The Fight Against Fraud on the EU's Finances

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EUROPEAN UNION COMMITTEE JUSTICE, INSTITUTIONS AND CONSUMER PROTECTION

Fight Against Fraud on the EU’s Finances Oral and Written evidence Contents Marta Andreasen MEP—Written evidence ...... 1 Attorney General for Northern Ireland—Written evidence ...... 4 City of London Police—Written evidence ...... 6 City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) ...... 9 European Commission—Oral evidence (QQ 62-78) ...... 25 European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238)36 European Court of Auditors—Written evidence ...... 49 Eurojust—Written evidence ...... 50 Eurojust—Oral evidence (QQ 100-120) ...... 59 European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) ...... 71 Europol—Written evidence ...... 83 Dr Inge Gräβle MEP—Written evidence ...... 86 JURI (Legal Affairs) Committee—Oral evidence (QQ121-131) ...... 89 Timothy Kirkhope MEP, European Parliament Special Committee on Organised Crime— Oral evidence (QQ 79-90) ...... 98 The National Fraud Authority—Written evidence ...... 105 National Fraud Agency and City of London Police—Oral evidence (QQ140-164)...... 108 OLAF—Written evidence ...... 109 OLAF— Supplementary Written evidence ...... 117 OLAF—Oral evidence (QQ 48-61) ...... 121 OLAF’s Supervisory Committee—Oral evidence (QQ 36-47) ...... 131 Public Prosecution Service, Belfast—Written evidence ...... 142 Dr Theodoros Skylakakis MEP, European Parliament Special Committee on Organised Crime—Oral evidence (QQ 91-99) ...... 146 Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1-35) ...... 151 HM Treasury—Written evidence ...... 164 HM Treasury —Oral evidence (QQ 208-226) ...... 170 HM Treasury – Supplementary evidence ...... 186 Lord Williamson of Horton—Written evidence ...... 187 Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) ...... 190

Marta Andreasen MEP—Written evidence

1. How much fraud affects the EU budget? What statistics are available and how reliable are they? How does the EU position compare with fraud against national budgets? 2. The estimates which you have provided in your call for evidence are of fraud costing € 500 million per annum, and fraud and irregularities combined as costing € 2.3 billion. As these figures represent 0.4% and 1.9% respectively of payments made in 2010 across the European Institutions, I think it can be safely stated that they are an underestimate. 3. The principal sources are the European Court of Auditors (CoA) and OLAF, though OLAF reports on its own activities rather than providing a general estimate. The latest available report of the European Court of Auditors, on the financial year 2010, found an overall Most Likely Error (MLE) rate across policy areas of 3.7%, in a confidence interval between 2.6% and 4.8%. 4. What is the distinction between fraud and irregularity? Is this distinction meaningful? How much is lost from EU funds through irregularity? 5. In theory, fraud is deliberate abstraction of funds, implicitly but not necessarily for personal gain, whereas irregularity is non-compliance with the funding rules. In practice there is a continuum, and I do not think that the distinction is meaningful or helpful. 6. For example, a project may indeed be fraudulent from the beginning - for example collusion between a corrupt contractor and a state functionary to obtain funding for infrastructure for which the costs submitted are spurious. 7. But equally a scheme started with honest intentions may begin to fail, and is kept alive dishonestly because the livelihoods of those running it depend on it. This is something which I have seen in my caseload, in particular in one case where the original member state sponsor of a scheme had to withdraw due to cash-flow problems, and the running of the scheme was taken over by another participant and outcomes were falsified in order to keep the funding coming. 8. Thus I would argue that there is an inbuilt tendency for EU funded projects, with 'deliverables' often agreed in advance, to carry on and to demonstrate, by hook or by crook, that the objects have been achieved - and this provides a very real incentive for irregularity which can spiral into fraud. 9. How much of a link is there between fraud and organised crime? 10. I think it varies nation by nation, but the systems by which (say) local authorities, higher education institutions and NGOs configure themselves to obtain European funding can doubtless be replicated by organised crime in those parts of the member states where it is rife. 11. Who is responsible for detecting frauds and irregularities, enforcing the law, and recovering misappropriated money? What are the roles of the Commission/OLAF, Eurojust, the Member States? How good is cooperation between the EU bodies and national authorities? 1

Marta Andreasen MEP—Written evidence

12. This is a good question, as it raises a fundamental problem with EU funding. 13. In my view, responsibility for the detection of frauds and irregularities falls into the cracks between the member states and the EU. 14. However both EU and member state have an interest in presenting the results of any scheme as a success, and bad results can be an embarrassment to both. Thus by the very nature of the funding there are incentives to tick boxes on 'deliverables' (typical ones being 'jobs created' or 'businesses advised') and move on to the next funding round. 15. Essentially monitoring of schemes is shared between the EU and the member state authorities, with the direct investigation, prosecution and recovery carried out by the member state police and judicial powers. 16. Do Member States take their responsibilities seriously? Are the doubts as to the commitment and capacity of national authorities to pursue fraud and irregularities, and the effectiveness of national actions, justified? 17. As there are 27 member states, it is difficult to make a generalised judgement on this. 18. Looking at the corruption perception data for 2011 prepared by Transparency International, one sees that EU Member States range from 2nd to 86th out of 182 in the world rankings for probity, with scores ranging from 9.4 out of 10 at the top to 3.3 out of 10 at the bottom. 19. One of the implications of the EU is that it encourages a perception of generalised probity across the Member States. Sadly that is not in fact the case, as my constituency caseload bears witness. 20. The Commission: how good are its internal systems and how effective is its training of staff? 21. It is extremely good at recruiting talented individuals whose career success is dependent on furthering the aims of the Project and presenting it as a success. 22. According to the Commission the systems and training are state of the art. In my opinion and out of my own background the outputs do not reflect such a situation. Moreover, the problem as I see is in the nature of the 'groupthink' surrounding the European project which discourages one from stepping out of line and denouncing wrongdoing. 23. OLAF: how successful is it? Does it have the necessary powers? Is it too powerful – does it respect the rights of suspects? Do the supervision arrangements work? Should it remain part of the Commission? 24. OLAF is the instrument of the European Commission and in my opinion is there to serve the Commission's purposes. Its creation followed the resignation of the discredited Santer Commission, and I believe that the intention was to show that something had been done whilst at the same time protecting the status quo. 25. I have previously argued that it should have complete independence from the Commission, and continue to hold that view. 26. What is the role of Eurojust? Should it focus more on fraud cases? How could the proposed European Public Prosecutor’s Office improve the fight against fraud?

Marta Andreasen MEP—Written evidence

27. Eurojust's role is more one of co-ordination and facilitation than of instigation. From a political point of view I would not wish it to have more proactive powers as they would be EU powers. 28. Does the Commission’s strategy set the right course? What should be the priorities? 29. Other than my desire to see OLAF have genuine independence from the Commission, I have no comment to make on this. 30. How vulnerable are EU programmes to fraud and irregularities? Are some programmes or sectors more vulnerable than others? Can the design of legislation and frameworks be used to minimise the possibility of fraud or irregularity? 31. I think that all of the programmes are vulnerable, but the ones that are particularly so are the Regional Funds and the Cohesion funding. 32. Paradoxically in my view, the measures put in place to deter fraud may make it more likely. In regional funding, for example, complicated and onerous grant regimes will deter small organisations which are short of funding and do not have large cash reserves from applying, but will encourage two particular groups to participate. 33. The first of these are the public sector organisations which have the cash flow to front their operations in advance, and are able to configure them to attract EU grant funding. They are able to present their administrative overhead costs as 'match funding' and thus turn EU grant funding into a reasonably stable medium-term source of income. Although this might not be deemed 'fraud' or 'irregularity' it does in my view undermine integrity, meaning that the organisations are directly beholden to the European institutions. 34. The second is the criminal elements which are able to game the system.

September 2012

Attorney General for Northern Ireland—Written evidence

Inquiry into fraud against the EU’s financial interests

Thank you for your letter of 11 July 2012 in which you indicate that the EU Sub-Committee on Justice, Institutions and Consumer Protection, under your chairmanship, has launched an inquiry into fraud against the European Union’s finances.

While the subject matter of the inquiry is of great interest and importance, and I am pleased to respond to your invitation, I should say, by way of preface, that my colleagues and I have little direct involvement with this issue. Since the devolution of policing and justice to Northern Ireland in April 2010 the Attorney General for Northern Ireland no longer has any superintendence or governance of the Public Prosecution Service.

I appreciate that this response will reach you outside the time scale set down by the Committee. The lateness of my response is, however, due, in part, to difficulty experienced by lawyers within my Office when conducting enquiries with OLAF. Put shortly, OLAF has not been found by us to be particularly accessible.

Lawyers from my Office recently met with senior prosecutors from the Northern Ireland Public Prosecution Service, who have responsibility for prosecuting fraud cases, as well as the Head of the Department of Agriculture and Rural Development’s Central Investigation Service.

The Northern Ireland Department of Agriculture and Rural Development (‘the Department’) is responsible for administering EU grant funding to inter alia; agri- environment, fisheries, forestry, rural development and the single farm payment scheme. The Central Investigation Service (‘CIS’) is tasked with providing the Department with investigative services to prevent and detect fraud. Its aim is to gather evidence enabling the successful prosecution of persons who have defrauded the Department.

The Public Prosecution Service for Northern Ireland (‘PPS’) is the principal prosecuting authority in Northern Ireland. As well as taking decisions on prosecutions in cases investigated by the police it also prosecutes cases involving fraud from Northern Ireland Government Departments, including cases involving EU funds. From our enquiries it appears that, in almost all cases of fraud involving EU funds, local Northern Ireland Departments, on many occasions assisted by the CIS, and the PPS have sole responsibility for investigating and commencing criminal proceedings.

The Department informed us that all Northern Ireland Government Departments are responsible for reporting irregularities in EU funding, including fraud, directly to OLAF. For example, the Department complies with Commission Regulation (EC) No 1848/2006 concerning irregularities and the recovery of sums paid in connection with the financing of the Common Agricultural Policy.

Chapter II Article 3 of this Regulation runs as follows:

Attorney General for Northern Ireland—Written evidence

1. At the latest within two months following the end of each quarter, Member States shall report to the Commission all the irregularities which have been the subject of a primary administrative or judicial finding. For each irregularity, Member States shall give details of: …. (b) the nature of the irregular expenditure, …. (e) the practices employed in committing the irregularity, (f) where appropriate, whether the practice amounts to a suspected fraud, …. (o) the suspension of payments, where applicable, and the possibilities of recovery,

Cases of suspected fraud in respect of EU Structural Funds in Northern Ireland are reported to OLAF through its database by the Department of Finance and Personnel.

On a quarterly basis, updates are provided to OLAF on action taken including recovery of monies paid. Based on the evidence provided by the Northern Ireland Departments, OLAF will decide to close the irregularity or to request repayment from Departments in respect of irregular monies paid to beneficiaries.

