By the Select Committee appointed to consider Community proposals, whether in draft or otherwise, to obtain all necessary information about them, and to make reports on those which, in the opinion of the Committee, raise important questions of policy or principle, and on other questions to which the Committee considers that the special attention of the House should be drawn.

ORDERED TO REPORT

Background

1.  No one doubts the need to take action to protect the assets of the European Union against fraud, corruption and waste. Events earlier this year following upon the publication on 15 March 1999 of the First Report[1] of the Committee of Independent Experts have focussed attention on the position of the Commission and the role of Commissioners individually and collectively. It would be wrong, however, to regard problems within the Commission, important as they are, as the only major ones that need to be dealt with. Similarly it is too simple to see the introduction of tighter internal financial controls and the creation of a new independent fraud prevention office as being the answer. The fight against fraud has to be seen in the wider context.

2.  The Community[2] has an annual budget of approximately £60 billion. National authorities are responsible for the administration of a large proportion of that sum. Member States have responsibilities as regards both collection and payments. Only about 12% of Community expenditure (such as foreign assistance, research and development social funds) is directly managed by the Commission. Less than 6% relates to the administrative costs of the Commission and the other institutions.[3] Both receipts and expenditure are liable to fraud, the consequences of which do not only affect the Community but may also be felt by individual Member States. The investigation and prosecution of such fraud is primarily a matter for national criminal laws and procedures. These are designed essentially to operate within one jurisdiction. Where the fraud takes place across national borders, and the accused or a witness or evidence is in another country, co-operation is necessary between police and other enforcement agencies. In practice there may be difficulties and delays. The Court of Auditors has described the problem, thus:

"Fraud against the Community budget is often transnational. The enforcement agencies, however, operate according to a huge number of different procedures and in dispersed order in a very time-consuming way. In contrast the fraudsters themselves can operate in real time using their international networks of contacts. The procedures in place can simply not cope with new criminal networks".[4]

A large proportion of fraud on the Community budget (80 per cent in value) is thought to be trans-national. The trans-national aspect is not necessarily limited to the Member States. In many cases it involves States outside the Community.

3.  Action has, of course, been taken by the Community, including the setting up of a task force within the Commission, the unité de coordination de la lutte anti-fraude (UCLAF), to assist and co-ordinate. A body of regulations imposes control and reporting obligations on Member States and provides for on the spot inspections[5]. Various measures have also been taken on an inter-governmental basis under the Third Pillar. These include the adoption in 1995 of a Convention on the protection of the Communities' financial interests which only two Member States have so far ratified. A further measure, an EU Convention on mutual legal assistance in criminal matters[6], is under negotiation. This would supplement present arrangements for co-operation between national investigation and prosecution authorities that rest on procedures established under a Council of Europe Convention of 1959.

4.  The Corpus Juris is a more ambitious project. It would introduce an autonomous criminal code for the investigation, prosecution and punishment of fraud and other crimes against the Community's finances. This code would apply in a single legal /judicial area comprising all the Member States. The proponents of the Corpus Juris contend that it is perhaps the only, or at least the most effective, way to tackle fraud against the Community budget. There is no suggestion that Member States should modify their laws and procedures except in relation to this limited category of offence.

Types and scale of fraud

5.  Fraud on the Community's finances may take many forms but, broadly, can be divided into (a) income or receipts fraud and (b) expenditure fraud. As regards the first, the income of the Communities is comprised of four main elements: agricultural levies; customs duties collected on imports to the Community; a percentage of VAT[7]; and, after all other sources of revenue have been taken into account, a budgetary resource based on each Member State's Gross National Product (GNP).

6.  So far as fraud against payments into the Community's budget is concerned, the main burden of investigation and prosecution is borne by national authorities. In the United Kingdom a major role is played by HM Customs and Excise (Customs), particularly as regards customs duties and own resources VAT. (In relation to VAT fraud the loss to the national budget is far greater than that to the Community). Much Community expenditure, particularly in implementation of Community industrial and agricultural support policies, is also handled at the domestic level. For example, payments under the Common Agricultural Policy (CAP) are made by Member States and reimbursed by the Commission out of the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF)[8]. Principal responsibility for deterring and detecting CAP fraud lies with the Intervention Board (which funds, accounts for and operates the CAP in the United Kingdom)[9]. Customs' involvement in the investigation of fraud on expenditure of the Community budget concerns export refunds paid in relation to the CAP.

