HC Deb 27 February 1990 vol 168 cc182-7

[Relevant document: un-numbered Explanatory Memorandum submitted by Her Majesty's Treasury on 4th December 1989 on anti-fraud policy: Commission work programme.]

6.38 pm
The Economic Secretary to the Treasury (Mr. Richard Ryder)

I beg to move, That this House takes note of the Annual Report of the Court of Auditors of the European Communities for 1988 and European Community Document No. 4582/90 relating to action against fraud; and approves the Government's efforts to press for value for money from Community expenditure. The two reports referred to in the motion will be discussed at ECOFIN on 12 March. I hope that the debate will help to show the Commission, and our partners, that the Government have the full backing of the House as we spearhead efforts to get to grips with fraud. It may be helpful to remind the House of the backcloth to the two reports.

The Commission's report on action against fraud stems in no small part from a growing anxiety here in Britain. This House has shown a major interest in the subject, on which we have held valuable debates. My hon. Friend the Member for Southend, East (Mr. Taylor), the hon. Member for Newham, South (Mr. Spearing) and my hon. Friends the Members for Holland with Boston (Sir R. Body) and for Stafford (Mr. Cash) have shown a particular interest in the subject. The House of Lords Select Committee on the European Communities published an excellent report on "Fraud Against the Community" in February 1989 and the Government's political determination to tackle fraud has never been in doubt. We have, with the full support of the House, striven to put fraud higher on the agendas of Brussels.

The British Government have ensured a higher profile for fraud in ECOFIN and other Councils of Ministers, and we will keep up our pressure to turn good intentions into concrete changes for safeguarding public money. The annual ECOFIN debate of the Court of Auditors report began in 1985, largely at United Kingdom instigation. The present initiative against fraud was launched by ECOFIN in March 1989, and followed discussion of a United Kingdom paper.

Our recommendations, accepted by the Commission, included revision of arrangements for monitoring and surveillance of common agricultural policy transactions involving the payment of export refunds to traders, adjustments to improve the monitoring of systems for storing agricultural products which have been taken into intervention, better scrutiny of the accounts of firms and traders which receive payments under CAP, simplification of Community legislation in relevant areas, and a review of the supervisory arrangements which member states were required to introduce in the regulations governing the expanded structural funds.

Those recommendations were reinforced at a meeting of the Commission's committee on fraud prevention, known as UCLAF, in May when another United Kingdom paper examined this work and suggested further work for the future. It emphasised the need for a long-term programme of action and laid particular stress on the need to improve systems for combating fraud. We advocated regular and comprehensive examination of control systems consistent with firm financial management control.

At our instigation, fraud featured both at ECOFIN and at the European Council at Madrid in June. ECOFIN welcomed the Commission's programme of work on fraud, called for early action on export refunds and intervention storage and asked all member states to instruct their ministerial colleagues to intensify the fight against fraud. The European Council in Madrid emphasised the need for firm action, welcomed the work programme and instructed the Council of Ministers to decide quickly on proposals from the Commission to combat fraud.

Britain has always been in the vanguard in the fight against fraud. The discussions and decisions that I have outlined owed a great deal to our political will and to the importance that we and the entire House attach to it. Sadly, the available figures do not suggest that all other member states take the problem as seriously as Britain does. We reported 163 cases of CAP fraud to the Commission in the first three quarters of 1989, whereas Greece and Portugal reported none. Regrettably, reporting standards differ between member states which makes comparisons difficult.

Dame Elaine Kellett-Bowman (Lancaster)

Does my hon. Friend agree that the maddening aspect of this is that, because we track down fraud assiduously and come up with figures, other people think that we are worse than they are, which is most misleading and unfair when we have far less fraud and are much more careful about it?

Mr. Ryder

My hon. Friend draws attention to an important point which she raised in the recent agriculture debate. We certainly believe that Britain is as assiduous as any other European Community country in identifying and reporting fraud.

Dr. Norman A. Godman (Greenock and Port Glasgow)

Is the Minister satisfied that Community fisheries policy funds can no longer be siphoned off by unscrupulous fishing interests in certain European Community littoral states?

Mr. Ryder

Fraud is such a complex issue that one can never be certain about anything when it comes to some of the ways in which people in Europe can commit fraud. The British Government, the Commission and most of our partners in the European Community have done everything possible to get to grips with this issue, especially in the past year and principally as a result of the pressure that we brought to bear in Brussels and at other Council meetings in Europe—notably the Council to which I have already referred, which met last June in Madrid. I leave it to hon. Members to draw their own conclusions from the figures that I have given, which show that our reporting of fraud seems to be far more accurate than that of some other countries.