A clear record of these reports - including details of amounts believed to be at risk and the circumstances of each case - is maintained by the Member State and is also accessible through the OLAF AFIS computer system.

The Department’s ‘Counter Fraud and Enforcement Activities’ Annual Report 2010/2011 (the latest figures available) indicates that eight cases of suspected European Grant Funding were referred to them. The total suspected fraud was £123,900. In total the Department received 18 referrals in suspected fraud cases related to EU funding. OLAF did not have an input in the investigation of any of these cases.

All cases of fraud involving Departmental funding, whether or not they involve EU funds, are prosecuted using national legislation. In the vast majority of cases the provisions of the Theft Act (Northern Ireland) 1969 and the Fraud Act 2006 are used to deal with the array of frauds that can be committed against EU grant schemes in Northern Ireland. Cases can be commenced either by the PPS or the CIS and are brought either in local Magistrates’ Courts or the Crown Court depending on the amounts involved.

John F Larkin QC Attorney General for Northern Ireland

21 September 2012

City of London Police—Written evidence

How much fraud affects the EU budget? What statistics are available and how reliable are they? How does the EU position compare with fraud against national budgets?

1.1 The National Fraud Authority, an executive agency of the Home Office, is responsible for calculating the combined fraud losses experienced by the UK government, companies and private individuals. Their 2012 Annual Fraud Indicator (AFI) provides an overall loss figure of £73 billion (per annum) which is further broken down into sectors and sub-sectors. However, whilst categorising ‘Grant Fraud’ (£488m in the 2012 estimate), the AFI does not contain a separate accounting line estimating fraud against the EU budget.

1.2 Much of the raw data used to produce the AFI is drawn from the National Fraud Intelligence Bureau (NFIB), a cross police/law enforcement service operated by the City of London Police. The NFIB ingests fraud intelligence from a wide range of industry and government sources, using this to prepare and disseminate investigative packages for local police forces and the wider law enforcement community. In addition, NFIB Analysts look for patterns and links between intelligence from the various partners – using this information to support a comprehensive system of fraud alerts. This is a very effective prevention tool; for example the UK’s major banks receive daily updates on accounts suspected of being used in the commission of fraud – in most cases resulting in the account being closed down.

1.3 At present, the NFIB does not receive a feed from OLAF or any of its contributing agencies such as the Department for Environment, Food and Rural Affairs (DEFRA). What is the distinction between fraud and irregularity? Is this distinction meaningful? How much is lost from EU funds through irregularity?

2.1 The police service, in its function as an investigatory body, only addresses activity that is contrary to statute or common law - by definition fraud not irregularity. The most commonly used piece of legislation in England and Wales is the Fraud Act 2006. How much of a link is there between frauds and organised crime?

3.1 Fraud perpetrated by OCGs is estimated to cost at least £9.9 billion per annum. However, due to a lack of information, this estimate does not capture losses suffered by the not-for-profit sector or most of the private sector. Moreover, due to a lack of qualified intelligence, many frauds which are recorded as being committed by individuals, charities or businesses are potentially linked to OCGs, but aren't done so as the OCG has not been identified. Therefore, the actual figure is likely to be considerably higher.

3.2 We have found that fraud can either be a primary activity for an OCG, or as a funding device for other serious crimes. Many of the OCGs linked to fraud are also engaged in other activities, including the trafficking of drugs, people, firearms and other illicit commodities.

3.3 Many OCGs also use professionally qualified/employed individuals as an enabler for their fraudulent activities. These can include corrupt employees from a range of business areas and at different levels of seniority. For example, they can include bank clerks or call centre employees revealing account details, law enforcement workers turning a blind eye to criminal activities, legal professionals complicit in the writing of fraudulent contracts,

City of London Police—Written evidence accountants falsifying business accounts, insolvency practitioners liquidating businesses, or retail workers facilitating the input of compromised payment devices. The National Fraud Intelligence Bureau, based in the City of London Police, have evidence of many examples of "professional enablers" being used to facilitate fraud, much of it of very high value and involving many perpetrators.

3.4 As well as OCGs based in the UK, there is a growing threat from organised criminals based overseas (who may be either UK or foreign nationals). The location of this threat is extremely diverse. Some OCGs operate in and from countries that provide stability and an attractive lifestyle (e.g. Spain and the UAE), while others exploit areas of political instability and countries with low levels of regulation and law enforcement capabilities.

3.5 The growing threat from organised criminals based overseas is largely being driven by enhanced communications infrastructures, in particular the increased availability of high speed internet in developing countries, which allows criminals to target victims in the UK remotely. These victims include individuals, businesses, and the Government and public sector.

4.1 UK policing is structured around 51 territorial forces (43 in England and Wales and 8 in Scotland) plus the British Transport Police. Each takes responsibility for crime occurring within its geographical area – less those offences that are, by definition, the responsibility of a separate government agency such as Her Majesty’s Revenue and Customs (tax fraud).

4.2 Local police forces have, from time to time, investigated EU related fraud. An example might be a rural force supporting DEFRA to pursue a farmer suspected of perpetrating agricultural subsidy fraud. It is, however, difficult to estimate the extent to which this is happening since the classification of ‘EU fraud’ does not feature in reporting standards set by the Home Office.

4.3 The City of London Police enjoy a good working relationship with EuroPol and EuroJust. We have recently signed up for the first Joint Intelligence Team (JIT) with Europe, and we participate in a European Cyber Taskforce. The City of London Police routinely attends meetings with Europol and EuroJust. The City of London Police Economic Crime Department are also represented at meetings for the Organisation of Economic Cooperation and Development.

Conclusion

There are a number of areas that would improve collaboration between agencies.

Clear guidelines for law enforcement

Bespoke training of key investigative staff

Sharing of best practice between law enforcement from investigations pan Europe 7

City of London Police—Written evidence

Sharing of intelligence, trends and ideas (a review of data sharing and collaboration across member states would be useful) Greater visibility from the EU centre. If they have issues and concerns they could engage more effectively

Strong internal and external media messages to deter criminality and encourage whistle blowing

20 September 2012

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164)

Evidence Session No. 10 Heard in Public Questions 140 - 164

WEDNESDAY 21 NOVEMBER 2012

Members present

Lord Bowness (Chairman) Lord Anderson of Swansea Baroness Corston Lord Dykes Lord Elystan-Morgan Baroness O’Loan Lord Rowlands Earl of Sandwich Lord Stoneham of Droxford Lord Temple-Morris ______

Examination of Witnesses

Adrian Leppard, City of London Police Commissioner, and Stephen Harrison, Chief Executive of the National Fraud Authority, gave evidence.

Q140 The Chairman: Gentlemen, good afternoon. Thank you for coming to meet the Committee and take our questions. As you know, we are the Justice, Institutions and Consumer Protection Sub-Committee of the European Union Select Committee. We are conducting this inquiry into the fight against fraud against the European Union’s finances. Perhaps I may cover the formal points. Members’ interests are recorded in the Register of Lords’ Interests and any relevant interests will be declared by individuals as they speak. As you know, this session is on the record. It is being webcast live and it will subsequently be 9

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) available on the parliamentary website. A transcript is taken and you will receive a copy to make any minor corrections that are needed, but the session will go on the parliamentary website before correction. Lastly, I would be grateful if, again for the record, you could introduce yourselves. In so doing, perhaps I may ask if you want to make an opening statement. I shall turn first to Commissioner Leppard. Adrian Leppard: Thank you. By way of an opening statement, I shall explain the role of the City of London Police, which may be helpful to the committee. I am Adrian Leppard and I am the Commissioner of the City of London Police. I am sure that Members know that the City of London Police is a small force that operates only within the square mile of the City, but it has the unique role of being the lead police force for economic crime. In that regard, we have around 200 staff, some of whom are funded by government, to form a role that predominantly is hosting specialist investigators, hosting the National Fraud Intelligence Bureau and providing a centre of excellence for training. If that is all right, it may be sufficient as an opening statement. Stephen Harrison: Thank you. I am Stephen Harrison and I am the chief executive of the National Fraud Authority, an executive agency of the Home Office. It was established in 2008 by the then Attorney-General, Lord Goldsmith, as part of his work to improve the country’s response to fraud. We work with partners across the public, private and voluntary sectors to tackle the cross-cutting issues in relation to fraud—so, common enablers of fraud or common types of fraud such as procurement fraud or grant fraud, which would affect a number of sectors. We develop good practice and help to disseminate it across organisations. We also operate a service called Action Fraud, which is the national fraud and internet crime reporting service. Members of the public and businesses can visit the website or telephone an expert adviser and make reports of fraud which are then recorded to police standards. They go to the National Fraud Intelligence Bureau operated by the City of London Police to improve the intelligence picture.

Q141 Lord Anderson of Swansea: Gentlemen, I have a general question. I may be well out of date, but when I used to deal with the Met in what was often a prosecuting role, I was amazed at—dare I call it?—the cult of the amateur at a time when one needs specialists to counter the great specialism of the fraudsters. One would find that police officers were on pornography one day and murder the next. There was an apparent lack of specialism. How do you deal with the need for specialism? Obviously this is more relevant to the Commissioner of the City of London Police. Also, could you mention any particular problems around the recruitment of specialists? Are they model police officers who see this as part of their career or are they allowed to specialise from the start? Adrian Leppard: The answer to the question splits into two areas, one of which is the City of London Police and the other is the police service as a whole. Broadly speaking, fraud detectives, certainly in the City of London Police, have been working in the environment for nearly all of their service and are very expert in that role. Around the country, fraud specialists often stay in the role for some time. One of the challenges that we are coping with is understanding that you do not just need to be a police officer today; you need to be a technical expert and an accountant. We buy in some of those skills. Some of the people we employ are specialist internet people and digital forensics people, and we will buy in some unique specialisms for certain investigations. Those might be specialist forensic accountants and others. Lord Anderson of Swansea: Do you have the resources to do that? Are the salary levels satisfactory?

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164)

Adrian Leppard: In terms of resources, I am sure that the answer to that question is always no. We have to prioritise both the cases and the manner in which we package up our skills. We can buy in the necessary skill sets to support investigations. I am sure that we will hear that the incidence and nature of fraud generally in the country is very high, and because a lot of crime is now internet based, it is one of the growth areas of crime that the whole world has to face. I do not think there will ever be enough in the way of resources to deal with it. Stephen Harrison: Could I add a word to that? The other aspect to an effective fight against fraud is to focus on preventing it in the first place or detecting it once it has happened, as well as the investigative response that might be led by the police or other agencies. A lot of effort is going into central government to improve general fraud awareness across civil servants who might be developing policy and not necessarily thinking about the implications for fraud in designing policy in a certain way. We try to get the message across to departments that spotting or preventing fraud is not just the responsibility of the audit or finance department but a broader responsibility across the Civil Service as a whole.

