House of Lords - European Communities

Select Committee on European Communities Ninth Report

PART 3: OPINION

105. The Select Committee has always taken a close interest in the protection of the European Union's financial resources[35]. Most recently, when discussing how the EU should be financed in future[36], we noted that both traditional own resources and the VAT based resource[37] were inherently susceptible to fraud. We concluded that (for this and other reasons) there would be considerable advantages in abolishing them, leaving only the existing GNP based resource as a source of income for the EU. The March 1999 Berlin European summit did not go so far as abolition, but did make changes to the own resources system designed to reduce fraud[38]. We therefore see some hope that fraud on the income side may decrease, but opportunities for it will remain until more drastic changes are made to the system.

106. On more than one occasion the Committee has drawn public attention to the fact that it is Europe's honest taxpayers and traders who bear the huge sums lost to fraud against the Community budget. Our earlier reports stressed the need for the Member States and the Community institutions, and in particular the Commission, to do more to put its own house in order. That necessity has been underlined in the Report of the Independent Experts delivered to the European Parliament and Commission on 15 March. But the responsibility of the Commission (and indeed the other Community institutions) to eliminate fraud and corruption is only part of the picture. The vast majority of fraud on the Community's finances is committed by parties operating outside the institutions, in the Member States and elsewhere.

Where does responsibility lie?

107. Member States have the primary responsibility for the detection, investigation and prosecution of fraud within their own territory. The legal obligations under the Treaty are clear. Since Maastricht Member States have been required to "take the same measures to counter fraud affecting the financial interests of the Community as they take to counter fraud affecting their own financial interest". They are also required to co-ordinate their action aimed at protecting the Community's financial interests. They must organise, together with the Commission, "close and regular co-operation" between their competent authorities. The Amsterdam Treaty has strengthened the requirement for the Community and Member States to counter fraud and any other illegal activities affecting the financial interests of the Community (Article 280 EC). An additional power has been given to the Council to legislate in order to deter fraud and provide effective protection in the Member States. The scope of this power is discussed below (para.112).

European Judicial Area

108. Member States have come a long way since the Treaty of Rome. A large measure of economic integration has been effected, expedited by the Single European Act and the notion of the Single Market. That has brought in its wake a substantial degree of harmonisation of social, environmental and other consumer orientated matters. The Maastricht Treaty established the European Union, bringing with it greater co-ordination of a variety of other matters closely affecting the citizen, under the heading of co-operation in the fields of justice and home affairs. Under the Amsterdam Treaty the Union has set itself an objective (among others) "to maintain and develop the Union as an area of freedom, security and justice …".

109. It is within this context of a more integrated Union that the idea of a European Judicial Area has developed. Within this area, "magistrates would be able to seek and exchange the information they need to pursue their investigations without obstacles save the requirement to uphold the law"[39]. The Corpus Juris is perceived as an element of a European Judicial Area, though its scope is limited to the protection of the financial interests of the Community. The Corpus Juris would not, however, remove the autonomy of national judges in other matters or superimpose a Community criminal court.

Problems identified

110. It is generally agreed that substantial difficulties exist in prosecuting frauds on Community funds in national courts. National criminal laws and procedures are essentially territorial in scope. Problems may arise by virtue of the absence of or differences in substantive criminal laws, rules of evidence, procedural rules and practice. Few Member States have laws specially directed at prosecuting such frauds. They do not all have laws which enable such frauds to be prosecuted extra-territorially. While there exists a good measure of practical co-operation between investigating authorities, conducting enquiries through a third person is an inferior method of investigation. Further, the legal mechanisms for collecting evidence from other jurisdictions are out-dated. They do not always enable evidence to be obtained in a form acceptable to the trial court. The process of negotiation and adoption of international agreements to harmonise substantive laws and procedures is notoriously slow. Political enthusiasm to secure agreement is not always matched by an equal will or ability to ratify speedily. It is not surprising therefore that more radical solutions, such as the Corpus Juris, are being examined and debated. But our investigation has shown that this particular solution is objectionable on a number of grounds, which we examine in the following paragraphs.

