HC Deb 27 February 1990 vol 168 cc225-45

Postponed proceeding on Question,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, resumed.

10 pm

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

If the House had been fuller, I should have been tempted to repeat my 25-minute speech to refresh hon. Members' memories on the important points that I have made to date. Instead, I shall leave hon. Members to read my remarks in Hansard and I shall draw my own observations to a close as I see the hon. Member for Newham, South (Mr. Spearing), who has been waiting patiently to speak, as has the hon. Member for Islington, South and Finsbury (Mr. Smith).

The Court of Auditors names the United Kingdom as one of the member states in which transport infrastructure moneys have merely subsidised projects that would have gone ahead anyway. We reject that accusation. We also think that the court has exceeded its remit in suggesting that the transport infrastructure fund might be treated differently within the budget. While we recognise the valuable work of the court, we believe that it should confine its remarks to the remit that it has been given—namely, to questions of implementation and effectiveness. It is important that Community institutions should concentrate on carrying out their specific functions properly. rather than attempting other tasks outside the scope of their responsibilities.

The Court of Auditors regards the role of the financial controller—covering both formal executive powers on the one hand and powers of inspection, opinion and advice on the other—as ill defined. We agree that it is important to clarify the responsibilities of the financial controller. The new financial regulation—introduced at our instigation—will provide a more precise definition of those responsibilities.

The new financial regulation is another example of Britain's determination to get results in this matter. It sets out the rules for implementing the Community budget. We have succeeded in getting the rules redefined to improve the framework for sounder financial management. In effect, the regulation introduces the basic principle of financial management initiative. The package of changes in the regulation is long overdue.

I must re-emphasise the results of our efforts during the past year. The basis for systematic reporting of frauds in all the main areas of revenue and expenditure has been laid. We shall now have a much better basis for judging whether those member states that report little or no fraud are bastions of lawfulness or havens of maladministration. Numerous control systems have been tightened. For example, under new rules for the post-payment audit of common agricultural policy transactions, the minimum number of checks by member states of the books of major firms and trades will increase by 40 per cent. on average.

We have started to simplify existing rules and regulations to ensure that regimes can be properly policed and audited. For example, last year's report of the Court of Auditors noted that special controls were necessary in respect of meat from adult male cattle. The number of refund categories applying to such meat has been significantly reduced over the past year. We have introduced tighter financial management, the new framework which reflects United Kingdom experience in this area over the past decade. Above all, we have kept fraud at the forefront of the European agenda and have been greatly assisted in that task by the support and encouragement of hon. Members.

10.4 pm

Mr. Chris Smith (Islington, South and Finsbury)

I open with my perennial complaint about the ability and opportunities of the House properly to scrutinise European Community activities and our Ministers' conduct within the European Community structures. Usually, we have a debate of only one and a half hours, which starts at 10 pm. That was true of the debate some weeks ago on the European Community budget for the forthcoming year.

Today, we have had a variation of that phenomenon. We have had a bifurcated debate. As usual, it was truncated, but it was also split into two parts. It must be unsatisfactory for the Minister's opening speech, which is important in setting the framework for the debate, to be interrupted by three hours of discussion on a private Bill and taken up again at this hour of night. In the near future, we must find a better way to address European Community budgetary issues as the House should address them, and more effectively.

I must confess that the Treasury memoranda issued along with the Community documents are improving somewhat. The memorandum of 4 December 1989 was at least intelligible, if somewhat bland. But attached to it was a completely illegible copy of a Commission document. The presentation of Treasury memoranda still needs to be improved to a certain extent.

We have before us the Court of Auditors report for 1988. The court undertakes a broad and detailed scrutiny of a wide range of Community activities. It considers not only the probity of the use of Community funds—I shall come to that when I concentrate on fraud—but the efficiency with which funds are used. They have some useful insights to offer about the efficiency or otherwise with which Community funds are put to use.

I cite one example—that of industrial support within the regional policy of the Community. The report devotes several pages to industrial support, which is a crucial issue for the United Kingdom economy. As hon. Members will know, the investment performance of the United Kingdom economy during the past 10 years has been far below that of our competitors. It would be useful to consider carefully the way in which European Community funds within the regional policy have been used to support industry in Britain.

I am pleased that the report reveals that the United Kingdom has done a little better than most of the Community countries in the proportion of regional funds that it devotes to industrial support. In Britain, the figure is a bit more that 20 per cent. However, that compares poorly with West Germany, which has consistently exceeded the desired percentage of support—30 per cent.—suggested by the Commission for member countries, because Germany has used 56 per cent. of its regional funds to support its industry. Therefore, although we are doing reasonably well in terms of our position on that scale, we are still not achieving either the desired objective or the performance of the best performing economy of the European Community.

It is also instructive to note in the section of the Court of Auditors' report on industrial support that the proportion of projects that were initially agreed for support but subsequently abandoned was 22 per cent. Surely that should give us some pause for thought in wondering whether the initial assessment is being carried out accurately or well enough.

It is also worth noting that the Commission's report highlights the fact that the creation of new enterprise, as opposed to the extension of existing enterprises, forms a small portion of the industrial support coming from European Community funds.

The Court of Auditors' report also draws our attention to the fact that the proportion of goods that are supplied locally within the regions of the United Kingdom, and the proportion of services and sales that are made locally within the regions of the United Kingdom, is poor in relation to the overall support that has been given.

Those are extremely interesting and important issues. The Court of Auditors' report should provide us with much food for thought on issues such as investment in and support for industry in the regions of this country.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

Does the fact that we keep using the expression "Court of Auditors" grate on the hon. Gentleman as much as it does on me? That is a fraud in itself, because a court has powers to act. It is not a court of auditors at all; it is a bunch of auditors who report to the Commission, all of whom are usually biased in favour of their own nation and so do damn all about it when the report is made, except to shove it under the carpet and to shove out their hands to get some more money with which they will carry out the same fraudulent practices. I wish that we could call it a commission, because that would not be quite as irritating as giving it the name of a "court".