Q142 Lord Elystan-Morgan: I have a general question to put to both witnesses. When looking at an area of crime, one looks at the national digest of statistics. You find that it is made up essentially of crimes that have been reported. One then has the biennial study, which of course is a very different study that can sometimes give different results, each of which is correct in its own field. There are thousands of respondents and you can find pretty well what the level of domestic burglary is at any given time. It seems to me that nobody has any real idea of the magnitude or the volume of fraud in relation to the EU. People make conscientious and intelligent guesses, but they can never be more than guesses. Is there a mechanism that would have a practical effect on bringing that information to light? Would I be talking utter nonsense if I asked whether it is humanly possible to have a sudden spot check on a fraction of 1% of cases? Has anybody got the authority to do that? Does anyone have the will to do so, and does anyone have the expertise to carry this out? If all three of those were present, could it work? Stephen Harrison: You are quite right to make the point about the difficulty of establishing the level of fraud or indeed the level of financial harm that results from fraud activity. What we have done through our annual fraud indicator work is, as you say, to work with best estimates based on consultation with experts in the field. Some of those experts have looked at particular fraud types in a very narrow context and then extrapolated the likely incidence of fraud based on a percentage of expenditure—for example, in the case of EU fraud. I would say that they are educated attempts that are based on quite detailed and forensic audits, but they are quite costly to do. Of course, doing a forensic audit at a particular point in time means that you may catch a fraud that is in progress or has just been committed, but there might be another one just around the corner that is outside the timeframe of what that forensic audit has been looking at. We consult the experts in the field and we tend to go for lower estimates in terms of the percentage of loss; that is, we are reasonably conservative in our approach. In certain areas of fraud loss, particularly in relation, for example, to the benefits system, there are much tighter measures of fraud. A lot of resource goes into measuring those specific losses and we use them to help inform the other estimates. But as we said in our written evidence to the Committee, please treat any estimates, particularly in relation to EU fraud, with a high degree of scepticism because it is the lowest confidence estimate we have of all the different estimates we publish. Adrian Leppard: Perhaps I may build on that point because it is a very important question. Recorded fraud in this country has been slightly reducing, by 1% or 2% over the past three years. Our assessment of the nature of fraud is that the bulk of it is now internet 11

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) electronically enabled and has a huge growth factor. You are absolutely right to say that there is not necessarily a correlation between reported crime and the nature of the threat we face. In the context of this particular hearing, if we look at some of the reported fraud within the EU, they are reported cases that OLAF is investigating. That does not necessarily mean that that is the true nature of fraud within EU funding. I know that the National Fraud Authority has done some work to extrapolate our EU funding in this country to make an assessment of what may or may not be the nature of fraud. Certainly in comparison with other member states, we would say that it is much lower than in other countries.

Q143 The Chairman: That leads us neatly into the whole question of EU fraud. Generally, to what extent has the City of London Police been involved in investigating fraud against the EU budget? Perhaps, given that OLAF has been mentioned, Baroness O’Loan should ask her question.

Baroness O'Loan: In your submission to the inquiry, you said that the National Fraud Intelligence Bureau does not receive a feed from OLAF or any of its contributing agencies. Given your force’s role in relation to fraud, do you think that you should receive one? Does your force have any working relationship with OLAF? Adrian Leppard: I will answer both questions, but one by one, if I may. The nature of our involvement as City of London Police is that we are a specialist fraud resource. As Members will know, we have 43 independent police forces in England and Wales. We do not have a national service in that sense. There have been 19 OLAF submissions to the UK over the past five to six years, and City of London Police has dealt with four of those cases. In three of the cases referred to us, the investigation concluded that there was no evidence of a fraud. There would have been enough irregularity and concern for there to have been an investigation, but it was not until we completed it that we could establish whether or not there was a criminal offence to be charged. The cases are diverse and I will not necessarily be able to give you the details of those cases in an open forum, but that is the scale and number. Other police forces have taken investigations. One of the differences between us and other member states is our access to Europe in terms of cases coming in from OLAF, because they will be presented either to the host force where a crime has been committed or where an individual is living, or to another agency. In the UK there are therefore submissions that come in and go to the Serious Fraud Office, the City of London Police, host forces or, as you know, Revenue and Customs. The cases will go to different agencies. However, the scale and numbers of cases are very small—only in the range of less than a dozen or so per year coming from OLAF into the UK. In terms of what we are doing in the NFIB, we host intelligence relating to anything to do with economic crime and cybercrime, and we have close relationships with Europol and, indeed, with Eurojust—very productive relationships. Our first port of call that we would like to see is that anything that is European in terms of exchanging intelligence should be hosted through Europol. That would be the correct method. While we can set up individual data-sharing agreements, once we get outside the UK border into Europe we have to consider the existing Schengen agreement and protocols for that data exchange. We have been working with OLAF because one of my core missions is to try to move from responses to fraud being force responses, a situation that is unsustainable given the nature of the threat and where jurisdiction issues mean that, although a case is reported in a force area, often the criminals are abroad or the case is multijurisdictional. All reports should be taken to the centre, and we are in the process of trying to roll that out with police forces to the point where I would like to build a new capability for dealing with fraud, but a national capability

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) similar to our police response to counterterrorism. That will need more resource, but the Home Office is considering that. In the light of the possibility and likelihood that we may build that, we have started to develop a relationship with OLAF whereby we can say, “We have become the first point of contact for you within the national capability”, which will, I hope, remove some of the individual decisions that may be made by forces against their own priorities when a case is referred by OLAF. All forces will have different priorities set by the locally elected commissioners and the chief constables. I hope that that may have answered both questions.

Q144 The Chairman: Clearly, you are hopeful about getting the co-operation of the other 42 police forces. How hopeful are you of getting the co-operation of the other agencies—particularly HMRC, which, as you probably know, was supposed to have attended with you this afternoon, but it seems not to consider VAT fraud to be a fraud against EU finances and HMRC therefore felt it had nothing to contribute. We are not sure that we agree with that, and may pursue it elsewhere, but would you envisage those agencies coming under your proposals? Adrian Leppard: The first point relates to other police forces. We have agreement from every chief constable in the country, through proposals that I have made through the ACPO Chief Constables’ Council, to manage fraud in a different way. If I move away from my independent role here as a commissioner for police into what the Government are doing, there is a positive direction of travel with the National Crime Agency. There are four pillars to that, one of which is an economic crime command. Its role, and City of London Police will be part of that command, will be to bring agencies together to work more effectively to try to make better use of the assets that are there. I know that that is the commitment of the Home Secretary and Keith Bristow, the director general of the National Crime Agency. I therefore hope that we will have a better engagement across the agencies in relation to all manner of different elements of fraud.

Q145 Baroness O'Loan: We have received evidence from elsewhere that it is difficult to get information from OLAF and that they are slow to respond. Do you have any comment to make about that? Adrian Leppard: We have not had difficulty getting information from OLAF if we ask for certain types of information. Of course, you do not know what you do not know, and that is the point about intelligence. What we in the National Fraud Intelligence Bureau are trying to do, by data sharing and intelligence sharing with other agencies, is develop a common understanding of a number of things—the organised crime groups, the offenders and some of the fraudulent entities that they use, whether they are fraudulent names or bank accounts, because you see many of the people targeting the same agencies, and they are the same groups. What we understand as well is that we are increasingly seeing offending from other countries in Europe and worldwide coming into this country. So your point about data sharing from outside the UK is important and we need to grapple with it. We are having equally positive discussions with the United States Department of Homeland Security about how we can share data across a much wider international domain.

Q146 The Chairman: Mr Harrison, please indicate if there is anything you want to add, although we have addressed these questions to the commissioner. Stephen Harrison: Perhaps I could just mention the work that we do alongside the City of London Police, HMRC and others looking at those common fraud threats. HMRC is very actively engaged in that work, and when you look at work to counter the cybercrime threat, 13

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) for example, or in relation to the use of false identity data, we get a very high degree of co- operation and participation. As the commissioner said, there is the whole data-sharing agenda, where we are trying to pool the knowledge that parts of government such as HMRC and DWP have, as well as run that against information that banks, insurance companies and other organisations have about fraud. The NFIB is a central enabler of that analysis. An awful lot of good work is going on in that area.

Q147 Lord Rowlands: In the recent evidence we took from OLAF, one of its—perhaps “complaints” is a bit strong—worries and concerns was that it often sent the information it collected to the appropriate authority in the United Kingdom but never heard back. It never heard why those authorities had not pursued it and had no feedback. In the cases in which you have been dealing with OLAF, have you always at least fed back why you have not proceeded, or why you did not do so? Adrian Leppard: In our cases, of which there have been four in the past four years, we have been actively working with OLAF during the investigation of the case. Of course, there is a difference in the UK whereby each agency will choose whether or not to take a case, depending on their own set of priorities of case acceptance, whereas other member states will have a duty to take a case. However, the lower-value cases that OLAF may refer to those member states may not be investigated if there are no resources to do it. I cannot speak for the feedback from other agencies, but I know each agency will have its own selection criteria, whether it is the Serious Fraud Office, Revenue and Customs, an individual police force or the City of London Police. We certainly try to give the feedback.

Lord Rowlands: It sounds a very good idea. Are you suggesting that you would become the first point of contact that OLAF makes, wherever the crime is or where the information is going to go? Adrian Leppard: In terms of policing, there are other agencies that will still take referrals. I cannot speak for the Home Secretary and Keith Bristow of the National Crime Agency, but I am sure that they would be very keen for the economic crime command—bearing in mind that it is not formed formally until September next year—to seek a better way in which to receive that on behalf of the UK, as opposed to individual agencies.

Lord Rowlands: Are you saying that that will come into place next year and that the policy is agreed? Adrian Leppard: The policy of an economic crime command is absolutely agreed. Indeed, they are appointing a director for that command within the National Crime Agency now. We, the agencies that address fraud—City of London Police representing policing as well as just the City—are working in a shadow capacity in a number of bodies now. In fact, the City of London Police is chairing a group on operations and intelligence. We have had some operations targeting what we call money-mule bank accounts and European money- laundering that bring all agencies together. This is the first time that we have achieved that. We are already making progress, even though the agency is not formed yet.

Q148 Lord Stoneham of Droxford: You mentioned that you dealt with a small number of cases from OLAF, and you cannot talk about the specifics; I understand that. You said that some were not pursued. For what reasons are we not pursuing cases? Is it because the OLAF work was insufficient to take them forward, or is it because of problems with our own priorities with the individual forces? Or is it simply that the people committing these

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) offences are untouchable, because they are abroad somewhere and it is not worthwhile pursuing them? Adrian Leppard: It is none of the above, if I may say so, in that the four cases I am aware of were all rightly referred for investigation and were then investigated. During the investigation, when you establish how the money was allocated, to whom and on what grounds, you establish that this is not actually a crime. It may be an irregularity, or it may be that through proper investigation of the accounting that was originally indentified through the auditing process—because the reports are flagged up through irregularity in auditing— and detailed work, you establish that there is no criminal offence there. It is absolutely not about people being untouchable. Of the cases we have, only one of them involved, as you would say, a proper, established organised crime group. That one was referred on to the Serious Fraud Office for investigation, and was investigated by them as an established, organised crime that was trying to use and gain EU money. That is the only real case I am aware of in the referrals that we have had. Stephen Harrison: We sometimes know that a loss is a result of fraud, but sometimes it is the result of an error or irregularity. When we look at the preventive tools that one might put in place to stop these errors or frauds happening, or detect them very early on, we find that some of the new techniques that are deployed will equally apply in cases of fraud or error. Some powerful data analytical tools, for example, will look at discrepancies in payment records, where suddenly similar types of payment are all bunched together. It might be fraud because of collusion with the accounts department. Equally, it could simply be error. The same tool would allow you to identify both types of loss and then do something about them.