THE CORPUS JURIS WOULD CHANGE LAWS AND PROCEDURES

111. Within its own particular field the Corpus Juris would involve major departures from the criminal laws and procedures of the United Kingdom. New offences would be created, some more extensive than existing provisions. In particular the notion of fraud would be enlarged from the existing concept, which is that of conscious dishonesty, to encompass negligent acts and recklessness. Witnesses were critical of this and other aspects of the offences set out in Part 1 of the Corpus Juris (Criminal Law). But the more fundamental and strongest objections related to Part II (Criminal Procedure). The approaches taken in the United Kingdom to the investigation and prosecution of crime are quite different in several respects from those in other Member States and the model proposed in the Corpus Juris. Under the latter, for example, the functions of investigation and prosecution of offences and execution of sentences would be combined in the hands of a European Public Prosecutor (EPP). The trial would be in a national court but before a specialist judge, with no jury. The Commission could be involved as a Apartie civile@ in the proceedings.

112. The procedure in the Corpus Juris seeks to marry the inquisitorial and adversarial/written and oral traditions of the Member States, though the result is probably closer to the Continental European than the Anglo-Saxon model. In our view, there would need to be significant added value to justify changes of such magnitude.

THE CORPUS JURIS IS NOT POPULAR

113. What seems clear from the evidence of the majority of our witnesses is that there is little enthusiasm for the Corpus Juris in this country. The Committee has, however, been concerned about the way in which the Corpus Juris has been portrayed in some sections of the press. Headlines such as "Alarm over Euro-wide justice plan"[40] and "Freedom's flame flickers"[41] may startle the reader and pander to prejudice. It is not helpful to indulge in such hyperbole. The Corpus Juris is a serious attempt to tackle a real problem where national laws alone seem to be failing the citizen. The Committee has therefore sought to establish the reasons for the opposition to the Corpus Juris. What are the real substantive objections? Are they grounded in practice, in principle or in both?

114. It is important that there should be no misunderstanding about the status and quality of the text of the Corpus Juris. Its authors have, with commendable frankness, acknowledged its possible shortcomings and have said that it should be treated as a (very) green paper. They must be thanked for their endeavours. A text helps to make the ideas more concrete and ascertainable. It also makes it easier to focus on the technical and practical issues. Whatever its defects, the Corpus Juris merits critical impartial analysis.

THE CORPUS JURIS LACKS A PROPER TREATY BASE

115. A preliminary, but important, issue is whether the Corpus Juris can be accommodated within the existing Treaty provisions. Under Article 280(4) of the amended EC Treaty, the Council can adopt measures "in the fields of the prevention of and fight against fraud affecting the financial interest of the Community with a view to affording effective and equivalent protection in the Member States". But such measures "shall not concern the application of national criminal law or the national administration of justice". This proviso, in the Committee's view, precludes the adoption of the Corpus Juris in the form of an EC instrument under Article 280(4) and also under Article 308 EC. We do not doubt that the Corpus Juris would affect the application of national criminal laws and procedures.

116. Even if there were the power to adopt the Corpus Juris under the EC Treaty, it would have to pass the tests of subsidiarity and proportionality. These two principles of Community law are given legislative expression in Article 5 EC. Subsidiarity demands that the Community shall take action "only if and insofar as the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale and effects of the proposed action, be better achieved by the Community". Article 5 EC also requires the observance of the principle of proportionality. Community action "shall not go beyond what is necessary to achieve the objectives of this Treaty". The meaning and effect of both principles are amplified in a Protocol agreed at Amsterdam[42].

117. In the present context the key sentence, in our view, is to be found in paragraph 7 of the Protocol. "While respecting Community law, care should be taken to respect well established national arrangements and the organisation of Member States' legal systems". There has to be a real and demonstrable need for the approach set out in the Corpus Juris to justify such radical change in national criminal laws and procedures as it would entail. The Committee is not persuaded that such a need exists or that it has been shown that it cannot be met by other, less drastic, measures if there is the political will to implement them.