Mr. Smith

I fear that I must advise the hon. Gentleman that "Court of Auditors" is precisely the title under which it goes.

Mr. Beaumont-Dark

I am well aware of that.

Mr. Smith

So, despite the hon. Gentleman's misgivings, we must give it that title when referring to it. The hon. Gentleman does a disservice to the work of the Court of Auditors. The documents that it produces are perhaps not perfect, but they are extremely valuable and give us a considerable insight into the way in which the substantial funds that are available to the European Community are used——

Mr. Beaumont-Dark

Or misappropriated.

Mr. Smith

Yes—as the hon. Gentleman has just remarked from a sedentary position, or misappropriated.

It is worth bearing in mind that our contribution to the Community budget is £7 billion in a full year and that the overall resources available to the European Community institutions are considerable. In monitoring what happens to that money, the work of the Court of Auditors is both valuable and, on the whole, extremely well carried out.

I shall turn to the reports that we have in front of us that relate to fraud, because that is the issue on which the Minister has concentrated and which is, I suspect, of most immediate interest to the House. It is worth noting—in this respect, the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) is again being unfair to the Court of Auditors—that action on fraud originated largely because of the comments made by the court in previous reports that it brought forward to Community countries.

It is also noticeable that the principal instances of fraud that are beginning to emerge and be looked at in detail relate especially to the agriculture regime. The Commission on the Fight Against Fraud found that there were no identifiable cases of fraud in relation to the use of regional funds, that cases of fraud in relation to the social fund were confined to one country in the Community, but that cases of fraud in relation to agriculture were more considerable.

The European Community budget is changing gradually—in my view, too gradually—from an over-preponderance of support for agriculture to support for the social and regional funds. That changing balance is to be welcomed and I suspect that one factor that will flow from it is a natural diminution in fraud. However, we must be as rigorous as possible in rooting out fraud as it presently exists. I must confess that, on this, the Government say quite the right things.

In their memorandum of 4 December, the Government say: The Government has made clear the high priority which it attached to the fight against fraud and had indicated its readiness to consider any practical and cost-effective measures to this end. That is absolutely right, and the Minister identified precisely that aim on behalf of the Government.

In their later memorandum of 6 February, the Government restate their objective: The Government especially welcomes the fact that legislation has been presented in the two areas highlighted by the Court of Auditors, namely export refunds and intervention storage. Like the Commission, the Government believes that it is extremely important to maintain the political momentum of the fight against fraud; and to foster co-operation at all levels". Those are exactly the right sentiments, and ones that the Opposition wholeheartedly endorse. We must ask whether the Government have yet done, or are doing, enough to put those sentiments into action.

There is one slight problem, which was touched on earlier in the debate by the hon. Member for Ludlow (Mr Gill). However efficient we are in looking at individual instances of fraud and particular types of fraud, due to the very nature of the agricultural support system, there will undoubtedly still be a possibility—indeed, a probability —that fraud will continue.

While we must seek to reduce those instances of fraud as much as possible, the principle of intervention tends to make the system capable of fraudulent use. That is one reason why we should continue our efforts to try to change the way in which agricultural support is organised in the European Community.

It is worth reminding ourselves of the nature of some fraud. Perhaps the best publicised example was the case in Leeds of a butcher named Jack Mercer, who was sent to prison in 1986 for a £465,000 meat fraud. He had developed a thriving business sending horse meat to southern Africa and claiming European Community refunds on the basis that it was prime beef.

The exporter was able to claim back in subsidy from the EC the difference between the prices at which he was selling the meat in Third-world countries and the prices at which it would have sold in the Community. Prosecuting counsel in the Mercer case said: This was a fraud on the British taxpayer on a very large scale based on a very simple idea. They claimed to export boneless beef when what in fact was being exported ranged from chicken fat and horse meat to meat already rejected as unfit for human consumption. The meat was so poor that it could be shipped out for little more than 25p a box, but it was worth simultaneously a refund of £10 to £15 a box. That is the sort of fraud we are discussing. It is not just a fraud against the British taxpayer but an insult to the eventual destination of the products which are then purveyed.

Another example is that of British sheep. Britain and France are currently being investigated after it has been identified that there is considerable scope for fraud in the subsidy scheme for sheep, which accounts for about £860 million a year. The payments that are made, of about £15 per animal, are uncheckable.

Farmers, it seems, can easily claim for dead animals or ewes past their prime, rather than for the pregnant ewes for which the money is supposed to be available. The investigation has so far revealed a number of frauds of substance", according to the findings of the Commission on the Fight Against Fraud. That is the sort of activity which the commission is trying to counter. When a Dutch Socialist tabled a question in the European Parliament on the subject, the answer revealed that an estimated 86 million ecu had been lost in refund fraud between 1972 and 1988. We are talking about large sums and particularly nasty instances of fraudulent claiming.

The commission on fraud is extremely worried about what has happened. So, to give them credit, are the British Government, and much of what the Minister said—about Her Majesty's Government being in the lead in trying to move forward with the so-called 45-point programme that the commission on fraud has set in train—was right.

Praise is due—it is rare for me to offer it—to the British Government for their robust endorsement of the alterations in the documentation required under the change to what is known as the annex 2 documents. The Commission on the Fight Against Fraud was extremely anxious to ensure that much tighter documentation was needed in order to prove that particular products had been exported from one country and imported by another.