7.  As regards customs duties and CAP exports, the types of fraud typically involve deliberate mis-statements (for example, as to value, tariff classification, origin and destination of the goods) on customs declarations aimed at minimising duty exposure or maximising refunds[10]. For example, finished textiles are exported from Indonesia to the Community under cover of preferential (GSP - general system of preferences) certificates. The textiles are found to be made from cloth which does not satisfy the rules of origin because it comes from a country (Taiwan) outside the system of preferences[11]. Another example is where export refunds are obtained for a consignment of butter destined under transit arrangements for Albania. The butter is improperly withdrawn from transit using falsified documents and diverted to Italy. The main types of VAT fraud are failure to register for VAT/ late registration, bogus registration, disappearance without remitting tax charged, failure to render returns, contrived liquidation, false export cases (including the diversion to the black economy of goods ostensibly exported), misdescription of goods, fraudulent inflation of deductible input tax, and suppression of sales to reduce the true tax liability (p 30).

8.  Frauds on the "expenditure" side of the Community budget may involve, for example, the embezzlement of money from the European Social Fund or of other structural fund moneys. Or it may involve claiming agricultural aid on a fictitious or false basis. For example, hazelnut oil is imported as sunflower oil and used to dilute olive oil. The olive oil is then placed on the market and consumption aid is collected on the entire product.

9.  The Commission's Annual Report for 1997 on the Fight Against Fraud stated that detected fraud and irregularities amounted for that year to ECU 1 billion, in revenues lost to the Community in the area of traditional own resources alone. While official figures speak of about 1.4 per cent of the Community's budget being lost to fraud, the real figure may be higher. Criminologists have estimated that the figure is around 10 per cent, upwards of 8 billion euros (£5.5 billion) (Q 24). The Government said that it was clear that a substantial part of the total loss was due to criminal activity. Organised crime is increasingly involved, particularly in large-scale smuggling of, for example, cigarettes and alcohol where there is less risk than in smuggling drugs Tackling fraud - EC institutions.

COURT OF AUDITORS

10.  The Court of Auditors is an independent body (and an institution of the Community) established under the Treaties to check that Community income has been received and expenditure incurred lawfully and in accordance with Community budgetary and accounting principles. The Court can carry out both documentary and on the spot audits at the Community institutions, in the Member States and also in non-Member state recipients of development aid. Each year it presents an annual report which is forwarded to the other Community institutions and is considered in particular by the European Parliament in the course of its exercise of control over the Community budget. Audits have revealed established and potential irregularities and fraud in the administration of the Community's finances. In addition to its annual report the Court can produce special reports. Recently, greater use has been made of such reports. The Court's Special Reports on UCLAF[12], VAT fraud in intra-Community trade[13] and on Agricultural Export Refunds[14] are significant examples of special reports dealing with fraud and irregularity affecting the Community budget.

UCLAF

11.  UCLAF was set up in 1988, following calls from the European Parliament for the creation of a task force that could carry out on-the-spot checks in the Member States as well as co-ordinate anti-fraud activities within the Commission. At first it was a small co-ordination unit in the General Secretariat of the Commission, other anti-fraud activities being undertaken principally by officials in the agriculture and customs Directorates. Pressure came from the Parliament to make UCLAF a fully-fledged operational fraud squad[15]. The Commission reacted in 1995 by centralising all its anti-fraud activities in UCLAF and giving it greater responsibilities, particularly in relation to fraud on the Structural Funds. The next important step came in 1998, when UCLAF's status within the Commission changed from department to task force, giving it a greater degree of autonomy. The Director can deal directly (ie without reference to Commissioners) with national police authorities (QQ 54, 56, 58).