118. The provisions of Title VI of the Treaty on European Union provide another possible legal base for the Corpus Juris. Article 29 TEU envisages common action among the Member States in the field of police and judicial co-operation in criminal matters to combat, inter alia, corruption and fraud. Such action might include, under Article 31(e) TEU, establishing minimum rules relating to the constituent elements of criminal acts and penalties in the field of organised crime. It might be possible to bring certain elements of the Corpus Juris within the scope of Article 31 TEU. But the Committee doubts whether that Article would be a sufficient legal base for its wholesale incorporation. The creation of the EPP would, for example, almost certainly require Treaty amendment.

THE CORPUS JURIS IS NOT PRACTICAL

119. In principle it is desirable that all those accused in relation to a particular offence should be prosecuted under one (and the same) law and all in one forum. It is fairer to have common rules and for all those involved to be tried in the one jurisdiction and sentenced in the same jurisdiction, so that equal justice can be done amongst all of them. The notion of a separate substantive law and procedure for Community fraud is not inherently objectionable. But it is, in our view, seriously questionable whether the scheme, as currently developed in the Corpus Juris, is feasible. The same course of fraudulent conduct could result in two legal regimes for fraud cases having to work side by side in the same jurisdiction. Witnesses pointed out the practical problems surrounding the co-existence of two legal regimes and the relationship between the EPP and the national prosecutor.

120. The Corpus Juris contains two key rules governing its relationship with national laws and procedures. The first, in Article 19, is that the EPP has control over all cases involving a Corpus Juris offence. He must be told of them, and can take them over. He decides whether to prosecute or to close a case. The EPP is also given the power to refer cases "which are not serious or which affect principally national interests" to the national authorities (Article 19(4)(a)). This approach is not trouble-free. As presently drafted the Corpus Juris would potentially apply to a large number of cases, many of which would not, except for the fact that they impact upon the income of the Community or its expenditure, have any cross-border or international dimension. Investigators and prosecutors, working with limited resources, would be subject to competing priorities and tensions would almost certainly develop. Witnesses also pointed out the potential problems relating to collection of evidence under different sets of rules. Creating different rules of evidence for different types of case, depending on the offence involved, would complicate the investigation and prosecution of fraud.

121. The second rule is contained in Article 17(2). Like Article 19, it seeks to avoid conflict between European and national criminal law by giving preference to the Corpus Juris offence. Where an act constitutes an offence under the Corpus Juris and national law "only Community regulations are to be applied". This would appear to leave no discretion to local investigators and prosecutors to take proceedings against the offence under national law. Witnesses questioned the implications, particularly as regards the effective prosecution of fraud. Article 17(2) would preclude a prosecution under national law even where under that law there was a greater likelihood of successful conviction. This makes little sense. Article 17(2) appears to owe more to theory, and possibly ideology, than practicality.

THE CORPUS JURIS IS DEFECTIVE AND INCOMPLETE

122. Our enquiry has revealed certain significant shortcomings in the Corpus Juris. The summary of evidence in Part 2 of this Report describes the principal concerns of our witnesses. Their more detailed criticisms are set out in Appendix 4. In this section we would point out four matters which, in our view, are particularly important.

123. First, there is the position of the European Public Prosecutor, described by one of the authors as the "key point" of the proposal. The Corpus Juris would invest enormous power in the hands of the EPP. He (or more accurately the EDPP and the EDelPPs) would be able to exercise substantial coercive powers in relation to the citizen and in doing so would be independent of national governments and the Community institutions. Certain of the EPP's activities would be supervised by the "judge of freedoms". Yet, except in disciplinary proceedings before the European Court of Justice and possibly by way of judicial review before national courts, he would not be accountable to anyone. There seems to be general agreement that this is politically unacceptable. The EPP should be answerable to a democratically elected body, national parliaments and/or the European Parliament. The latter has acknowledged the sensitivity of the notion of a European Public Prosecutor and has proposed that the EPP might be introduced gradually, initially to co-ordinate anti-fraud procedures and to superintend Europol. We would need to be persuaded that such a role was necessary and could not be carried out by an existing body or bodies.