The British Government were almost alone in the Community in pushing that issue and in ensuring that, in the end, although the original proposal was, sadly, watered down to a certain extent, better documentation than was previously required was insisted upon. The British Government deserve considerable credit for that. However, a number of questions are outstanding on which I would be grateful for ministerial confirmation.

First, the strength of the anti-fraud co-ordinating unit in Brussels is clearly inadequate for the task with which it is charged. The Minister referred to the fact that it now has 30 members of staff. Is that sufficient? Surely we ought to know by now that well-trained and competent investigators in such anti-fraud units pay for themselves many times over. It would be good to know what commitment the United Kingdom Government have made to improving the effectiveness and increasing the strength of that unit, and what discussions the Government have embarked upon with their fellow member states to ensure that that happens.

Secondly, what specific steps do the Government intend to take to improve cross-border co-operation in the fight against fraud? For example, there is a proposal on the table that draft treaties on extradition and the transfer of criminal proceedings from one EC country to another should be brought forward. Will that happen? Will the Minister give a commitment that the British Government are keen to see such developments? The Select Committee on European Legislation, chaired so ably by my hon. Friend the Member for Newham, South (Mr. Spearing), specifically mentioned that in its report on the commission on fraud documents.

Thirdly, what specific proposals do the Government have for improving the inspection regime for sheep subsidy claims? That is an area where the British regime has been criticised by the commission on fraud, and it clearly needs to be improved.

Fourthly, the Minister brushed aside the Court of Auditors' anxiety about the way in which road and rail projects are financed when Community money is made available in Britain. The most obvious example is that of funds that are available from the EC being deducted from the funds that are available within the United Kingdom. The result, on a number of projects, is that the organisation constructing the project delays claiming the EC money so that it does not lose the British Government money that is available for the project. There is clearly a need to tighten up procedures here, and it would be good if the Government were somewhat less complacent about the criticisms that have been made about the British practice by the Court of Auditors.

Fifthly, the Court of Auditors has drawn attention to the fact that records on fraud are not kept in a uniform way from one EC country to another. There is not even agreement on what counts as an irregularity within the terms of the Community's provisions. In Britain, we interpret an irregularity as simply and solely a fraud, and it is filed under that heading. In other countries, it is not just fraud but errors that count as irregularities. Would it not be sensible to ensure a common parlance and a common standard throughout the Community? What are the Government doing to achieve that?

I should also like to know what provisions the Government are pressing for to ensure that the proposed bank for reconstruction and development, which is to assist the newly emerging democracies in eastern Europe, will be marked by the same probity that appears to exist in the operation of the regional and social funds in most Community countries. There must be proper scrutiny and proper safeguards in place for the bank similar to those being established for other aspects of the Community's budget.

In summary, the Government have the right aims to ensure that fraud is combated vigorously. The Court of Auditors, the Commission on the Fight against Fraud and the Government have made a good start on combating some of the more obvious and worrying cases of fraud, but there is a long way still to go and a lot still to be done. It would be good if we had further commitments from the Government, straight answers to the questions which we have put to them and a determination to ensure that the fight against fraud is taken further and that fine words issue into sensible and worthwhile actions. A start has been made, but much still needs to be done.

10.31 pm
Mr. Christopher Gill (Ludlow)

In the debate on the report of the Court of Auditors this time last year the Minister, my right hon. Friend the Member for City of London and Westminster, South (Mr. Brooke), said that fraud was endemic in many states in the European Community. The hon. Member for Islington, South and Finsbury (Mr. Smith) has pointed out that the United Kingdom is not entirely blameless in this regard.

There is a catalogue of evidence that fraud exists. European Members of Parliament, giving evidence to the Foreign Affairs Committee last November, stated that the European Parliament was powerless to stop it. The European Association of Agricultural Law estimated that the cost of fraud was about £3 billion per year, although press reports suggest that it may be between £2 billion and £6 billion per year. There were reports of 1,000 Sicilian livestock breeders being involved with local officials in defrauding the Community of 2 billion lire in subsidies.

My hon. Friend the Minister will be aware of my view that in many instances we are dealing with the effect and not with the cause—that it is the system which is at fault in that it creates a situation in which people are tempted to indulge in fraudulent practices. As the hon. Member for Islington, South and Finsbury pointed out, the preponderance of fraud is in agricultural products. I believe that that problem will never be solved because of the commodities which are involved.

We have to ask ourselves how a system of export refunds and intervention payments benefits the consumer. The answer, I suggest, is not at all. How does it benefit the primary producer? Again, I have to say that in my view the answer is, directly, not at all. If consumers actually understood the system, would they support it? I believe that it is very doubtful that they would. So who benefits from a system which allows such fraud? The answer is that only the commodity brokers, the fraudsters and swindlers benefit.

Enough has been said about fraud, so I will deal now with the Court of Auditors report. It is difficult to take exception to the conclusions contained in the report, which makes fascinating reading, and I commend it to people outside the House because they would learn an enormous amount from it.

On page 12 and again on page 49 of the report, the conclusion is that it is clear that the Commission's administration and control over own resources needs to be considerably strengthened so that the budgetary authority can have reasonable assurance that the Communities' own resources are properly established, collected and accounted for. That is an indictment that the House cannot afford to ignore. If we ignore it, there is no point in having a Court of Auditors report. I remind the House of the undertaking given to the House on 14 March 1989 that the United Kingdom Government would follow up the Court of Auditors report.

There is no doubt that the European Community must be brought to book. It deals with a large budget, and from what we read and what we know from previous reports, its accounting systems are poor and leave a great deal to be desired.