Q149 Lord Anderson of Swansea: I just wanted to clarify Lord Rowlands’s point. Has it been agreed by all parties that the City of London will be the first point of contact in the UK from OLAF? Adrian Leppard: No, not by all parties. We are having those discussions with OLAF on the basis that we are trying to build a national capability for policing. We have yet formally to receive funding for that, and are yet to establish it. I cannot speak for SOCA, the agency that is in being, or any of the other agencies or the economic crime command, which will formally be formed next year. The most positive answer I can give you is that there is certainly a direction of travel which would suggest that we will bring this together in a central point. We will certainly do it for policing.

Lord Anderson of Swansea: Within a reasonable period? Adrian Leppard: Yes, but we have to have a national capability to feed those referrals to. Even then, they will have to fall within a case acceptance criteria. Simply because OLAF makes a referral, we will still have to look at the nature and victimisations of the fraud. That will have to be considered against other investigations that might have more victims, and more vulnerable victims.

Q150 The Chairman: Let me go on to Europol and Eurojust, which you mentioned in your evidence. You say that you have a good relationship with them. Can you tell us about the practicalities of the relationship and how it works and give us specific examples of work that you have done with them on fraud against EU finances? Adrian Leppard: To paraphrase very simply, Europol is a means by which intelligence is shared and investigations—not always police investigations—are brought together. Eurojust 15

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) is where we would then seek to involve the prosecuting bodies. Often, that is earlier in other countries that are advocacy or magistrate-led. In the sort of cases that we have, as I highlighted earlier, increasingly our organised crime groups are based abroad—often in Europe, often elsewhere. We had a very large case where UK people, an organised crime group, based themselves in Spain and other countries, and were targeting people in this country by selling fraudulent shares. They had hundreds of victims involving millions of pounds of fraud. We would give a referral to Europol, which would then facilitate the coming together of the policing agencies and the sharing of intelligence to start that investigation off. That is very helpful to us. When we have a meeting with Eurojust, we can form a joint investigation team that, within European law, allows each host country and investigating body to share intelligence and gather evidence without us having to obtain a certain piece of European legislation, a commission rogatoire, to get each piece of evidence. It is a bit technical, but it makes both the sharing and gathering of evidence a lot easier when we have these in place. We have probably had four meetings on joint serious fraud cases in Europol in the past couple of months—not European funding, but other fraud cases. My feeling is that they are very successful. We feel, comparing where we were 10 years ago to where we are now, that it is a very effective body and represents the nature of the threat that we face at the moment.

Q151 Lord Dykes: My apologies; there have been some urgent phone calls from the Foreign Office which I had to take immediately. Because there is to some extent some kind of interface in crime possibilities and fraud between national fraud and European-type fraud in practical terms—I imagine you see examples of that—do you regularly have the opportunity to share knowledge, information, techniques and practical ideas with other senior officers in foreign police forces, where the interface can be explained not just at the European level, but at what you call at 4.3 a very good relationship with Europol and Eurojust? Is it also on a national basis that you see them regularly to reinforce the general ability to deal with these matters? Adrian Leppard: Yes, we do, although it is not a systemised process. Through a number of different bodies, we meet either in conferences or specific meetings to share knowledge, best practice and investigating methods. Indeed, the Government hosted a conference on organised crime only a month ago. Many of our American colleagues in other agencies came, and we talked about some of the challenges. Europol hosted a conference on intellectual property crime only about six weeks ago. We attended as we have quite a big role in that in the UK. So sharing sessions are going on, not necessarily in a systemised way but in a fairly informal way.

Lord Dykes: And in a personal knowledge way, as well? For example, you might say, “I remember a very good idea from a senior person in Berlin who suggested such and such”. Are there practical examples of that? Adrian Leppard: Yes. I will give the example of intellectual property crime. I know that it is not part of the remit of the Committee, but other countries are coming to us on this. We have established that by working with some of the funding companies, we can close down the websites that are hosting some of the piracy material. Indeed, by working with online ad companies, we can remove the ad companies that are the means by which the criminals get their income. We have been so successful in that area that the Department of Homeland Security has visited us twice, and other European countries are also coming to us. That is an outcome of the sharing of knowledge across law enforcement agencies.

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164)

Q152 Lord Elystan-Morgan: Am I right in thinking that whereas in contrast to crime that has a victim, where there is a pretty structured organisation such as you described and it is working rather well, when it comes to victimless crimes such as crimes against public funds, whether they are funds directly from the British Government or funds paid by the British Government on behalf of the EU—something like 80% of EU payments are made in this way—you are looking into a glass darkly? Is there any way in which you can improve your knowledge of that situation—how it works, how serious it is and its locale? I know that I am asking a massive amount here. Adrian Leppard: First, on the question of victimless crimes, when we have fraud on the table, we look at the nature and scale of the fraud to start with, and then at the victimisation behind it. We have to balance size and scale against the vulnerability of victims. Fifty victims who might be retired members of our public, each losing £1,000 to £5,000, would not amount to a large multimillion-pound fraud, but it is something we would investigate because of its scale. By the same token, a multimillion-pound fraud against government would also be a serious fraud that we would look at. However, not all cases reach those criteria.

Lord Elystan-Morgan: You would know about the victim crime because the victim would complain, but you would not know about the other crime; that is my point. I am sorry to come round to it again and again, but is there some way that one can improve the approach to that problem? Adrian Leppard: The current method by which we try to draw a balance between the two is the most practical and reasonable method of doing so. It draws a neat balance between volume, vulnerability and other issues. We will always have to have some criteria to balance a shrinking resource against a growing threat and demand. I understand your point but I still think that probably we are doing the best we can in the circumstances. Stephen Harrison: You use the term “victimless crime” but ultimately there is always a victim in the form of a loser, even if it is the Exchequer. I will give an example that is not specific to EU fraud. It relates to work we have done with local authorities on housing tenancy fraud. Somebody rents a council or social property. They pay the appropriate rent to the council, which on the face of it does not lose any money, but they illegally sublet the property to a range of other tenants, as well as probably claiming housing benefit. The effect is that a family genuinely in need of social housing cannot get it because the property is occupied by people who are not entitled to it. You do not have to look very far with crimes against the Exchequer—government expenditure or government revenue—to find real victims. That always informs our approach.

Lord Elystan-Morgan: I totally accept that. I was using the term as shorthand. Stephen Harrison: We look at the broader harm. I will highlight the work that the Cabinet Office is doing in this regard. The Minister for the Cabinet Office is leading a very concerted and co-ordinated effort, looking at all three aspects of fraud against the public finances—not just fraud against tax and revenue or fraud against the benefits system but other cross- cutting fraud such as procurement fraud or fraud in the administration of grants. If you tot up all that expenditure, it probably loses the Government about £2.5 billion, plus £2.2 billion from local government. There is a concerted effort to look at ways to improve prevention and enforcement outcomes in that area, as well as in more conventional fraud where a victim has lost money on an individual basis.

Q153 Baroness Corston: In previous evidence submitted to the Committee, we were given to understand that a growing proportion of the fraud against the European Union was 17

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) being perpetrated by gangs operating from the United Arab Emirates, and in particular from Dubai. Is this your experience? If so, how do you deal with fraud coming from that jurisdiction? Adrian Leppard: I spoke recently to one of the directors of OLAF. Fraud looks very different in different member states. In this forum, it is not for me to give further details; I am sure that you could call for evidence. I am not aware of the particular countries that you mentioned, but I am aware that the different types of fraud might feature in the nature of the funding stream, the nature of the organised crime group or the country in which the group is based. Different crime groups use different methods to defraud. Indeed, in different countries the same groups have been successful at defrauding in a different way. That in itself starts to bring a type of criminality into the pan-Europe crime context. But I do not have enough evidence to give a detailed answer to your question. Stephen Harrison: I would like to add to that. I might sound like a stuck record on this but we need to focus on preventing the fraud happening in the first place, particularly as organised crime groups become more sophisticated and are able to base themselves overseas while perpetrating crime in the UK. The more that we can focus on preventing fraud and putting better systems and controls in place, the more we can address the fact that it is difficult to reach these people when they are in certain jurisdictions.

Q154 Lord Anderson of Swansea: I was just wondering to what extent the witnesses can help us on cross-border VAT fraud and the role of the various European bodies that have been mentioned in that context. That may be a matter for Revenue and Customs and outside your personal experience, but can you help at all on that? Stephen Harrison: I think it is probably outside my experience. However, I would make two points. Again, when one looks at common enablers of fraud, sometimes use of false identities and so forth can be used as part of perpetrating that, so part of the response is not necessarily just to focus on the fraud type itself but to focus on some of those common enablers. For example, if you have more rigorous checks on identity and so forth, you might prevent that fraud happening. The other point links to what Baroness Corston said about organised crime. We know that organised crime in particular has used certain types of VAT fraud in relation to the so-called missing trader intra-Community—MTIC—fraud. Lord Anderson of Swansea: I thought you would have used Nigeria rather than Dubai. Stephen Harrison: There is certainly evidence that the nature of how those frauds are perpetrated requires a degree of organisation and sophistication that you would associate with organised crime. However, we could not pin it down and say that a specific amount of this type of fraud is perpetrated by organised crime. We have come up with a global estimate of around £9.9 billion within the £73 billion figure, but we could not drill that down to specific fraud types. Lord Anderson of Swansea: Commissioner, can you say anything on cross-border VAT? Adrian Leppard: I do not know in terms of VAT, but what we do know is that some of the organised crime groups that are targeting VAT will often target many other areas. The issue that you raise concerns cross-jurisdictional issues in terms of law enforcement, exchanging intelligence and then the hunt for those responsible and bringing them to justice. Those are very real issues and, outside of fraud in relation to EU funding, are very serious issues for us as a country to consider, particularly when the vast majority of fraud is now internet-enabled and is global in the way it is reaching into our country. We have good relationships with Europol and Eurojust but we need to do further work on establishing how we take the fight 18

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) to those people who live beyond our shores. One of the areas we are looking at is how we seize assets from people. We can make forfeiture orders in this country but if the assets are held in other jurisdictions we do not have European legislation that would seek to bring those assets together. That is not a direct answer to your question but it is very relevant in that these people are often outside our country but still represent a threat to us.