124. Secondly, the scope of application of the Corpus Juris would be limited to the territories of the Member States. Witnesses, and especially the Commission (UCLAF), have emphasised the international nature of fraud against the Community's finances and the increasing involvement of organised crime. Further, the fraudulent conduct or activity in question does not necessarily take place solely within the Member States. Elements of the offence may occur in third States. Witnesses, evidence, assets may be situated outside the Union. The Corpus Juris does not address this. The EPP would not be able to request mutual legal assistance from countries outside the European Union.

125. Thirdly, the Corpus Juris is not a complete code. This is expressly recognised. Article 35 performs a sweeping-up operation, providing that national law should fill any lacunae. These matters are not identified and listed, but witnesses noted, for example, that the Corpus did not contain any rule on the standard (as opposed to the burden) of proof. It is inevitable that recourse will have to be had to national law in order to make the Corpus Juris work in practice. At this stage it is difficult to predict exactly what this will entail and how far it would require domestic rules to be reviewed and adapted. What is virtually certain, however, is that it is likely to be burdensome for all Member States. Moreover, the Corpus Juris would produce an inherently incoherent system throughout the European Union.

126. Last but not least, the rights of the defendant seem largely to be set indirectly by reference to (minimum) international standards. This is in marked contrast to the detail given to the powers of the prosecution. We see a real danger that the Corpus Juris will be too much prosecution driven, with insufficient account being taken of the rights of the defence. The accused has a place in an "area of freedom, security and justice".

127. It has been said that the Corpus Juris would, within its sphere of competence, abolish habeas corpus. The Government did not accept this. Nor do we, as the legality of European warrants of arrest would be open to judicial scrutiny. A particular concern, however, is the powers of remand given to the agents of the EPP. The EDPP or an EDelPP can request a person's remand in custody without charge or remand on bail for a period of up to six months, renewable for three months, where there are reasonable grounds to suspect the accused has committed a Corpus Juris offence or good reasons for believing it necessary to stop him from committing such an offence or from fleeing after committing it (Article 20 (3)(g)). Though it would be in the discretion of the national judge to decide the matter, the prospect that an individual may be held in custody, without charge, for up to nine months is totally unacceptable.

A better approach

WOULD LIMITING THE SCOPE OF THE CORPUS JURIS HELP?

128. We have considered to what extent the Corpus Juris might be more acceptable and workable if it were to be limited in some way. The authors were attracted by the notion of trying to formulate a jurisdictional dividing line which would have the effect of limiting the ambit of the Corpus Juris to genuine and serious international cases. Seriousness might be fixed by reference to the monetary value of the alleged fraud. But finding easily identifiable, objective and operable criteria to define what is "genuinely international" would be more difficult. Moreover it has to be recognised that such a rule would only limit the scope of the Corpus Juris and would not remove the other problems, political and practical, identified by our witnesses.

THE 1995 CONVENTION

129. The Convention on the protection of the European Communities' financial interests 1995 has so far been ratified by only two Member States.[43] We have not been able to ascertain all the reasons for the others' delay. But one reason was that some Member States were awaiting completion of the Explanatory report on the Second Protocol. Progress has been made here. The report was adopted at the Justice and Home Affairs Council on 12 March 1999. As regards the position of the United Kingdom, ratification of the 1995 Convention has been delayed mainly because of the need to bring into force Part 1 of the Criminal Justice Act 1993, which is necessary to enable compliance with Article 4 of the Convention.

130. It is important that all Member States should ratify the Convention and its Protocols as soon as possible. The Government has recently acted to bring into force Part 1 of the 1993 Act, thus freeing the way for the United Kingdom to ratify the Convention. The ratification is expected to be completed by September[44]. Once the United Kingdom has ratified, it will be in a better position to encourage other Member States to speed up their process of ratification.