Mr. Charles Wardle (Bexhill and Battle)

Does my hon. Friend agree that the Court of Auditors report would be more effective if it was produced sooner than 11 months after the financial year ends? Does it not make it even more difficult to bring the Community to book if it takes 11 months before the report is published and 14 months before the House can consider it?

Mr. Gill

My hon. Friend makes a good point. I am not unaware of his considerable experience in commerce. I was about to invite the House to consider contrasting the report, the scale of the budget and the deficiencies outlined in it with the reaction that there would be in a commercial organisation to receiving such a report from its professional auditors. I suggest that the Government would be failing in their responsibilities if they did not take note of the report, although, as my hon. Friend has said, it is regrettable that we are today considering the report for 1988 rather than for 1989.

We know that the European Community has an almost insatiable appetite for cash, and some hon. Members feel that some of the schemes on which the cash is spent would not pass muster in our national Parliament. Ministers must therefore make better efforts to ensure that we get satisfaction and that the report is not just noted but acted upon.

I am sometimes amazed at the reaction of hon. Members when we talk about European Community expenditure. I agreed with most of what the hon. Member for Islington, South and Finsbury said. At one stage, he contrasted the proportion of European regional development fund money spent in Germany on industrial projects with the proportion spent on industrial projects in this country. I invite him to consider whether it would not be better in terms of improving the long-term prospects of the British economy and of British industry if all the funds were spent on infrastructure rather than being allocated to specific industrial concerns. Not only industry but everyone living in this land could benefit from that. Surely increasing emphasis should be placed on projects which benefit every taxpayer in the land, rather than the Government—or the European Community—trying to pick commercial winners.

Mr. Chris Smith

It would indeed be sensible for a substantial amount of Community money to be spent on infrastructure projects. Spain and Portugal, for instance, have spent virtually all their regional fund allocations on such projects. However, so long as it remains the British Goverment's practice to assume that infrastructure money from the Community means a reduction in such money from the Government, such a move would not be entirely good for the overall health of the British economy.

Mr. Gill

I am not sure that I entirely agree. The hon. Gentleman and I perhaps view such matters from different philosophical standpoints.

As I have said several times before, I find two things unacceptable—the cost of Community administration, and the tax churning. We remit our taxes to the Revenue in Whitehall, which in turn remits money to the Community in Brussels, where administration costs are incurred before the money is reallocated to this country. Surely many of the projects currently benefiting from Community money would be better served if we kept the money here in the first place. We are always hearing that this or that project would not have gone ahead without European funds, but where did those funds come from originally? The European Community, like our own Government, has no money other than that which it collects from taxpayers.

The report is full of criticism of the administrative and accounting systems and controls in Brussels and calls into question the administration arrangements generally. Surely we could have a perfectly adequate European Community without structural funds. In the context of what is now unfolding in Europe, it might even be preferable. Would not forging links with eastern European countries struggling to establish industries and democracy be easier without such an irksome and complex system of administration?

I believe that we should be fully justified in demanding a root and branch improvement both in the performance and in the probity of the European Commission's financial affairs.

10.44 pm
Mr. Nigel Spearing (Newham, South)

The Minister and my hon. Friend the Member for Islington, South and Finsbury (Mr. Smith) referred to the bifurcated nature of the debate. As for the time available for the debate, it would not have been unreasonable had the debate on the Criminal Justice Bill lasted until 7 o'clock, for private business to fill the three hours between 7 and 10 o'clock and for this debate to start at 10 o'clock and to finish in three-quarters of an hour. Our time will be constrained if every hon. Member who wishes to take part in the debate does so and if we hear a proper reply by 11.30. This year the Government have allowed only one and a half hours for the debate. On 2 March 1989 three hours were made available for it. In terms of a time audit, we have gone backwards.

Money lies at the root of the power of this House. Rightly or wrongly, by means of various Divisions some hon. Members have thought it fit that taxpayers' money should be spent by the European Community. Whether or not that is desirable, all hon. Members agree that that money must be properly audited.

By what means do we exercise control? Ministers can exert influence over the conditions that the Council of Ministers places upon what is called the discharge of the accounts. I shall read into the record article 206B of the treaty of Rome. It says: The European Parliament, acting on a recommendation from the Council which shall act by a qualified majority, shall give a discharge to the Commission in respect of the implementation of the budget. To this end, the Council and the European Parliament in turn shall examine the accounts and the financial statement referred to in Article 205A and the annual report by the Court of Auditors together with the replies of the institutions under audit to the observations of the Court of Auditors. Our aim, therefore, must be to ensure that when the Minister goes to the next meeting of the Council of Ministers he asks it to consider the Court of Auditors report and to make recommendations to the European Parliament, which will then have power to give a discharge. According to my reading of the article, the European Parliament need not discharge the accounts. It would need to be given reasons for not discharging them. If the Council of Ministers, by a qualified majority, gave the European Parliament such a reason, that would be possible. I place that on record because the House still has the power to influence events. However, the key to what happens is the Council of Ministers. I hope that the Minister will be influenced by what we say.

I intend to refer to what happened a year ago and follow up what was said in last year's debate. On that occasion, an amendment was tabled by Her Majesty's Opposition that tried to beef up the Minister's response in the Council of Ministers' meeting on 13 March 1989. The Opposition amendment said: and to this end calls on Her Majesty's Government to withhold their approval of any recommendation by the Council of Ministers of the European Economic Community to the European Parliament to discharge the annual accounts of the Community for the year 1987, in accordance with the procedures specified in Article 206B of the Treaty of Rome, until the Council has received and discussed the report of the working party established by the Commission of the European Communities to consider the recommendations of the Special Report No. 5/88 of the Court of Auditors (8502/88) dated 13 September 1988 on the management and control of public storage of agricultural products."—[Official Report, 2 March 1989; Vol. 148, c. 464.] In other words, it asked the Minister not to approve the discharge until a working party had reported. That was a relatively mild amendment, but for reasons that were not made clear in the debate by the then Paymaster General, who we all respect and who is now carrying out a non-party job in Government administration, he resisted that amendment. My hon. Friends pressed it to a Division. I want to follow up what may appear to be verbal gobbledegook but was an extremely important amendment.