12.  UCLAF has a total of 125 staff who are allocated in eight units, including five specialist units dealing with specific areas of the Community budget (customs, excise, VAT, agriculture, Structural Funds). There is also a "legislative" unit, whose staff includes prosecutors from the Member States who can advise on national systems and assist in cross-frontier co-operation (Q 60). UCLAF has no independent criminal investigative powers. It has no powers to search for and seize documents, to arrest and question suspects or to compel witnesses to attend and provide information. Investigation and prosecution remain matters for national authorities. In practice, UCLAF plays an important role in the co-ordination of anti-fraud activity and in disseminating information (Q 143). UCLAF has contacts with national authorities and can provide support as appropriate and necessary in the circumstances (QQ 75, 80).

13.  Where responsibility for the collection or expenditure of Community funds is in the hands of the Member States, UCLAF supervises and supports national authorities. In some areas, where the Commission has direct responsibility for Community expenditure (eg in relation to the Phare and TACIS programmes), it has a more active role. Trade agreements with third States regularly provide for administrative co-operation between the Commission and national authorities. UCLAF has no authority to investigate directly in the territory of third States, though it may be able to obtain assistance by exerting political pressure. It is building links with the applicant States and has, for example, plans to establish a joint office in Warsaw to control Community expenditure in Poland. In addition UCLAF has an important role to play in advising the Commission on proposed legislation and on administrative procedures (QQ 62, 70, 73).

14.  UCLAF itself has not escaped criticism. In the early summer of 1998 the Court of Auditors presented a Special Report on UCLAF, as mentioned above, calling attention to a number of shortcomings[16]. UCLAF has put in hand remedial action in response to criticisms (QQ 82,84). More recently, in the report of the Committee of Independent Experts, UCLAF has again been criticised, this time for duplicating the internal auditing services and not carrying out its fraud investigation responsibilities effectively. The Experts concluded, on the evidence of the particular cases they examined, that "Its intervention sometimes slows the procedures down, without improving the end result"[17].

PROPOSAL FOR A EUROPEAN FRAUD PREVENTION OFFICE

15.  In response to the Special Report of the Court of Auditors and a Report of the European Parliament ( the Bösch Report) the Commission brought forward a Proposal for a Council Regulation establishing a European Fraud Investigation Office[18]. It was presented to the Vienna European Council in December 1998. In response to the reactions of the European Parliament and the Council, an amended proposal, for a Regulation "concerning investigations conducted by the Fraud Prevention Office", was adopted by the Commission in March 1999. The new body (the Fraud Prevention Office) would take over certain functions presently exercised by UCLAF. The proposal does not involve the creation of any new powers for the Commission. Nor does it involve the creation of a body with its own legal personality, though the Office would have operational independence. As regards "internal investigations" the Office would have the right to initiate an inquiry and to have access to information held by the institutions and to their premises. The Office would also decide whether to transmit case files to national prosecution authorities. It is recognised that the Staff Regulations, which set out the rights and duties of EU civil servants, need to be changed. As an intermediate step, an inter-institutional agreement has been proposed in order to enable investigations in all the main Community institutions. The Office would also have powers to conduct "external investigations" in the Member States. Here it would have to abide by existing Community regulations providing for inspections and on-the-spot checks in order to detect fraud and irregularities[19]. The Director of the Office would report regularly to the European Parliament and the Council. A Supervisory Committee, made up of five independent fraud experts, would be entitled to give its opinion to the Director on the Office's activities and would make annual reports to the institutions. The proposal is currently under negotiation, with a view to entry into force on 1 June 1999.