PRACTICAL CO-OPERATION

131. We are in no doubt that practical co-operation offers the best way forward for the foreseeable future. Witnesses reported that things are getting better but accepted that there is room for further improvement. Three recent developments deserve special mention. First, a Judicial Network has been set up. It is understood to be working well and that it is to be developed further. Secondly, a system of peer review, an initiative proposed and adopted in 1998 under the United Kingdom Presidency, is now under way. This should expose shortcomings and provide a spur to Member States to act more effectively. Thirdly, there is the Joint Action, again adopted in 1998, on good practice in mutual legal assistance in criminal matters. Member States are due to deliver their first responses shortly.

132. Notwithstanding these initiatives, there seems to be general agreement that more could and should be done to improve mutual legal assistance and judicial co-operation. Witnesses put forward a number of practical suggestions, for example greater education and understanding of each others laws and procedures. This would not require legislative action, and probably does not have substantial resource implications. Other ideas, such as extending the use of Fiscal Liaison officers, might require a moderate increase in resources, but should also be seriously considered. In passing we note the particular criticisms made by witnesses of the performance of the United Kingdom Central Authority. The Minister thought that the UK's performance was as good as that of other Member States and indeed better than some of them. However, she indicated that a review of the Central Authority and its procedures is to be put in hand. We welcome this step.

EU CONVENTION ON MUTUAL LEGAL ASSISTANCE

133. The negotiation of an EU Convention on Mutual Legal Assistance looks to be close to conclusion, though certain sensitive provisions relating to interception of telecommunications remain to be decided. As regards the matters covered by the Corpus Juris, the Convention should go some way to alleviating some of the problems relating to the collection and provision of evidence in trans-national cases, in particular by enabling evidence to be collected in accordance with the procedures of the requesting State. But the Convention will not, as a general rule[45], enable foreign witnesses to be compelled to give evidence, a problem that affects both prosecution and defence at the moment. Adoption of the Convention by the Union will nevertheless be an important step forward.

MUTUAL RECOGNITION OF COURT DECISIONS

134. The Government has proposed the concept of "mutual recognition of court decisions" and has recently produced a discussion paper entitled "Mutual Recognition of Judicial Decisions and Judgments in Criminal Matters". The Government recognises the advantages of approximation of criminal laws, but notes that "full harmonisation of all criminal offences is not a realistic prospect; moreover differences in criminal procedures will continue to impede judicial co-operation. Member States will continue to have different systems of criminal law for the foreseeable future". It suggests that mutual recognition might provide a shorter route to improving co-operation, without fully aligning legislation. The aim would be "to develop a regime where each state recognised as valid the decisions of another Member State's judicial authorities with the minimum of formality".

135. Of particular relevance to this enquiry is the proposal that mutual recognition would extend to judicial decisions taken before as well as after conviction. The abolition of dual criminality restrictions, expedited extradition procedures based on judicial backing of arrest warrants, and mutual recognition of judicial orders or warrants for the tracing, production and seizure of evidence could all assist in the investigation and prosecution of fraud. The Government recognises that there would have to be agreed minimum standards in the exercise of coercive powers and that full mutual recognition "would have to rest on the presumption of directly comparable systems of justice and protection for the individual".

136. The Committee welcomes the discussion paper and agrees with the Government that the aim should be "to pursue a practical and needs-based approach". We believe that a progressive approach, identifying short, medium and long term goals, and which takes account of political realities, is most likely to produce real results.

Eurobail

137. In the context of our consideration of the detention rules of the Corpus Juris Fair Trials Abroad exposed a more general issue. The application of remand and bail rules where the accused is from another Member State may in practice give rise to discrimination. The non-resident is unlikely to get bail. If Fair Trials Abroad is right (and we have no reason to doubt them on this) there is a serious problem that may well increase. It is not restricted to fraud cases. We are concerned that, apparently, no action is being taken. This is an issue, which, in our view, the European Union should be addressing.