That was a debate on the annual Court of Auditors report. Its additional report 8502/88 dated 13 September 1988 on the management and control of public storage of agricultural products was a special report which I christened the Mart report after the president of the Audit board. The Government had every reason to pay attention to that report because during that and preceding debates the former Paymaster General coined the phrase "fraudster friendly". The way in which the accounts were kept, or not kept, invited fraud. We heard a graphic example from my hon. Friend the Member for Islington, South and Finsburgh (Mr. Smith) who referred to the case of the Leeds butcher.

The 1988 report contained plenty of material. I shall re-read one of its findings: With regard to the operations financed by the Community resources in which the EIV —the European Investment Bank— is involved to varying extents, the Court is justified in fearing that, due to a lack of watchful action on the part of the Commission, its task as … external audit authority will gradually become meaningless if not impossible. Has that position changed? Has anything happened in the intervening year which would vary that finding of the Audit board last year? If not, all that the Minister said about Commissions and more people has to be qualified.

I now wish to consider the way in which the Community has reacted—or not reacted—to the Mart report. In document 4582/90, the Commission set out at fair length what it has done. I presume that that document was a reaction to the Council meeting of 13 March 1989—the one to which the former Paymaster General hastened after the debate. The document reports on the operation of the new unit—UCLAF—and tells us its aims. It refers to the Council meeting of 13 March and, under the heading, Historical context, political background and developments in 1989 states that UCLAF started with 10 people and has now increased to 30. It continues: Fraud prevention was a major topic in 1989. Parliament held a public hearing on the subject in January and continued to show a special interest in fraud prevention activities throughout the year. On 13 April 1989 it adopted a resolution on fraud affecting the Community budget. It then refers to Council meetings on 25 and 26 May 1989 and the European Council meeting at Madrid in June 1989. That report does not mention the Mart report, which was the subject of an amendment moved by the former Member for Vauxhall. It was subject to much discussion last year, but what has happened since? The audit board's important report drew attention to the fundamental flaws in the system for accounting within the EEC. It was not merely a qualified account—year after the year the accounts have been qualified—because it produced some recommendations.

Section 6 of the Mart report contained several headings, such as "Quantitative Control", "Qualitative Control", "Flat Rate Basis", "Year End Stock Valuation Methods and Depreciation" and "Conclusion on the Accounts." It said: The conclusion that inevitably results from these findings is that it is technically impossible to arrive at any audit opinion whatever, on the view presented by the EAGGF budget accounts, of public storage expenditure. I do not think that one could find a more qualified report than that.

The Mart report also contained paragraphs entitled "Overall Systems", "Overall Audit Organisation", "Preparation of Monthly Declarations", "Complexity of the Accounting System" and "An Alternative Accounting Method."

I hope that the Minister will say what happened—if he does not know, perhaps he will write to me—to the working party that was supposed to report on the action that will be taken by the Commission on the Mart report. Last year, my hon. Friends suggested that the Government should await its report before giving assent to the discharge of the accounts. The former Paymaster General did not say why that report should not be adopted, but it was not adopted, and there was no mention in the Commission's accounts of activity to prevent fraud. Further, there was no mention of the working party or its conclusions, still less of the Mart report itself. I hope that the Minister will clear up that rather startling omission from the Commission's accounts of its efforts to detect fraud.

10.57 pm
Mr. Teddy Taylor (Southend, East)

I want to say a few words about tobacco, but before doing so I must say to the Minister, and I hope that he will at least agree, that it is an insult to Parliament and to our democracy to hold this annual debate after 10 pm, when nobody will notice. It is an outrage that we are discussing the scandals, fraud and spending of the Commission more than a year after the report should have been prepared. That makes it clear that the Government believe that the House is useless and pointless in controlling or making recommendations on the EEC. At some stage, we must say that, with the mass of legislation from the EEC, The total lack of democratic control and the desire, I am afraid, of the Government to ensure that people do not know what is going on, we are not doing a service to democracy.

Like previous reports, this one contains some juicy stories of fraud and scandals. It says that some member states are not paying their contributions, and two are mentioned in particular. We heard the interesting story that development funds are being used in a useless way.

However, the real problem of the report is that it tends to give the impression that something can be done about the scandals that are revealed. I believe that it cannot. There is not much opportunity to probe for a reduction in crime if all the back doors are left open. As my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) has so rightly said, it is pointless to set up new bureaucracies to examine fraud when the basis of fraud is available to every trickster, to every criminal and to every bright person who seeks to find a way of making some money out of it.

What worries me more is that, despite the report, there is a constant conspiracy to try to convince ourselves that problems have been solved. The new unit on fraud is a perfect example. Whenever the issue arises again, we shall be told, "Just wait until the new unit gets to work."

We have heard constant tales in Government reports responding to the auditors' reports about the sad situation of the Common Market tobacco industry. We have heard Ministers say—and it has been put to me—that the Commission showed years ago a welcome determination to tackle the costs of the tobacco regime. I was told that a new agricultural stabiliser had been introduced in the tobacco sector in 1988 and that savings of 9 million ecu had been secured. However, the plain fact is that, despite all the reports, the policies and the scandalous references in the reports of the Court of Auditors over the past six years, production of tobacco in Europe is again at an all-time high. We find that the subsidy of European tobacco is again at an all-time high—£813 million this year or, in European terms, 1,139 million ecu.