Q155 Lord Rowlands: I remember a witness in Brussels a couple of weeks back saying to us, “Imagine that you are an overworked national prosecutor and you receive information about a possible fraud involving European funds or budgets. However, it is European funds that are being lost, not national funds. What sort of priority are you going to give to that matter?”. How do people feel about that? Adrian Leppard: It is the context of the fraud that will always be very relevant, not necessarily the scale, which is why our decision-making is not quite as black and white as that. We have to ask ourselves, “Is the fraud still being perpetuated?”. If it is, we need to take action to stop it, and therefore we need to arrest somebody. How old is it? Is it within our ability to gather evidence? Even if the fraud is small scale there will still be victims, as Mr Harrison said earlier. As I have said, the decision-making will have to assess a number of criteria. There will be different criteria in each agency that may receive a referral, and, indeed, each police force as well, which is why the other questions that I have answered in terms of how action needs to come together better, hopefully through the economic crime command— Lord Rowlands: Is there a chance you could create agreed criteria? Adrian Leppard: There is certainly a view within the Home Office that as we move to establish the economic crime command, and as regards how we investigate all types of fraud, we need a better understanding of how we share responsibilities in certain areas. We need to find common case acceptance criteria to make the best use of what is a shrinking asset in all our resources.

Q156 Lord Dykes: On your point about the location of assets, which can sometimes be a problem, do you feel that the individual national Governments in the EU, including the UK, and the EU institutions themselves and others outside, and the G8 and the G20, are now getting better results in that field in terms of knowing where the tax havens are and getting better behaviour from the nearer tax havens, including the ones in Europe? Adrian Leppard: I do not have enough detailed knowledge to answer that question. I can only tell you about our perspective. We are sharing more information. The financial services sector is very supportive worldwide, but chasing down the money of fraudsters is always a big issue and a big problem. Getting that money from other jurisdictions either in Europe or worldwide is still a very difficult thing to do. Ultimately, if we are to make inroads into international criminality, as well as enforcing and prosecuting, we have to remove assets from people, which is one of the biggest factors that prevents and deters.

Q157 The Chairman: Perhaps we can now move on to the National Fraud Authority. Commissioner Leppard, if you wish to add to Mr Harrison’s replies, please do so. Lord Elystan-Morgan: I think I have already shot my bolt—the bigger bolt that I have, anyway. Lord Rowlands: 80% of all EU funds are distributed by the relevant national authorities. Therefore, it is within the national authorities that there is the highest likelihood of fraud

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) occurring against European funding. To what extent does your agency deal with that kind of fraud and how do you prevent it or discover it? Stephen Harrison: I think I said in some of the earlier answers that we look at the more strategic causes of fraud and the more strategic interventions that might typically help prevent fraud as well as supporting the enforcement response. In our annual fraud indicator we looked at what we call grant fraud, taking the proportion of government expenditure which is a grant—in a sense something which is given— Lord Rowlands: That can be either a national grant or a European-funded grant? Stephen Harrison: This is all EU. We asked the Treasury how much grant expenditure goes on in government whereby a government department usually gives money to another organisation for a specified purpose. There is usually either an entitlement process for that—an eligibility check—or some degree of applying for that assistance. Using that gross figure, we then applied, as I said to Lord Elystan-Morgan, a very crude but the best we could estimate of likely fraud losses there. When we look at how that money is administered, a lot of it is done in an analogous way to what I call grant fraud, so there is a grant-issuing process. We did some work with a number of agencies, including the Rural Payments Agency but also other organisations such as the Big Lottery Fund and so forth, about what constitutes good practice in administering a grant scheme so as to prevent and detect fraud and improve the enforcement response. Lord Rowlands: But does any of your work have an EU-specific dimension? Stephen Harrison: Not in that respect. What we would say is that the good practice that we have identified in how to reduce fraud in the administration of grants would apply to a number of areas where EU expenditure is carried out in the UK. We did that work with a network of counterfraud champions that the Cabinet Office worked with us to set up. The Cabinet Office is now taking forward the work on grant fraud and looking to develop more sophisticated processes to screen grants and share grant information across a number of awarding bodies. That would have the indirect effect of helping organisations that administer EU funds, but we would not do a project purely on EU fraud. We do not do that type of project, anyway; we look at cross-cutting issues.

Q158 The Chairman: You said that you do not do anything specific on fraud against EU funds. I am not sure whether I am the only Member of the Committee who thinks this. When we started, it was made out to us that it was a huge problem—vast—and yet nobody seems to think that it is a priority; it is just one of those things that comes along with everything else. Is that fair? Stephen Harrison: No, I do not think it is, because a large part of the way to tackle how fraud is perpetrated against EU funding that is spent in the UK is to look at improved processes for the elimination of grant fraud. We work very closely with the Rural Payments Agency and a number of other agencies that are learning from its experience. We have worked with the Cabinet Office to develop better processes that should allow those organisations to detect more fraud, and to provide the information to agencies such as the National Fraud Intelligence Bureau. We take fraud very seriously. It is a major priority for Government to deal with, and one of the reasons that we were set up and that additional funding was given to the City of London. But in tackling it, we look at broader common strategic fraud threats rather than chase individual types of fraud. Adrian Leppard: Grant fraud is different from other fraud because it would be administered through a public body. The way fraud gets prevented depends on how you apply for it, on 20

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) the methodology for you receiving it and on the auditing behind it. In this country we have one of the lowest spends of EU funding, and in types of areas that would not necessarily lend themselves to fraud as much as those of other member states. Secondly, our auditing function is very well regarded by the rest of Europe. We have the Audit Commission and the National Audit Office. When I spoke to the director of OLAF, it was clear that they had the perception that this country had a low level of fraud in EU funding compared with other member states. The Audit Commission’s role and the inspection of how funds are delivered are very effective. They provide the first indication of irregularities. If I may, in answer to your question about whether there is a huge problem, I will say that clearly there is always the potential for fraud—and there will always be fraud—with any funding: the estimation that we give is that fraud will account for 1-2% of anything. But I do not believe that the UK has a problem that is potentially anywhere near the size of that in some other member states of Europe.

Q159 Lord Temple-Morris: I rather rashly volunteered to ask the last question on the formal list, and all the goodies were steadily taken away by questioner after questioner, including by the Lord Chairman himself, whose last question virtually killed anything I might like to say. Perhaps I may address this to both of you. It is a moot question. The whole problem with the European Union is that you represent two bodies that are an advanced system of fraud prevention in an advanced country. There are a number of advanced countries in the European Union and a number that are not so advanced. The poor old Commission comes up again and again and says that “more Europe” will be more effective over Europe. Of course, politically that is objected to by various people. The question comes down to what you are saying about Europe to your superiors. You mentioned the Cabinet Office and various other things. A while ago the commissioner said that taking the fight against fraud outside European jurisdiction was a problem. For example, has it entered the official mind that the European Union is a very good instrument to take it outside our jurisdiction, bearing in mind that we are dealing with two very good national agencies? So much of the questioning has been on national issues, although this inquiry is about the European Union. I wanted to ask, on your attitude to this, whether we are taking the European Union seriously enough, and whether we take any notice whatever of the Commission’s desperate crying out for action to be taken. This Committee considered in 2004 or 2006 the frequent declarations of strategy by the European Commission. Nobody takes any notice of them. This Committee produced a report but no action was taken at European Union level for political reasons. Therefore, the question is what you think about how we are doing generally, and whether there is any weakness in our national system that might be improved through representations to the European Union. For example, if you think that outside our jurisdiction we need to improve, surely to goodness the European Union should be advanced and not allowed to deteriorate. Adrian Leppard: In answer to your question, the Home Secretary very much realises this. The organised crime strategy for this country is entitled “Local to Global”. The issue is to make sure that we address and respond to the needs of local people in their local areas, while recognising that the threat is now truly global. Beyond Europe is international. We regard that very seriously. We are having active discussions with the Home Office as agencies and bodies dealing with issues such as European opt-in and opt-out: do we have European arrest warrants and what will we have in future? I said earlier that we do not at the moment have powers to seize and recover assets Europe-wide. That is what we need to think about now, and that is what the Government are thinking about now. There is an active debate about how we maximise our reach in Europe. There needs to be an equal debate about how we go beyond Europe. A great number of threats in my world of 21

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) economic crime, cybercrime and fraud are way beyond Europe: they are international and outside Europe. We in law enforcement have to think about how we get better intelligence and how we share it in that regard as well.

Q160 Baroness O'Loan: I will ask Mr Harrison a question on the basis of the written evidence that we received. It states that fraud against EU revenues is outside the scope of the annual fraud indicator. I was contemplating the question asked by the Lord Chairman. The fact that EU fraud is not quantified is considered to be a very significant problem that does not seem to be a priority for any particular organisation. Should it at least be brought within the scope of the fraud indicators? Stephen Harrison: Breaking down the fraud cost has proved difficult. I am not an expert in how the EU is funded. Perhaps in trying to prepare for this Committee I learnt a little bit more about it than I ever envisaged I would, but I would not claim to be an expert. If we use, for example, the VAT system, as far as I understand it the EU will take a proportion of our VAT receipts in the UK. Obviously, HMRC will crack down considerably on VAT fraud for general reasons as well, because it funds a large chunk of UK expenditure. What I was trying to say in my written evidence was that there is an estimate for VAT fraud across the piece that sits within the annual fraud indicator. What we have not done is to say that, for example, 1% of it is fraud against EU revenues because that money is passed on to the EU. Baroness O'Loan: What about fraud against grant programmes? Stephen Harrison: That is included. We do not particularly highlight it as a component, but if the money is spent through central government and local government, as it is, it will be captured through the mechanism. Baroness O'Loan: If you have large sums of money passing through from the EU, a situation where despite your proactive work to prevent fraud, investigations are rare and prosecutions rarer still, and no real quantification of the loss, is that not an invitation to organised crime to develop its activities? Stephen Harrison: I think organised crime goes for the areas of weakness in any systems and controls. I do not think it looks at the annual fraud indicator for hints on where it might go next. Baroness O'Loan: No but they might look at the overall activity of the various organisations. Stephen Harrison: They might well do but they tend to look very carefully—the Committee may know more about this—at weaknesses in systems and controls. They use internal knowledge, often gained by corrupt insiders, as to how best to get around the systems and processes. They target those weak spots to generate their frauds.

Q161 Lord Temple-Morris: The Chairman asked me to ask the question that I just asked both witnesses. Indeed, Mr Harrison has not had a chance to comment on what I called a moot question but it was actually quite deep. May I just add to the depth by saying that the commissioner mentioned the need for international co-operation in his answer to me at the very time when it seems we are about to opt out of virtually every method—in the criminal justice sphere—of co-operation within the European Union. Of course, we may be able to opt back in again. I asked originally about whether some of these messages might be passed up from people such as you, who are in very influential positions. But Mr Harrison first.

