reform that is being discussed in the Council working group is the staff regulation—the terms and conditions for EU civil servants. My hon. Friend the Minister for Europe has already informed the House of the Commission's latest proposals. I would like to add that the proposals will complement the financial reforms by modernising the EU civil service—by improving career structures and skills through training, bringing in more outside expertise, having a new and more effective disciplinary code and making promotion dependent on merit.
The changes in regulations, however, will not be sufficient to stop the small minority who deliberately try to defraud the EC budget, whether officials or beneficiaries of programmes. The Government view any level of fraud against the EC budget as a grave issue. There must be zero tolerance of fraud and fraudsters and the necessary resources must be found to detect and prosecute them. That is why the UK Government were strong advocates of the creation of OLAF—the anti-fraud office—and are pleased that it is making headway in the fight against fraud. We particularly support the emphasis that it has placed on prevention of fraud and the need for a culture of mutual co-operation between member states.
As hon. Members may recall, it has taken OLAF some time to get up to full complement. That is because it took longer than expected to recruit skilled investigators and analysts. However, all the key posts in the office are now filled. On the investigative side, OLAF is proving an effective weapon. The latest reports make it clear that it is actively pursuing fraudsters. The number of investigations is on the increase and close to 1,000 cases are being investigated. Almost twice that number have been closed. The message is clear: the resources are now in place and if people try to defraud EU moneys, they will be found out.
There have also been some important improvements in intelligence and data gathering now that the staffing is in place. The UK and other member states have been pressing OLAF to provide a fuller analysis of fraud against the budget. We are asking that, rather than merely reporting all irregularities as it did last year, it should give a detailed breakdown sector by sector, separating errors from frauds.
As members of the Committee will be aware, the figure for total irregularities was €598 million in 2001—approximately £374 million. As I have repeatedly pointed out, we know that only a portion of that is accounted for by fraud. I am pleased to report that OLAF is now working with member states to provide the information. By this time next year we expect to have the data. Needless to say, the advantage of such intelligence is that it helps investigators and auditors to focus their resources better on key areas of risk.
OLAF now needs a period of stability in which it can focus on investigations and make headway on
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developing a prevention strategy. It can also play a key role in improving information flows between member states and increasing co-operation.
The documents are important. They highlight many problems to be tackled, but there are also many positive developments. Some of the Commission and Council initiatives have already begun to take effect. Others have clear timetables and will take effect soon. I can assure the Committee that the Government intend to maintain an active role in keeping the fight against fraud and waste high on the European agenda.
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