In that situation, it is an outrage to common sense that the Common Market is devoting an increased contribution to the "Europe Against Cancer" programme and, at the same time, we are spending over £1 million a week dumping high-tar cigarettes—which we are not permitted to smoke—in Africa, where, no doubt, the people are simply unaware of the specific dangers. There is nothing more shameful and shocking, and which makes us feel more sick than to have such a huge expenditure on producing tobacco, which is the highest subsidised item in the whole common agricultural policy, and to spend a fortune in exporting 149 million tonnes of it at the same time as we are spending a fortune on a massive programme to try to talk about the "Europe Against Cancer" proposals.

Sixty five per cent. of the Common Market harvest, which comes from seven members of the Community, is of the high-tar variety, which will shortly be almost wholly unlawful in the EEC. It is costing us a fortune to promote the growing of tobacco. I can see no point in having the industry at all. I am not alone on these Benches seeing no

I suggest to my hon. Friend the Minister, first, that he should give us a commitment that the Government will endeavour to ensure that we can debate these vital matters at a reasonable time so that people can know about them. Secondly, if we want to try to stop fraud, the easy answer is to say no next time the Common Market asks for more cash. Thirdly, does my hon. Friend agree that there is little point in talking about new initiatives and setting up new fraud units when all the evidence shows that despite all the assurances, things go on the same as always?

If we doubt that, we need only look at the current budget for the CAP. Despite the massive programme of the destruction of mountains of food, we find that, this year, £9 billion is being spent on the simple destruction and dumping of food surpluses. It is a scandal, as are many things in the report, but the biggest scandal is to debate the report 14 months late at 11 pm.

11.4 pm

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

My contribution to this debate will be brief, as time is very limited and other hon. Members want to speak.

It is rather sad, especially during a week when the parliamentary burden has been comparatively light and there have been very few votes, that the very important issue of Common Market finance and the Court of Auditors is given such low priority. This is a matter to which my hon. Friend the Member for Southend, East (Mr. Taylor) and I have referred on many such occasions. We say—in vain, I know, but it should go on the record as it appears to be the view of all of us—that the House does not appreciate the fact that tens of billions of pounds go astray. But even when money is being spent properly, we are given little time to debate the expenditure.

Let me return to a point that I made in an earlier intervention. The Court of Auditors sets us on the road to fraud because people think that it is a court. It is not a court at all. One is not criticising the work of the auditors when one says that it is not a court. It cannot initiate prosecutions. It reports, I think, to the Council of Ministers. We all know what happens then. Tons of people have their hands and feet in the trough: "You scratch my back, and I'll scratch yours." That applies particularly to Spain, Greece and Italy. It applies to the Irish farmers, who, in their lovely slap-happy Irish way, keep hurling the same cattle and pigs back and forth over the border and collecting money every time they pass go. It must be absolutely splendid for them. I love the Irish, and I think that if peace ever came to Ireland I would have a farm on the border myself—[Laughter.] There is a certain humour about this, but it is appalling.

Mr. Roger Knapman (Stroud)

Is my hon. Friend aware that France now has a record grain surplus of 5 million tonnes? That grain is being shipped to Northern Ireland, and £1 a tonne more than market price is being charged, despite the fact that shipping costs £7 or £8 a tonne. What does my hon. Friend think the Court of Auditors will say about that in two or three years' time?

Mr. Beaumont-Dark

I am grateful to my hon. Friend for the point that he has made. Of course, those of us who have been aficionados of the Common Market for some years are completely unmoved by such a thing. It is part of the general madness of the system of finance. I am sure that the Court of Auditors will simply open another large bottle from the wine lake to slake their thirst and keep their nerves steady.

The point that I want to make is clear. We are about to enter a period in which more of our money and more of the money of everybody else in the Common Market will go to our friends from east Europe who have discovered freedom late in the day. Happily, of course, it is never too late to be free. The money going to the Poles, the Romanians, the Hungarians and the East Germans will be administered under the sort of ramshackle, wretched, fraudulent system that cannot be contained even in a part of Europe where, for at least 200 years, people have been running things in a reasonably democratic way. Imagine what will happen to the millions of pounds, ecu, or whatever, that will go hurtling into those countries. I prophesy that the Court of Auditors will look upon that as an appalling situation and will say that anything that goes on in western Europe is absolutely marvellous. We may have fraud here, but one thing that people in east Europe have learnt is that fraud comes easy.

Mr. Teddy Taylor

They are well experienced.

Mr. Beaumont-Dark

They are well experienced in fraud. They were brought up with it. To survive, poor devils, they had to be.

If we are not careful, 80 per cent. of the money that goes to east Europe will not be put into proper schemes. I hope that we shall tell the Common Market quite clearly that if such things can happen here—I am not criticising the Court of Auditors; just the name—we should have a really strengthened bunch of auditors to make sure that, in the case of east Europe, money goes to the people whom it is intended to help, and is not used to bolster a new kind of bureaucracy and a new kind of financial dictatorship. It has happened in the past and could certainly happen again.

I wish to raise a matter that is a little nearer to home—the European development fund. It is most disappointing that the court should have expressed its amazement—its word, not mine—that there has been a reduction in the proportion of the aid from the fund going to industrial projects. In terms of growth, the projects aided have hardly any incentive effect on the economic activity in the region. That is an appalling indictment of the Common Market. The fund was meant to be an engine to power economies and to help deprived regions to get going. If it is not working, let us abandon it and keep the money. We can spend it far more wisely on the purposes for which it is intended. I estimate that we subscribe £300 million or £400 million of our money to the fund. We could do a lot in the north of England and the midlands with that money.