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164)

Stephen Harrison: I thought the commissioner gave a very full and comprehensive answer, so I do not wish to add anything to that. We are a small organisation; we have “national” in our title and we have a big problem to deal with in the UK. There is an awful lot that can be done just within the UK to strengthen our response to fraud. That has been the focus of our work for the past few years. As I say, it does impact indirectly on EU fraud because of the work that we have done on grant fraud. We have had some very interesting bilateral discussions with some individual EU countries, most recently the Netherlands, which was looking at the experience of how the NFA goes about its work—the fact that we bring together public and private sector and voluntary organisations and try to develop a common strategy and approach. I do not think I can go any further than what the Commissioner said in his earlier answer. Adrian Leppard: May I add one point on the justice measures? I very much support the view of the Home Secretary. While I am not cited on the view of the Government or the decision on the opt-out, there is a need to select immediately what provisions we need in this country. That is the view of the Home Secretary. She is considering those issues and consulting with a number of agencies about that. Indeed, we are part of that consultation. We need some of those provisions and I think that is what the Government understand and would wish as well. Lord Temple-Morris: That is what I wanted to know. Thank you very much. The Chairman: You may be about to get yourself an invitation back because we are doing an inquiry into the opt-in with another sub-committee. Lord Rowlands?

Q162 Lord Rowlands: My question follows straight on from that. There is the European arrest warrant and you have suggested a European seizure of assets. What about the European public prosecutor’s office? How would that contribute? Adrian Leppard: In member states, particularly those that are led by prosecutors—in a lot of the countries in Europe, investigations are prosecutor-led—there is a view across Europe that bringing those bodies together under one common prosecutor would assist. I am unsure myself about the value of that in the UK or for the investigations. I am very clear as to what Eurojust does at the moment. I am very clear on what intelligence-gathering and sharing we have with Europol. The Commission has yet to produce clear proposals for what a European prosecutor would do. I think it would be something that you would want to look at, but at the moment I am unclear about what the business case is or what the benefit would be. The Chairman: I do not know whether any Members wish to pursue the question of VAT that we would have put to our absent guest. Lord Sandwich?

Q163 Earl of Sandwich: We had Professor Spencer here. I will put to you the point he made to us. To some extent, problems of EU fraud are problems with the way that the tax system is structured. Do you think that this applies to the VAT system? You may want to express a personal view. What can be done to counter it? There must be many ways of getting around VAT. Stephen Harrison: I am afraid that is beyond my area of competence. Adrian Leppard: My personal view response is that there has to be something in that point. The way that anything is structured presents either greater challenge or greater opportunity for a fraudster. Within Europe, member states host taxation, funding and auditing in different

City of London Police and National Fraud Agency—Oral evidence (QQ 140-164) ways. But I would not be able to make any comparison of taxation rules across other member states to know whether that is an opportunity or not. Earl of Sandwich: That is the fullest answer that I could have expected. The Chairman: We do not want to push you in any particular direction but do you agree with the statement that VAT fraud seems particularly prevalent, in the most general sense? Adrian Leppard: In terms of European funding? The Chairman: No, just in the general sense of VAT fraud. Adrian Leppard: My general view is that I could not comment on that. I suppose I would have to give a more contextual comment about the nature of fraud in the UK. There are many types of fraud, from charity fraud to grant fraud. Do we think that VAT fraud is more common than other types of fraud? Actually, there are many other frauds that are more volume-oriented. Online shopping and the hacking of personal websites and Facebook accounts are very volume-oriented. Baroness O'Loan: I am not sure, Commissioner Leppard, whether you have any involvement in the investigation of VAT fraud. Adrian Leppard: The only involvement is our relationship with HMRC. Her Majesty’s Revenue and Customs has the largest investigative capability in fraud around tax and revenue. Therefore, we do not investigate that. Baroness O'Loan: Is it your understanding that HMRC would, for example, work with Europol and Eurojust in that context? Adrian Leppard: I do not know how it works with Europol so I am unable to answer that specifically. HMRC, very much like us, will look at the cases that it is working with and seek to engage with agencies or countries that would help it to pursue its investigation. That is a natural thing that you wish to do when you have a case that you wish to take to court. Baroness O'Loan: So you would expect HMRC to be engaged with Eurojust and Europol if it was engaged in such a case? Adrian Leppard: I would expect it but I have no details.

Q164 The Chairman: Gentlemen, is there anything that you would like to say to us or any questions that you would like to answer and think we should have asked? Adrian Leppard: Lord Chairman, to sum up, I feel that globally we have a very serious fraud threat facing the western world and this country. I do not see EU funding fraud as a large issue on the radar, compared to other frauds we face. Maybe within Europe the fraud threat on EU funding is greater than in the UK. The Chairman: Thank you very much indeed.

European Commission—Oral evidence (QQ 62-78)

Evidence Session No. 4. Heard in Public. Questions 62 - 78

WEDNESDAY 7 NOVEMBER 2012

Members present

Lord Bowness (Chairman) Lord Dykes Lord Rowlands Lord Stoneham of Droxford

______

Examination of Witnesses

Hubert Szlaszewski, Donatienne Claeys Bouuaert, José Pirão Vivian Loonela and William Floyd, European Commission

Q62 The Chairman: Good morning. For the record, perhaps I may point out that this session is on the record and a transcript is being taken. We will send the transcript to you and your colleagues shortly, should you wish to make any minor amendments in the interests of accuracy. The evidence of witnesses in these inquiries is published. Members will declare any relevant interests during the course of the hearing. I shall do so as a solicitor in so far as that may be considered relevant to the subject in hand. I should also be grateful if you and your colleagues, again for the record when speaking for the first time, would introduce yourselves and tell us the position you hold within this particular prong. I do not know whether you want to make an opening statement or if you would like to proceed straight on to the questions. Mr Hubert Szlaszewski: Perhaps it would be best to proceed to the questions. However, I shall say a few words to present myself. I am Hubert Szlaszewski and I am a director in the Secretariat-General of the European Commission. The Secretariat-General is a special directorate-general of the Commission which reports to the President of the Commission.

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Its role is to be the link that joins all the other directorates-general. We have an overview of all the other departments and we have responsibilities as a central administrative service. My colleagues who are here with me today are all from different areas of the Secretariat- General and specialise in financial aspects or in the follow-up conducted into OLAF cases.

Q63 The Chairman: Thank you for describing what you do. Perhaps you could tell us how the department relates to OLAF itself and, in connection with that, touch on how the independence of OLAF is protected, as it were. That is because from time to time questions have been raised as to whether it should be part of the Commission or whether it should be separate. Also, perhaps you could help us with something that has slightly troubled us. Distinctions are drawn between fraud and irregularity. I think we understand that, but how vulnerable to fraud and irregularities are EU funds? Is there a bias towards irregularity rather than fraud, or is it the other way round? Lastly, if you are able to generalise on this point, where do these irregularities and frauds occur? Are some activities particularly vulnerable or, dare I say it, are there greater problems in some countries than in others? Mr Hubert Szlaszewski: I shall turn first to OLAF, which has a dual nature. On the one hand, it is a department of the European Commission because it is administratively a part of the Commission. On the other hand, it has an investigative arm that is totally independent of the Commission and of any other European institution. There is a Chinese wall within OLAF between the investigative activities and the other activities. Those other activities comprise assisting the institutions in combating fraud as a policy. Moreover, because OLAF is part of the Commission, it has to fulfil a number of administrative tasks. For example, it participates in the decision-making process of the Commission, as would any other department of the Commission. It is therefore important to understand that there is a huge difference between these two aspects of OLAF, although it has just the one name. Most of the time, people on the outside see only the investigative side. However, I have to insist very strongly that it is totally independent and that is why it has a supervisory board which I believe that you have also had the opportunity to meet. It is the guardian of its independence. Would you like some additional clarification on these points or are you happy with that response?

Q64 Lord Rowlands: When reading the documents we have seen a lot about fraud of the cohesion funds, the distribution of money and what is paid out at the member state level. However, what has struck me is the enormous potential for VAT fraud, excise fraud and so on. What kind of new initiatives are being taken on that side, particularly on VAT where we are fighting an uphill battle against what is really very well organised crime? Am I right in believing, first, that it is a serious drain on European finances? Secondly, are there any initiatives in the pipeline to deal with what is obviously a serious issue? Ms Donatienne Claeys Bouuaert: I am working with Hubert Szlaszewski as head of unit responsible, amongst other things, as contact for the Commission on OLAF internal investigations. Exactly as you have said, the President of the Commission said in a speech on 12 September that stopping tax fraud and tax evasion could put extra billions into the public purse. It is one of the types of fraud that OLAF could work on.

Q65 Lord Rowlands: Obviously. No doubt you have tried a few things already, but it does not sound as if you are winning. If you are not winning, you need to find a way to do so. How are you going to do that? Mr Hubert Szlaszewski: That is a question that I think would be better put to Commissioner Šemeta. I really do not want to mislead you on this. I believe that we are, but Commission Šemeta has the technical answers. 26

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The Chairman: Perhaps we may write to put these specific questions to him. There may be other questions arising out of this session that we may not have time to cover so, if we may, we will write to you with them and the replies can be added to the evidence. Mr Hubert Szlaszewski: Perhaps I could come back to your question about fraud and irregularity. I am sure that OLAF explained the difference between an intentional criminal act on the European Union’s finances, and irregularity, which is just a non-respect of the rules or poor judgment. Obviously, it is very important to combat, but it is also extremely important to create conditions that are less conducive to this kind of situation. I very strongly believe—and the statistics show—that only a very small part of the irregularities proves to be fraud. It is a mistake, an error, and there are different reasons for that. One area in which we consider much progress can be made is in the way the programmes are designed. If the rules are confusing and complex, varying from one programme to another, it is easy to make mistakes. Also, if the requirements go into lots of details, you multiply the risk of mistakes. It sounds as if I am criticising the European institutions and the Commission in particular for proposing such extremely complex programmes but that is not exactly the case. In fact, the Commission is always trying to simplify those programmes. As you know, discussions are currently going on about the future financial framework for the years to come after 2014. The Commission has proposed a number of simplification measures to reduce the scope for irregularity. There will always be fraud because fraud is intentional but at least you can reduce the scope. The measures for simplification include fewer programmes, and the programmes that are put forward should have as many common administrative regulations as possible so that the differences between implementation of the rules are limited to very specific situations where it is unavoidable; as far as possible, there should be the same rules so that people do not have to learn a new skill each time before they apply for this or that. It is an uphill struggle. We see a tendency in both the member states and the Parliament to add complexity, to micromanage, to pay lip service to simplification rather than walking the walk. This year the Commission decided to create a monitoring tool of the simplification measures. At the end of September the Commission issued a communication to the other institutions about the first simplification scoreboard for the future programmes, which shows, point by point, where we have concerns with the way the negotiations are evolving. I would like to take the opportunity of your presence here to make a strong pitch for the simplification. We will never avoid mistakes if we create conditions for those mistakes. Another element where we want to improve by simplifying the programmes is to allow the implementation of the programmes to start earlier. Today there tends to be a peak at the end of the period of the programme where people rush to finish. When people rush, people make mistakes. It is again a cause of much of this irregularity, which can be avoided. Another element of simplification is internal. If each programme has a completely different legal base with different rules and conditions, you have to create different IT systems to run them. Because of this compartmentalisation, it is much easier for fraudsters to hide because there is simply no dialogue between those different elements. Again, we want a single programme framework that covers across different programmes. We do not see why we should be inputting the recipients 10 times in 10 different programmes—why can we not do it once and have them appear somewhere else? All this hinges on those legal bases. There are 57 financial proposals for the future programmes that are being prepared. Each of them is the target of the creative initiative of every member state in the Council and EP, which tweak it here and there. The Commission is doing a lot to combat fraud, but we would like to reduce the opportunity first. I hope that you can pass this message to your colleagues, because the 27

European Commission—Oral evidence (QQ 62-78) more people speak about it, the better. The communication was presented to the Council and to Parliament and met total silence, as if nobody was interested.