I wish to highlight four areas in which concrete progress has been made. First, a new export refund monitoring regulation toughens up existing arrangements by requiring customs officers in all member states to inspect in person a minimum proportion of items on which export refunds are claimed. The proportion will rise to 5 per cent. by 1992. This measure is a direct response to last year's Court of Auditors report which catalogued numerous examples of frauds relating to export refunds. In a sample of 95 export consignments examined by the court in one member state, only one had been subject to random examination; and that was fraudulent.

Mr. Ron Leighton (Newham, North-East)

Does the Minister agree that that is shocking, and that if a private company was involved in that amount of fraud it would soon be up in court and prevented from continuing to trade?

Dame Elaine Kellett-Bowman

That is why we are dealing with this.

Mr. Ryder

As my hon. Friend the Member for Lancaster (Dame E. Kellett-Bowman) observes from a sedentary position, that is precisely why we are dealing with this matter. As I have said, the British Government have been in the vanguard and have spearheaded the efforts of the European Community to get to grips with the problem. I only wish that others in Europe took the issue as seriously as we do. A considerable amount of the progress in the past 12 months has been made as a result of the efforts undertaken by Ministers in many Council meetings in Brussels. We have also received the support and approval of the Commission.

Secondly, in its report last year the Court of Auditors said that existing documentation for export refund purposes did not provide sufficient proof that cargoes had arrived at their stated destination. The court cited the discovery in one case that two major export refund traders in different member states owned complete sets of customs stamps of the main countries with which they traded. This illustrated the danger of relying on the documentation in question—the so-called annex 2 documents—which bears no greater proof of arrival than a customs stamp. This document has now been abolished and replaced with a more secure system. Incidentally, the United Kingdom is one of only two member states that have given the Commission wholehearted support in this matter.

Thirdly, a new code of conduct defines the basis on which member states are obliged to report all significant frauds and irregularities in respect of structural fund receipts. The code specifies the information to be provided by national authorities, including information on the state of legal proceedings, and the timetable for returns.

The last of my four points concerns tougher regulations relating to the payment of own resources. For example, regulation 1552/89 requires member states to report all funds and irregularities involving more than £7,000 of own resources and empowers the Commission to carry out on-the-spot inspections at traders' premises and customs offices in member states.

Attempts have also been made to simplify the tests applied to determine whether a payment is justified. This makes sense for everyone involved in a transaction—the person claiming the payment and the organisation, such as a Ministry of Agriculture, deciding whether the payment is justified. In some areas, notably agriculture, the requirements were becoming difficult to apply, as well as being increasingly difficult to audit. A good example of what has been achieved is the scheme for export refunds of beef and veal where the number of product classifications has been reduced by more than a third and the number of frozen meat refund rates has been cut by half. That will reduce the scope for fraud based on bogus declarations of the quality of exported meat and its destination. While recognising that sensible simplification of complex rules should he supported, we shall not fall into the trap of agreeing rules which diminish our chances of preventing fraud.

Dame Elaine Kellett-Bowman

Does my hon. Friend agree that we would stand a much better chance if people from other countries inspected each other's things? An inter-EEC inspectorate, in which we do not have to adjudicate on our goods and the Dutch do not have to adjudicate on theirs, would be better because people are by nature more reluctant to identify fraud in their own country because it redounds badly on their country. Does my hon. Friend not agree that interchangeable inspectorates would be much more likely to sus out what was going on, so long as they all worked alongside one another?

Mr. Ryder

We have been making broad progress in that direction. When this subject was debated in the House a year ago, only 10 people were employed in the Serious Fraud Office in Brussels—now the number is 30. The office also has considerable powers along the lines that my hon. Friend the Member for Lancaster would like. As time goes on we shall move further in the direction in which she wants the House and the Community to go.

Mr. Anthony Beaumont-Dark

(Birmingham, Selly Oak): In countries such as Britain, which has a national Parliament, if someone engages in fraud he or she is taken to court and faces severe penalities. That is right—otherwise, fraud would prosper. What penalties have been imposed on people who have engaged in fraud abroad? Is it not true that all that happens is that one loses the payment for which one fraudulently claims? If that is the only penalty, would it not be worth having a try?

Mr. Ryder

I am not sure whether my hon. Friend would ever do that. I shall refer directly to my hon. Friend's point about prosecutions later in my remarks.

Mr. Christopher Gill (Ludlow)

rose——

Mr. Ryder

I must make progress. I have given way several times already, but shall give way for the last time to my hon. Friend.

Mr. Gill

Before my hon. Friend moves on to another subject will he consider that with beef—a product that he mentioned—the inspectorate will find it difficult to discern whether fraud has taken place. The way in which the commodity is handled, stored and generally presented defies expert identification. Even people who have spent a lifetime in the industry would be hard put to tell whether the commodity that is labelled as being in the box is actually contained in it, and whether it is a certain cut of beef or not. The only way in which my hon. Friend will ever solve the problem of fraud in that sphere is to do away with the whole system. No amount of inspectors and extra cash thrown at the problem will eliminate it because it defies even the experts.