I end as I began. We must concentrate on helping our friends in the emergent new democracies, but we must ensure that the greater proportion of the hundreds of millions of pounds involved ends up where it belongs—on the backs and in the stomachs of those whom we are endeavouring to help—and not in somebody's else's pocket. The Government could do something to ensure that, and I hope that they will.

11. 11 pm

Mr. Bowen Wells (Hertford and Stortford)

I join the hon. Member for Islington, South and Finsbury (Mr. Smith) in congratulating the Government, who have led the fight against fraud in the European Community. The Commission paid tribute in its report to the degree of political support for the fight against fraud, which it says has produced tangible results. That is due in large part to the activities of Ministers in the British Parliament and to our debates over the years—however short—drawing attention to fraudulent activities.

We should warmly welcome the fact that we have achieved an increase in the number of auditors and that they now have the power to conduct spot checks of the way in which European funds—in the CAP and in structural funds—are being applied. The increase to 30 auditors is welcome, although that figure is still quite insufficient for the task. I hope that my hon. Friend the Minister will encourage further moves to enlarge the staff so that we can make certain that member states administer CAP and other European funds properly and that those moneys are properly accounted for. Without such a move, I doubt whether we shall begin to stamp out fraud in many of the European countries that administer European funds—a point to which my hon. Friend the Member for Southend, East (Mr. Taylor) referred.

Let me take the Minister up on the question of the Treasury function of absorbing European funds into Government programmes and not delineating properly so that the public can see where the money is coming from. That makes for difficulties in auditing the use of European money and means that the people of Britain do not know whether the money is coming from the Treasury or from a European source. That weakens support for the European Community in Britain and may in itself be a fraudulent use by Britain of European funds for programmes decided and agreed in Europe.

My hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) referred to the European development fund. Paragraph 70 on page 195 of the auditors' report contains an alarming statement on the question of its administration: There is still no notion of accumulated experience in the development field. Regardless of evaluations of individual past development projects or measures, the lessons learned from this or that type of operation, or in this or that field of activity, should be more clearly brought to the fore, if only in order to emphasize the absolute need for certain commitments, whenever it is clear that failures are due to shortcomings or omissions on the part of the administrations concerned. The imbalance between the objectives proclaimed throughout the programming process and the results obtained so far, which. all things considered, are modest, is evidence of the difficulty that most ACP countries experience when they try to adopt a genuine development strategy. It goes on in that vein. We have now voted, or are about to vote, through the new Lomé convention—another £8.5 billion to the European development fund. I submit that the fund's method of administering that money is seriously at fault. When each Lomé agreement is reached, the European development fund goes round the countries establishing what it calls umbrella agreements for each one.

The umbrella agreements set a total budget for a country which must be spent. If it is not spent the officer involved is called to account. That is a wasteful way to use development funds. It will apply in eastern Europe because, as my hon. Friend the Member for Selly Oak said, the same people will administer the considerable funds being made available to eastern Europe. That is to say that they will not establish what is needed, what funds must be used for particular purposes and whether those purposes can be fulfilled within the economic infrastructure of a country. In agreement with the developing country—presumably with Poland, Czechoslovakia and so on if we do not check this—we shall simply stipulate a certain sum of money to be spent and we shall spend it on anything that the Government of that country wants. That is entirely wrong. We should decide what we shall support, put the money in and then ascertain whether it has been spent properly and the objectives have been achieved. In that way the auditors could check what the EDF is doing with our money. That is an important point which I hope that my hon. Friend the Minister will take up at the Council of Ministers.

As the hon. Member for Newham, South (Mr. Spearing) said, Parliament discharges the report. But what option does it have? It can either discharge it or not discharge it. If it does not discharge it, what will happen? The answer is nothing. The only sanction that we have is under the recent court ruling which stated that, where fraud takes place in a member country, that country has to repay the money to the European Commission. That principle should be established by the European Parliament so that, where it finds that the auditors are right and money has been misspent, the member country must repay it to the Commission.

11.17 pm
Mr. Ryder

I was dismayed to hear my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) contemplating the day when he will become a farmer in Ireland as I had fondly envisaged that when we retired he and I could become VAT inspectors in Palermo or at least agricultural officials in the Peloponnese. I am sure that we would make good VAT inspectors in Palermo.

In the short time that remains, I will do my best to answer the main points raised in the debate. If I am defeated by the clock, I apologise and will write to those hon. Members whose points I have not covered.

I am grateful to the hon. Member for Islington, South and Finsbury (Mr. Smith) for his remarks about the quality of the Treasury memoranda and above all for his praise of what he described as the Government's robust attitude to fraud. I appreciate his words. I am also aware that he would like the Treasury memoranda to be improved even more and I will look into that on his behalf.

The hon. Gentleman tackled several matters and I will comment on as many of them as possible. I am pleased to inform him that a treaty on extradition and transfer of criminal proceedings from this country to another country has been drafted. The implications of the draft are being considered in the light of the judgment in the Greek maize case to which I referred in my opening remarks.

I agree with the hon. Member for Islington, South and Finsbury that controls have not been sufficiently tight in the past, which is precisely why the requirements have been strengthened during the past year and minimum levels of physical examination have been specified. Those improvements are in no small measure due to the efforts that have been made by the Government, by Ministers in all Departments and, above all, by the decisions that have been taken by ECOFIN and by the European Council when it met in Madrid last June.

The report notes that the Court of Auditors is preparing a further separate report on export refunds, and I am pleased about that. When we receive it, we shall see what other specific actions are needed. As I explained in my opening speech, we do not believe for one moment that we have conquered fraud—far from it. I agree with my hon. Friend the Member for Southend, East (Mr. Taylor) who I do not think was in his place earlier when I said that, like him, I believe that at present we are seeing only the tip of an iceberg—those are the words that I used—and that that is why the British Government are keener than any other Government in the European Community to get to grips with this serious problem.