Tackling fraud - instruments

THE 1995 CONVENTION AND ITS PROTOCOLS

16.  In June 1995 the Council adopted the Convention on the protection of the European Communities= financial interests[20] (the 1995 Convention). This requires Member States to amend their national criminal laws to include certain fraud offences against Community funds. It establishes a common definition of fraud and other offences which damage the Community budget. The Convention specifies appropriate penalties and also lays down rules for jurisdiction, extradition and co-operation. The main elements of the Convention are based on a resolution adopted by EU Ministers of Justice in December 1994. But for lack of time not all of the proposals in the resolution were included in the Convention. One was picked up in the First Protocol to the 1995 Convention, adopted in September 1996. This deals with corruption by national or Community officials resulting in damage to the Community budget. (There are a number of other international instruments dealing more generally with corruption of and by officials)[21]. The Second Protocol includes provisions concerning money laundering of the proceeds of fraud and corruption to the detriment of the Community budget, the responsibility of legal persons, the confiscation of proceeds of such conduct, and co-operation between the Commission and national prosecuting authorities. A further Protocol, adopted in November 1996, concerns preliminary rulings by the European Court of Justice in relation to the Convention and the First Protocol.

17.  Member States undertook, in the 1997 Action plan to combat organised crime[22], to implement the Convention and its protocols by mid 1998. But so far, only two Member States have ratified the Convention[23]. It is the practice of the United Kingdom not to ratify until the necessary domestic provisions are in place. In this case, this depends on commencement of Part I of the 1993 Criminal Justice Act. An Order was made on 19 April 1999 to bring the provisions of Part 1 into force on 1 June 1999. Part 1 widens the jurisdiction of English courts over fraud offences and gives effect to the recommendations of the Law Commission's Report "Jurisdiction over Offences of Fraud and Dishonesty with a Foreign Element"[24].

MUTUAL ADMINISTRATIVE ASSISTANCE

18.  For many years those charged with the investigation and enforcement of the criminal law have co-operated and assisted each other, formally and informally. An important distinction in practice has to be made between mutual administrative assistance and mutual legal assistance. Mutual administrative assistance involves the provision of information (sometimes capable of being developed as evidence) between the agencies (such as HM Customs and Excise, in the United Kingdom) of different countries, but limited to use for administrative or intelligence purposes by the requesting agency. Information is given on a voluntary basis and documents are only supplied with the consent of the person concerned. Customs has established a network of Fiscal Liaison Officers[25], originally to provide intelligence on fraud directed towards the United Kingdom (QQ 135,136). Mutual administrative assistance is widely used and is valuable in its own field. But if information or documentation is to be used as evidence, it has to be requested through the separate and more formal process of mutual legal assistance.

MUTUAL LEGAL ASSISTANCE

19.  Mutual legal assistance is the subject of a number of multilateral and bilateral agreements between States. Typically such agreements provide for one State, upon formal request from another, to assist the other State in serving process and in the obtaining of evidence. In some cases it may extend to the freezing or confiscation of assets. Within Europe, the principal instrument is the European Convention on Mutual Assistance in Criminal Matters 1959, which originated in the Council of Europe and to which some thirty States, including all Member States of the European Union, are party. Requests for assistance, usually in the form of commissions rogatoires (letters of request) are channelled though Central Authorities. In the United Kingdom mutual legal assistance is effected under the Criminal Justice International Co-operation Act 1990, the Home Office acting as Central Authority. It is clear that substantial use is made of existing procedures (QQ 119,133). The European Union has brought forward, in pursuance of its Action Plan to combat organised crime, a proposal for a Convention on Mutual Assistance in Criminal Matters between Member States of the European Union. It would update, as between EU States, the 1959 Convention and includes provisions concerning both traditional co-operation and modern cross-border investigation methods. The draft Convention was the subject of our earlier Report, Mutual Assistance in Criminal Matters[26].

Corpus Juris

20.  The Corpus Juris, with which this Report is concerned, was prepared by a group of eight academic lawyers, expert in criminal law and procedure, from different Member States. Its preparation was part of the European Legal Area Project launched by Mr Francesco de Angelis of the Directorate General for Financial Control (DGXX) of the European Commission. The Corpus Juris was published in April 1997. It is not a formal proposal of the Commission. It has the status of a research report or study.