138. We therefore urge the Government to take the initiative and seek to persuade the Union to undertake the necessary research across all Member States in order to ascertain the nature and size of the problem. Disparity in the treatment of defendants may be due in part to a concern on the part of the bail judges that existing procedures are inadequate to ensure that residents of another Member State who are granted bail will fulfil the conditions of bail, especially that of returning to the court promptly when required to do so to face trial. The Union should consider whether existing procedures could be strengthened to meet this concern. Fair Trials Abroad has itself devised a Eurobail system (described briefly at para 81, above). A preferable solution might be a European Union regime for the mutual recognition and enforcement of conditions of bail, which, in our view, might be simpler to operate and more attractive to Member States. This might be taken forward in the context of the Government's discussion paper on the mutual recognition of court decisions, mentioned above (para 134).

Tackling the problem at source

139. Our primary purpose has been to look at the problems surrounding the investigation and prosecution of fraud on the Community's finances. We recognise the need to try to eliminate, or at least minimise, fraud at source. This has become a matter of greater political urgency in the light of the recent Report of Committee of Independent Experts.

140. The Prime Minister set out, on 16 March[46], ways in which the Commission might be reformed:

"In the short term, reform must include at least the following: a complete overhaul of the approval and auditing procedures for financial control; a new system for financial management and spending programmes; an entirely new procedure for the awarding of contracts for the provision of services with a new management system to oversee it; reworking of the whole disciplinary procedure so that staff in the Commission know exactly what is expected of them and what will happen if they fall short of those expectations; and a new system of accountability in the bureaucracy so that each individual holding a position of responsibility is fully accountable for the budget and the measures that he or she manages.

In addition, we also need an entirely new framework for fighting fraud and financial irregularities. We have long been advocates of the appointment of an independent investigation office which has full access to documents and officials, and the powers that it needs."

141. What the Prime Minister said accords very much with recommendations made in our earlier reports. Their general tenor, as already mentioned, has been that the Commission should do more to put its house in order[47]. Witnesses referred to the importance of the Sound and Efficient Management 2000 Initiative. As the National Audit Office has said, it is important that pressure is kept up to ensure the effective implementation of this initiative[48]. Other detailed proposals are likely to emerge when the Committee of Independent Experts makes its Second Report[49], due in September.

142. Reference has also been made to "fraud-proofing" Community legislation. This requires anti-fraud considerations to be taken fully into account when new policies are being developed and new or revised Regulations are proposed. The Community has such a policy. But it was only introduced recently and the Court of Auditors has found that "fraud-proofing" has had limited impact so far[50]. More generally, major work is currently being undertaken, under the heading of "Better Law Making", to improve the quality of Community legislation. That improvement, including robustness against fraud, will require a considerable concerted effort, and sometimes restraint, on the part of all those involved in the negotiation and adoption of Community legislation.

Conclusion

143. Is the Corpus Juris a realistic way forward? It was the Minister's clear view that it is not. We are inclined to agree with her. We recognise the work that has gone into this imaginative project so far, and we believe that it would be worthwhile for it to continue. It would be rash at this stage to rule out any possibility of its future value. But we are not persuaded that the Corpus Juris offers, at the present time, a practically feasible or politically acceptable way forward having regard to the state of the Union and public opinion. Part II (Criminal Procedure) of the Corpus Juris would undoubtedly present greater difficulties for the United Kingdom than Part I (Criminal Law). In particular, the creation of a separate prosecution authority with no accountability to Parliament would raise very difficult issues.

144. It is generally recognised that the present text of the Corpus Juris is not a text for negotiation, not least because it has no formal status. Much more work would need to be done to it. In our view it is most important that the detailed study being undertaken on the compatibility of the Corpus Juris with national regimes should be completed and put into the public domain. Beyond that, in the short term, energy and resources would be better directed towards improving mutual legal assistance and practical co-operation. Moreover, recent developments in the Commission should not deflect Member States from implementing measures, starting with the 1995 Convention, to tackle fraud on the Community budget occurring in their own domain. However, if the steps which should be taken to improve assistance and co-operation do not materialise soon or prove less effective than is hoped, it may be necessary to reconsider the question of a special regime for dealing with fraud on the Community's finances and, possibly, other forms of cross-border fraud within the EU. In that event, any formal proposal should address the substantial concerns and criticisms raised by our witnesses.