Mr. Ryder

I know that my hon. Friend speaks with a deep knowledge of the subject. I believe that he has been in the industry all his life.

Mr. Ian Taylor (Esher)

It has made him a vegetarian.

Mr. Ryder

My hon. Friend whispers from a sedentary position that it has made my hon. Friend the Member for Ludlow (Mr. Gill) become a vegetarian.

I was beginning to have some sympathy with the point made by my hon. Friend the Member of Ludlow until to his conclusion. If he believes that there are ways in which the system can be improved in line with what we have been doing during the past 12 months, I shall be happy not only to receive his advice but to consider it before the ECOFIN meeting in mid-March, which will be attended by my hon. Friend the Financial Secretary to the Treasury.

Before we can assess the effectiveness of measures against fraud we need better information about the scale, nature and incidence of fraud, especially from some of our partners. Nevertheless, it is clear that there is widespread recognition of the problem of fraud in Europe. The Commission's report on fraud includes two significant examples. The first is a list of 132 irregularities in agriculture, totalling about £39 million. I do not for one moment believe that that represents more than the tip of the iceberg. The second example involves a legally significant Greek fraud, where maize imported from Yugoslavia was re-exported under a Greek label and payment of the agricultural levy thereby evaded. The respective powers of the member states and of the Commission are being examined as a result of the ruling by the European Court of Justice on the case which followed the exposure of that fraud.

The Commissions regard the European Court of Justice's judgment as reaffirming the power of the Commission to impose administrative sanctions to ensure compliance with Community law and the obligation on member states to take effective action to penalise fraud affecting the Community budget in the same way as fraud affecting their national budgets. We believe that the Commission's position on administrative sanctions is right and we are disappointed that some other countries do not share that view.

We support the imposition of administrative penalties, provided that the penalties are automatic and In proportion to the scale of error involved and that the arrangements do not involve any form of judicial process. An attempt to distinguish between genuine mistakes and deliberate attempts to defraud should not be undertaken by the Commission as that would be an unacceptable intrusion into role of the judiciary. The Commission may publish a regulation setting out its view. That is unnecessary, but we will support it if it is the only way 10 improve financial discipline.

We agree with the general direction of the Commission's programme of work on fraud for 1990, but we want to see a clear timetable, with dates for completion of the work. We want concrete evidence of improvements in the reporting of fraud and in the controls carried out by member states and resolution of the question of administrative penalties in agriculture. We also want early introduction of a binding code of conduct for the structural funds.

With regard to legislation, we shall maintain pressure on the Council to react to Commission proposals quickly. Indeed, the European Council underlined the need for swift action last year in Madrid.

I have set out the background to and some of the main themes of the Commission's report, "The Fight Against Fraud". Thanks in no small part to our efforts, progress was made in 1989, but British pressure will be maintained at all levels and within every Department.

With regard to the Court of Auditors report, I appreciate the court's thoroughness and professionalism in preparing the report, which highlights ways in which policies can be improved and control systems tightened up. The court comments on the clearance of accounts—the procedure whereby the Commission checks the reliability of member states' annual declarations of expenditure on agricultural support. It also decides the amounts charged against the budget. The Commission disallows expenditure when payments have not been made in accordance with the scheme's rules. Expenditure which is not recognised is disallowed. It then has to be repaid to the Community.

The principle of disallowance is central to the control of Community funds. The Commission has drawn the attention of member states to the fact that proper checks are not being carried out on Community expenditure. France faced disallowances—in effect a penalty of £80 million—for inadequate control over payments of livestock premiums in 1986 and 1987. The United Kingdom was penalised by £3.3 million in 1987 for late collection of clawback debts and poor controls over the reliability of traders' export declarations.

The Court of Auditors criticises the slow introduction of proper audit systems and recommends that the Commission look at the resources required to carry out this task effectively, and we agree. On the structural funds, the Court of Auditors raises questions about additionality and transport infrastructure. The United Kingdom strongly supports the court's work, but in neither of those areas do we agree with what is said about the United Kingdom.

On additionality, the court alleges that expenditure is not being devoted to the projects intended and that expenditure from the Community budget should not simply replace national expenditure. We rebut those allegations. Every ecu that we get from the funds goes to the programme or project for which it is intended. Public spending plans are set after taking account of likely levels of receipts from the Community budget. Those receipts enable public spending in the United Kingdom to fund more projects than would otherwise have been the case.

The court also names the United Kingdom as one of the member states in which transport infrastructure moneys have merely subsidised projects which would have——

It being Seven o'clock, and there being Private Business set down by direction of THE CHAIRMAN OF WAYS AND MEANS under Standing Order No. 16 (Time for taking Private Business), further proceeding stood postponed.