21.  The Corpus Juris is designed to provide a uniform code of criminal offences to deal with fraud on the Community's finances. Part 1 (Criminal Law) sets out certain specific acts of fraud/corruption/money-laundering which are to be made criminal offences throughout the single legal area. It also specifies penalties for those offences. There are provisions creating secondary offences and dealing with corporate liability. For the purposes of the investigation, prosecution, trial and execution of sentences relating to an act which constitutes an offence under the code "the territory of the Member States of the Union" would constitute "a single legal area" (Article 18(1)). The Corpus Juris as drafted covers all frauds upon Community funds and is not confined to major frauds having a substantial international element. But as noted below, the authors recognised that, to be acceptable, a revised Corpus Juris could be limited to frauds of this kind.

22.  Part II of the Corpus Juris (Criminal Procedure) deals with procedure and evidence. It would create a new authority, the European Public Prosecutor (EPP), with a Director and deputies in each Member State. The EPP would have investigatory powers and be responsible for bringing the case before national courts appointed by each Member State. There would be powers to direct and instruct national prosecution authorities. Determining where each case is to be judged as Aseems appropriate in the interests of efficient administration of justice@ would depend on a number of criteria: where the greater part of the evidence is found, the residence or nationality of the accused and the place where the economic impact of the offence is greatest. The Corpus Juris also creates new judicial officers, to be known as the Ajudge of freedoms", whose responsibilities would be discharged by national judges in the Member States. The "judge of freedoms" would ensure that the rights of the defence are protected. The Ajudge of freedoms@ would exercise judicial control over the investigatory activities of the EPP and ensure, for example, that obligations (Article 6, in particular) of the European Convention on Human Rights (ECHR) were met. The Corpus Juris would require the case to be tried by professional specialist judges, not by juries or lay magistrates (Article 26).

Follow-up study

23.  The Commission has taken no view on the proposal and given no commitment to pursue and adopt it. But the question of the compatibility of the Corpus Juris with national criminal laws and procedure is presently under consideration by a group of experts for the Commission, the Comité de suivi. It is carrying out investigations in each Member State on how far the provisions of the Corpus Juris are compatible with national laws and, where they are not, what difficulties there would be in implementing them. The experts are supposed to keep to the general outline of the Corpus Juris. Their remit is to find answers to any difficulties, not to change the whole draft (QQ 52,88, 90, 91). It is understood that, in the light of the questions raised in our enquiry and the views of interested parties (set out in the evidence given to us), the experts may propose amendments on such matters as non-jury trial, supervision of European warrants of arrest and bail/remand in custody. A report, based on the work of the Comité de suivi, is to be published later in 1999.

The enquiry

24.  Sub-Committee E (Law and Institutions), whose members are listed in Appendix 1, decided to carry out an inquiry into the principal issues raised by the Corpus Juris. The views of witnesses were sought on:

-  the adequacy of present arrangements (including co-operation between national authorities) for investigating and prosecuting fraud on the Community's finances;

• the major legal, political and practical implications of the Corpus Juris; and,
• whether any other options for reform should be considered.

The Sub-Committee received the written and oral evidence from the witnesses listed in Appendix 2. The text of the Corpus Juris is reproduced in Appendix 3. Appendix 4 contains a summary of the more detailed and technical points made by witnesses on the text of the Corpus Juris. The evidence is printed with the Report. We are grateful to all those who assisted in the enquiry.

2   We refer for convenience to the Community's finances and budget. Strictly speaking the budget is the budget of the Communities. Each of the three Treaties establishing the Communities (ECSC, EC and Euratom) makes provision for a budget or budgets. They are brought together as "the budget of the European Communities" by the Financial Regulation. The Treaty on European Union provides for administrative and operational expenditure relating to the Second (Common Foreign and Security Policy) and Third (Police and Judicial Co-operation in Criminal Matters) Pillars to be charged to "the budget of the European Communities", except in the case of operational expenditure where the Council acting unanimously decides otherwise. Special rules also apply in relation to expenditure arising from operations having military or defence implications. Back