Q66 Lord Dykes: Is that because MEPs and others think that fraud is very marginal and therefore a bearable expense for running a gigantic financial community? Mr Hubert Szlaszewski: I do not think so. I think the main reason is that everybody wants to micromanage these programmes. Of course, that comes at a cost. The Chairman: If you would be kind enough to let us have a copy, we may see where it is within our own bureaucracy. I can feel a question coming on from colleagues as to whether the Government have deposited it within our structures. Mr Hubert Szlaszewski: Usually the political declarations are sympathetic but it gets much more complicated when these legal texts are being discussed in different committees, where everybody tries to pitch in. The Chairman: Indeed.

Q67 Lord Dykes: The earlier discussion revealed the piquant nature of those cases where more than one member state is involved, where the national judicial authorities are incorporated into the initial launch of the OLAF or other investigations. Are there ways in which the Commission can also monitor that process? There must be quite a few transnational examples in these cases that are followed up. I imagine that with three or four countries there would be a complicated matrix. Does the Commission have the resources and officials to monitor that? Of course, OLAF is seriously overburdened with work and has slightly fewer officials than it had before. Mr Hubert Szlaszewski: I will pass that to my colleagues, but everyone is getting fewer officials than they used to. Ms Donatienne Claeys Bouuaert: Maybe it is more a question for José because it is more for external monitoring and fraud. Mr José Pirão: I am José Pirão and I work in Unit B1 Corporate Management, Budget and Administration on the organisation chart, which is responsible for the multiannual financial framework and the general co-ordination of budgetary and audit activities. I answer directly to Lord Dykes’ question on monitoring. We do not have the capacity to monitor the diversity of fraud cases. OLAF is normally in charge of covering all the actions presented by the member states because we cannot intervene. At directorate-general level we can have an idea of the errors committed but the fraud cases go far beyond the simple detection of irregularities in terms of financial operations. We do not have a central framework for monitoring fraud cases except OLAF.

Lord Dykes: Presumably if OLAF was better resourced, it would do a better job? Mr José Pirão: That is the intention of our strategy. We are trying to put that more with the directorates-general because they are much more linked to the specific programmes and to the risks involved. By defining their own fraud prevention and risk management strategies, they would be able to get further than we are doing now. That was the intention of our antifraud strategy. Mr Hubert Szlaszewski: We also wanted to avoid “deresponsibilising” the directorates- general. It is very easy to say, “OLAF takes care of fraud. It is not my business”. It is very

European Commission—Oral evidence (QQ 62-78) important for us to ensure that every department feels its responsibility. OLAF is there to support and investigate but the responsibility should be with those who pay out the money.

Lord Dykes: That is not merely on agricultural, is it? Mr Hubert Szlaszewski: No, that is general.

Q68 Lord Stoneham of Droxford: Do you regard OLAF as suitably independent? The relationship between the supervisory committee and OLAF seems a little complex, to say the least—perhaps you could comment on that. Should OLAF remain part of the Commission? Ms Donatienne Claeys Bouuaert: For the time being, OLAF is part of the Commission and is independent. That is a matter of fact. It is not so easy for the accountability and the responsibility to have an investigative body completely outside everything else. This was studied earlier by the Prodi Commission, so it is not a new debate. But after due consideration of all those aspects, it was decided to maintain OLAF inside the Commission, which was strongly supported by the Parliament. The Parliament wanted OLAF in the Commission because it is easy to have someone responsible. It is completely independent for the investigative functions, but at the end of the day, if OLAF is condemned, the Commission is responsible. It is a tricky situation for the Commission, but difficult to organise differently. The Commission was not convinced that changing OLAF’s status would really help the quality of the investigations. Also, OLAF itself thought that it would be better to be integrated in the Commission so that its experience could feed the anti-fraud programme of the Commission and there could be better and more constructive co- operation with the Commission for all those horizontal issues. With regard to the contact with the new supervisory committee, I noticed that there was a debate in the European Parliament yesterday and the supervisory committee was claiming that it did not have enough resources and was not given access to files. It is a situation that OLAF should react to; of course it should help the supervisory committee to do its job properly. I know that Commissioner Šemeta is interested in addressing how to organise this better, to help the supervisory committee to do its job properly.

Q69 Lord Stoneham of Droxford: There seems to be some suggestion that the relevant supervisory committee is going to change. At the moment its primary purpose is to ensure the independence of OLAF. Does it have responsibility for an audit of what OLAF does? That is where there seems to be a bit of a conflict. Ms Donatienne Claeys Bouuaert: The revision of the regulation does not change so much the role of the supervisory committee. The first role is to ensure and guarantee the independence of the investigative function of OLAF, and also to report on the work done by OLAF, to control the length of investigations and to ensure that things are going well. It can also make a report at the request of the institutions, either the Parliament or the director- general of OLAF. It has quite a big role but auditing is not really part of it. At the end of the day OLAF is responsible to the Commission for its political part—the horizontal work—but not its investigative function. After the investigation is closed, the supervisory committee can appreciate if everything went well or not. It can be consulted or it can tackle an issue by making a report, but it should never intervene during the investigations.

Q70 Lord Rowlands: We have just come from a meeting with the director-general. He presented us with a rather vivid picture of the problems in the complex relationship between OLAF and the national authorities. That was partly an explanation for why 40%-odd 29

European Commission—Oral evidence (QQ 62-78) of the cases that are submitted to national authorities are not pursued. Are there any thoughts within the Commission about how that relationship between OLAF and the national authorities can be changed, altered or improved? It did sound like a bit of a nightmare, the way he described it to us. Ms Donatienne Claeys Bouuaert: The revision of the regulation also intends to address that, as member states will be invited to have a contact point to receive and direct OLAF demands to the national authorities, and also to report. It should be easier for OLAF to address problems. That is the first point, a focal point in a member state; there is also the obligation to report. We have avoided too strong a bureaucratic obligation but at the request of OLAF, national authorities should give an answer. OLAF should be informed as to the reason (for non-pursuit).

Q71 Lord Rowlands: At the moment, once OLAF sends its report there is no obligation on the national authority to explain why it is not pursuing the matter? Ms Donatienne Claeys Bouuaert: According to OLAF, it is not informed enough. It says that there are discretionary reasons or sometimes no reasons at all. But we do not know what was communicated by the authorities. Maybe it is self-explanatory sometimes. It is difficult to know. But of course the national authorities should work with OLAF and help OLAF to do its job properly, for the protection of financial interests.

Lord Rowlands: You said that one idea was the creation of a focal point. Are there any other ideas? Ms Donatienne Claeys Bouuaert: A reporting obligation, on request.

Q72 The Chairman: Following on from Lord Rowlands’s question, you did not mention, as witnesses mentioned to us this morning, how a situation in which you are dealing with offences that cover different jurisdictions would be aided by the creation of a European public prosecutor. Has the Commission a view about that at this stage? I ask you to lift the veil because it is, as you will appreciate—I am not sure how I should put this—a matter of some interest to the United Kingdom and could create some legislative problems, were we to be involved. I hasten to add that we do not want to be involved in that. This is an inquiry into combating crime, and if it is thought by our witnesses that a European public prosecutor would assist, we would like to know why, and what kind of office and role such a prosecutor would have. Do you know how it would impact on national criminal jurisdiction and national laws? I promise you that this is not— Mr Hubert Szlaszewski: I would be happy to add something after my colleague. Perhaps you could introduce yourself. Mrs Vivian Loonela: I am Vivian Loonela and I am the policy co-ordinator within the secretariat-general for justice affairs. We have the three institutions—Europol, Eurojust and OLAF—which are in various ways responsible for detecting fraud cases and EU financial interests. The treaty indeed gives us the possibility to establish also the post of the European public prosecutor’s office, with the aim of protecting the financial interest of the Union. We are now in the preparatory stages, as you know, and in the Commission’s work programme for the coming years, it is now planned for the second quarter of 2013 for the Commission to come up with a proposal on the EU public prosecutor’s office. This is at a very preliminary stage, where we are doing all the internal impact assessments. We will have thorough discussions with stakeholders and within the Commission. Then we will bring something to the table, and that then of course would be a matter for the Council and the 30

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Parliament. We shall see what comes out. However, at this stage, the aim of the Commission is to create some coherence and fill the gaps that that are not yet fulfilled by the three institutions—OLAF, Eurojust and Europol. The aim is to achieve more results in the fighting of fraud. I hope that you have the communication from last year on the protection of the financial interests of the EU. That explains the general picture of where we are. Now, the legal and procedural framework is for member states to take action. Each member state can prosecute fraud cases according to their own national legislation. There are no minimum standards in place. There is the convention from 1995, but that, as you know, has been implemented fully only by five member states. In order to rectify this situation, the aim is to make a proposal on the European public prosecutor’s office, which could detect and investigate the protection of financial interest independently—of course with the co-operation of member states. It would also enjoy Europe-wide enforcement and have some kind of a mandatory element towards the member states in prosecution, which, for now, Eurojust does not have. That is the aim. What comes out of it, we do not know at this stage.