I can assure the hon. Member for Islington, South and Finsbury that there is no complacency in our attitude to regional funds. As I said earlier, we believe that the court's criticisms are misplaced. As a result of Community receipts, public expenditure is higher than would otherwise be the case. I will try in a moment to answer the specific point about Community receipts that was raised by my hon. Friend the Member for Hertford and Stortford (Mr. Wells).

The hon. Member for Islington, South and Finsbury and one other hon. Member expressed concern about the number of staff in the anti-fraud unit in Brussels. Thirty people now work in that unit, so the number has trebled since 2 March last year when we held a similar debate, when there were 10 people working in the unit. However, that is only part of the story because those 30 people represent only a proportion of the total number of staff engaged in anti-fraud activities in the Commission. Specialist staff deal with these matters in each relevant directorate general. The House can be sure that the British Government will continue to press for an effective unit in Brussels to combat fraud—just as we have done in the past year—and we shall also be looking to see whether the directorates general need to be improved so that the staff to whom I have already referred can help with this subject.

I mentioned earlier the improved reporting requirements for the structural funds and own resources. There are two further improvements in train which are relevant to the observations made by the hon. Member for Islington, South and Finsbury. After 18 years of legal and administrative discussions, the Community has finally managed to come up with an agreed definition of "irregularity" for the purpose of reporting. The 1986 Court of Auditors report lamented the absence of such a definition.

The Commission will shortly present an amended version of the main regulation governing reporting requirements in respect of CAP expenditure. We hope that these proposals will contain clear requirements for member states routinely to report cases of fraud and irregularity.

At this stage, I should like to reassure the hon. Member for Newham, South (Mr. Spearing) on the question of follow-up to the report on intervention. I am advised that the working party that was set up to consider improvements to the intervention system met several times and, as a result of its work, a number of reforms have been agreed which go a long way towards meeting the court's recommendations. These include changes to the system of financing on a flat-rate basis,; improvements in the system of accounting and the introduction of an annual physical check on intervention stocks.

The hon. Member for Newham, South was also concerned that we had given no satisfactory answer to last year's amendment on discharge. Since he made that point I have had a quick glance at last year's debate on the Court of Auditors report. In the first two paragraphs of Hansard, my right hon. Friend the then Paymaster General, now the Secretary of State for Northern Ireland, dealt with that very question. He said: First, by formally withholding approval of the discharge, we would be admonishing the Commission, because the Commission alone is responsible for implementing the budget and drawing up the accounts. If our motive for withholding approval was to make a broader point about fraud and mismanagement, the impression therefore would be that we were holding the Commission to be largely responsible for such problems. In fact, the responsibility goes much wider."—[Official Report, 2 March 1989; Vol. 148, c. 456.] My hon. Friend the Member for Ludlow (Mr. Gill) queried the Government's commitment to follow up the last ECOFIN, on 15 March 1989, which dealt with the Court of Auditors report. I think that he was here when we began the debate at 6.30 pm, but I assure him that I was able to outline the ways in which the Government have followed up the debate and the Court of Auditors report last year. We did so not only at ECOFIN on 15 March, but at subsequent ECOFINs, and have continued to do so. Our successful application of pressure to introduce new provisions on sound financial management and accounting into the revised financial regulations has brought about one of the biggest improvements in the past 12 months.

My hon. Friend the Member for Southend, East observed that the time provided for this debate was inadequate in view of its importance and significance. I promise to pass on to my right hon. and learned Friend the Lord President the remarks of my hon. Friend the Member for Southend, East and others, including my hon. Friend the Member for Selly Oak. I understand that in previous years the debate has taken one and a half hours, and it was only last year that a three-hour slot for the debate could be found by the business managers.

I cannot share the pessimism of my hon. Friend the Member for Southend, East about the action taken to combat fraud, nor can I share the optimism of those who claim that all is well. That is precisely why the Government will continue to spearhead efforts to get to grips with fraud. In my opening speech, I outlined what we had done and gave an indication of what we proposed to do, not only at ECOFIN in two weeks' time but during the next few months.

My hon. Friend the Member for Selly Oak talked about the money wasted on structural funds. It is worth remembering that the court's report relates to 1988. Since that report, as he knows, the operation of structural funds has been substantially reformed.

My hon. Friend the Member for Hertford and Stortford claimed that people do not know where the United Kingdom's EC receipts are going. I refer him to the annual White Paper on public expenditure which gives a detailed breakdown of Community receipts by programme.

As usual, the debate has been lively and well informed. The House has recognised that significant progress has been made in the past 12 months. I do not wish to exaggerate that progress because—here I agree entirely with my hon. Friend the Member for Southend, East—much more needs to be done, but the Council has now approved the new financial regulation and that is a major advance that we should all welcome. We should be clear, however, that fraud remains a major problem and we certainly cannot afford to relax our efforts.

As I stressed earlier, this debate will help to inform the Government's policy when we go to ECOFIN on 12 March. Our primary purpose at that meeting will be to secure specific conclusions committing the Community to further detailed measures in clearly defined areas. At the March 1989 ECOFIN we identified export refunds and intervention storage and action has been taken in terms of that remit. This year we shall emphasise, among other things, improved reporting, the need for agreement on administrative sanctions and further progress on the simplification of regulations.

I hope that I have reassured the House that the Government take this matter very seriously indeed. By outlining the progress that we have made in the past year, I hope that I have satisfied the House that we are in the vanguard in Europe, and I hope that when we have a similar debate in a year's time I shall be able to report even more progress.

Question put and agreed to.

Resolved, 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.

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