3   The Fight Against Fraud. Annual Report 1997, p.7. Back

4   Special Report No 8/98 on the Commission's force specifically involved in the fight against fraud, notably the 'unité de coordination de la lutte anti-fraude' (UCLAF). [1998] OJ C230/1, at para 7.5. Back

5   There are two principal regulations providing a framework for control, reporting and on the spot inspections - Council Regulation (EC) No 2988/95 and Regulation (Euratom, EC) No 2185/96. These complement and supplement regulations (some long-established) dealing with a specific sector (eg Agriculture) or subject matter (eg Structural funds). Back

6   The subject of our earlier report, Mutual Assistance in Criminal Matters, 14^th Report 1997-98, HL Paper 23. Back

7   Because of national differences in national VAT rates and coverage adjustments are made in order to determine a common "VAT base" to be applied by all Member States. A "call in" rate, currently 1%, is then applied to the VAT base and further adjustments made where necessary (eg to correct previous calculations). Back

8   The Commission audits Member States' accounts and makes financial corrections before clearing them. Back

9   The Intervention Board administers market regulation and production support measures of the Fund. It buys, sells and stores agricultural goods into and out of intervention, such as butter, beef and cereals. It supports traders who produce, process, store, export or import agricultural goods by payment of aid. It issues import and export licences for agricultural goods and pays refunds on exports or, if the market conditions are adverse, raises levies. It acts as a co-ordinating body in respect of other UK paying agencies, including the four agriculture Departments and others such as the Forestry Commission and the Countryside Commission (Q 105). Back

10   In addition the diversion in the United Kingdom or in another Member State of goods which have ostensibly been exported may lead to the loss of CAP export refund revenue and/or of duties and taxes. Back

11   This and the other examples given in this paragraph are taken from cases described in the Commission's The Fight against Fraud Annual Report 1997. Back

12   Special Report No 8/98 on the Commission's force specifically involved in the fight against fraud, notably the 'unité de coordination de la lutte anti-fraude' (UCLAF) [1998] OJ C230/1. Back

13   Special Report No 9/98 concerning the protection of the financial interests of the European Union in the field of VAT on intra-Community trade. Back

14   Special Report No 20/98 on the audit of physical checks of agricultural products receiving export refund. Back

15   In 1994 the Parliament provided for 50 new investigative staff posts in the budget and postponed the discharge of the 1992 budget to compel the Commission to act. Back

16   The Court of Auditors was particularly critical of the following: shortcomings in internal organisation and in relationships and co-operation between UCLAF and the Member States; the fact that the Commission's databases were not fully operational or effective; lack of management information and the absence within UCLAF of standard rules for the opening, conduct and conclusion of proceedings; poor discipline in the handling of documents on files; failures in the operation of the "black-list" relating to agricultural expenditure; security problems within UCLAF; incomplete and misleading statistical information in UCLAF's annual reports; the staffing arrangements of UCLAF; failure of the Commission to adopt a "zero-tolerance policy" to fraud within the Commission; and, the Commission's denial of full access to documents to UCLAF. Back

17   First Report on Allegations regarding Fraud, Mismanagement and Nepotism in the European Commission. Paras 9.4.18-19. Back

18   COM (1998) 717 final. Back

19   In particular, the Fraud Office would exercise the power to carry out inspections and checks conferred by Regulation (EC, Euratom) No 2185/96 and would carry out the inspections and checks referred to in Article 9 of Regulation (EC, Euratom) No 2988/95. Back

20   [1995] O.J. C316/48. Back

21   For example, the Convention, drawn up on the basis of Article K.3(2)(c) of the Treaty of European Union, on the Fight Against Corruption Involving Officials of the European Communities or Officials of Member States of the European Union (1997), and the Criminal Law Convention on Corruption (Council of Europe, 1999). Back

22   [1997] O.J. C251/1, point 14. Back

23   Germany and the Netherlands. Back

24   Law Com No 180. 27 April 1989. Back

25   In the EU: in Belgium, France, the Netherlands, Germany, Spain, Italy and Ireland. Elsewhere: in Hong Kong and Russia. Back

26   14^th Report, Session 1997-98. Back