Q73 The Chairman: I do not want to put words in your mouth—I genuinely do not—but is it a firm view of the Commission that a public prosecutor’s office at European level is necessary for this purpose, whatever shape or form that may ultimately take? Mr Hubert Szlaszewski: There is no firm view of the Commission on the matter at this stage. I think we have to take a step back. The question originally was about those investigations that straddle different legal systems and the difficulty of ensuring a proper follow-up. It is not always simple. After all, we have different member states with different legal systems, and it will always be a complex matter. We are not in a superstate, no matter what the tabloids may say. It is a fact of life. The question is: how can we improve it, considering this fact of life, which I am not qualifying? One level of improving is about improving the quality of OLAF investigations, because if member states do not follow all the leads, it does not necessarily mean that that they tolerate crime; it may mean simply that, on the basis of an investigation within their legal framework, they do not have sufficient elements to pursue a case; or when balancing the potential crime and the costs, they decide that a case is not worth pursuing. We have an example years ago of a €50 case being sent to national authorities. It is natural that those national authorities closed the case, without explanation. However, it of course adds to the statistics, and we must be careful not to jump to conclusions now. I believe that the contact point mentioned by my colleague will be a welcome addition to make sure that there is always someone who has a keen interest in ensuring this dialogue. Otherwise, it is about dialogue, being convincing and making a strong case. Of course, for an investigative body it is always better to have more. I know that OLAF has hopes that the creation of a European prosecutor will assist their efforts. That may well be the case, but it is not so simple. That is why the Commission is, at this stage, looking at the impact assessment and at what the impact of such a new sui generis position would be when compared to the national legal systems, because it has to fit. People often tend to too quickly translate or transpose national solutions to a non-national level without realising that it is not simple, and there are consequences and risks. At national level there is a system of checks and balances that sometimes does not exist at a European level. We are open to evaluating the possibilities of this new position of a European prosecutor, but do not have the answers at this stage, and we do not know what will be the conclusion. We want to avoid by all means the creation of something that would not work. That is not the purpose. You started, Lord Rowlands, on the issue of independence and the fact that OLAF is within the Commission. Here again, we are not dogmatic; we are very open. As my colleague said, OLAF happens to be in the Commission and it happens to be fully independent, but we 31

European Commission—Oral evidence (QQ 62-78) would not mind if it were somewhere else because, being independent, the relationship would remain the same as regards the investigative arm. We would probably lose the closeness to a pool of expertise, but that may be not so dramatic. We would gain the fact that, as Ms Claeys Bouuaert mentioned, we have had past cases when OLAF was condemned for insufficient respect for the rights of the defendant, and that meant that the Commission had to pay, because it was the Commission, the legal body, which was condemned—not OLAF as such. It is therefore a bit of a strange situation, but it is the best we could think of. If anyone comes up with better solutions, we are open—even to the plan that we mentioned even two or three years ago—to the other institutions and to the European Parliament, and to look at other solutions. That prompted from most angles an immediate reaction of, “No, no, no; do not cut OLAF loose because it is doing good work where it is and people are afraid of what would happen”. But of course, it may be that in future, there is a new body and a new system that could be attached, with all the independence and, of course, guarantees of accountability. That is also important.

Q74 Lord Dykes: I come back to the first part, which is the question of the EPPO and the Commission’s views on it. Although I am sure that I was incorrect, I did get the impression that Mrs Loonela was about to say something else, but decided perhaps not to do so because everything is in flux and there is no collective official view. My memory may be letting me down, but I had thought that the President of the Commission, M. Barroso, had made some exhortatory references to the idea of an EPPO, but only in putative and cautious terms. Presumably, therefore, Commissioner Šemeta has not actually dealt with that in the public arena as a good idea. I do not know—he might be very keen on it—but time is short if the promulgation of the Commission’s draft plan on the idea is to be ready for the third quarter of next year. Some sensible observers of the scene consider that the idea has some merit, but it is very treacherous and tricky ground. Is it possible that we will see the emergence of a halfway house idea where, if an EPPO was set up with full legal powers and so on by the avenue of the strongest kind of full regulation you can imagine and sanctified the Council of Ministers and the European Parliament working together, that it might conceivably be empowered to—“request” is not a strong enough word, but “command” is too strong—liaise with the national prosecuting authorities so that they would willingly take up cases on behalf of the EPPO as well as in the national interest of their own country? That would enable the office of the EPPO not to be gigantic, which might be the fear felt by some people in these days of rigid discipline on the expenditure of public money. That at least would be a start. I know that this is all theoretical and rather tricky ground, but I thought that I would put the point anyway. Mr Hubert Szlaszewski: Before the Commission takes a decision, there is simply no decision, so I really cannot comment. These are precisely the questions which are the elements of the analysis now being made, along with the impact assessments. Lord Dykes: It might be more reassuring for certain member states that are hesitating. Mr Hubert Szlaszewski: I understand that and what you say about the present budget is true. You see, as soon as something is in the treaty, it is potentially something that will come up. Of course there is a lot of interest in this, so while it is a good idea, it has not been decided in terms of the treaty. The question is how to construct it so that it remains a good idea and not a creation that does not serve its purpose.

Lord Dykes: Have you been struck by any particularly interesting press reaction in the different member states?

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Mr Hubert Szlaszewski: Obviously in some member states the question is polemic in nature.

Q75 Lord Dykes: That might be the UK. But have you not seen it elsewhere in other EC countries? Lord Rowlands: Of course it has been presented in some elements of UK law practice that it is something that would fundamentally undermine our common-law system. That was at the heart of the issue. Whatever proposal is made, it would have to be sensitive to national characteristics and principles. Mr Hubert Szlaszewski: Of course. That is why when we talk about the efficiency of OLAF investigations and how the member states follow them, I personally focus less on possible future set-ups and more on how we can make improvements today. It is all about a dialogue and being convincing. Again, what OLAF does with its reports and how it proceeds is not a decision for the Commission, but a fully independent decision by OLAF. In our opinion, you have to ensure that you understand how local judicial systems work and how much they can shoulder. For example, many cases are brought before the Belgian courts simply because this is the seat, but those courts are cracking, having become completely overburdened by the number of cases. We have to wonder if, for example, in cases that concern minor but of course criminal activities, there are not more efficient ways of imposing sanctions, perhaps by the use of administrative sanctions, if these misdemeanours concern people working in EU institutions and so on. These are being handled by a national judicial system that simply has neither the time nor the appetite for what it considers to be petty cases. To us, however, they are very important. Lord Rowlands: I can see why you would define €50 as a petty case, but if it were €500,000, that would be different. Mr Hubert Szlaszewski: Definitely. But only one part of the question is how to recoup these funds. We have had cases where we never recouped the funds, but there was still a pending criminal offence. Mr William Floyd: A public prosecutor from Belgium said, “When I am presented with a case that has come from OLAF, my first question is, ‘Why should I provide the resources for this?’”. And my second question, if it is a transnational case, is, “Why am I in charge of this file and not someone from the other country?” These are aspects of the way of doing things which ostensibly can be improved upon. Lord Dykes: Perhaps I could say in response that the people who are theorising about the concept that I mentioned en passant would say that the EPPO, if it were to be created, would allocate resources to the national judicial entity in order to pursue such a case. Mr William Floyd: It would indeed, presumably.

Q76 The Chairman: There is one last question that we have not put to any previous witnesses, but again is in a rather sensitive area, which is that of whistleblowing. I would guess that it is sensitive for the Commission as well. What steps are taken to protect people who blow the whistle on perceived fraud? Mr Hubert Szlaszewski: There are statutes.

The Chairman: Are you referring to staff regulations?

European Commission—Oral evidence (QQ 62-78)

Ms Donatienne Claeys Bouuaert: There are specific provisions and regulations to protect whistleblowers and only in a very few cases do problems arise in that respect. It is also sometimes a question of protecting their identity. For example, if OLAF sends information on an internal investigation in the Commission, European Parliament, the Committee of the Regions or other agencies and entities of the EC, it should then inform the institution or agency concerned because they need to take precautionary measures and act in order to prevent irregularities carrying on. When we are informed about internal investigations concerning the Commission we always ask OLAF to blank out the name of the whistleblower in order to avoid any risk. The information they give is completely confidential. It is protected and handled very carefully, but even with that level of protection, we ask OLAF not to mention the name of any whistleblower to ensure that they are kept completely safe. Mr Hubert Szlaszewski: We consider that we do not need to know because the names are not relevant. It is the case which is relevant. It is also important to understand that where there is a case against someone in the Commission, we are the first victims, so we are keenly interested in making sure that information is dug out and that the consequences are taken. As my colleague has said, the dialogue is very important. We do not intervene at all in investigations and we do not necessarily know much about them. However, it is important to know that a person is under investigation—that information being kept completely confidential—because perhaps the person could be moved to another position, perhaps one of less financial risk and so on. Sometimes a delicate balance needs to be struck in the interests of an investigation when OLAF needs to continue to monitor a situation for months—the example of which would be someone who is suspected of taking bribes. The more often you see bribes being taken, the more evidence you have. That is done to protect the financial interests and, of course, the reputational interests of the institutions. There is an extremely restricted body of people—the Director-General of OLAF, the Secretary-General of the Commission and the head of the legal service—who can discuss these matters in a fully independent way without any risk of such information going astray. It is important and it has worked very well for years. We are pleased with this respectful collaboration between the independent bodies in this context.

Q77 The Chairman: Lots of European programmes are administered by member states—in some member states by lower tiers of government. It has been drawn to our attention that there are very few cases of fraud notified by France, Germany, Spain and the United Kingdom—the larger countries. Is there any significance in that? Bearing in mind that the Commission gets the blame if there is a problem with these European funds, are member states and their tiers of government sufficiently engaged in trying to prevent the misuse of European money? In a sense, it is a circle: if they know about it, are they reporting it? Mr Hubert Szlaszewski: The statistics usually reflect the quality of the administration, the administrative culture. So the countries with a very strong administrative culture, which you mentioned, may be better protected against this kind of occurrence. Of course, that does not mean that there is no fraud, but it is certainly much more difficult to commit fraud in such countries than in countries with much looser administration and lesser traditions. I am very hopeful that it is a matter of time for some countries that do not score well today.

The Chairman: I suppose that you do not have the resources or maybe not even the power to check on what is going on and how the money is being disbursed to the relevant members. 34

European Commission—Oral evidence (QQ 62-78)

Mr Hubert Szlaszewski: We have audits, of course—lots of audits—which sometimes pick up things. When they do, we transfer the information to OLAF. Perhaps Mr Pirão can add to this. Mr José Pirão: No problem at all. The question of the general operation of controls is quite tricky within the European Union. According to the financial regulation, each authority— agency, body, member state, the Commission itself—has the obligation to communicate this kind of thing. Nevertheless, in terms of fraud—this is related to the definition of fraud— there are several different judicial and legal frameworks in different member states. Sometimes something that is classified as criminal in one member state may not be so in other member states. The other question is the interlinking between member states when there is fraud covering several member states—and it is rare that it does not cover several member states. That is even trickier because you are acting in different legal modes. Finally, you have the management mode, which is linked to the funds or the programme in question, whether it is managed directly or indirectly by a member state or another organisation. That makes it even more difficult to set up a uniform way of communicating data related to fraud.

Q78 Lord Rowlands: Mr Floyd, is the answer to your point about the Belgian prosecutor saying, “Why should I bother? It is not my money”, that, although presumably the Belgian authorities would be in favour of a European prosecutor of some kind, in many other member states national prosecutors would be jealous about their territory; that if there was a perceived fraud in their territory they would wish to pursue it and would accept the liability and costs? Mr William Floyd: In the end that is precisely what happened but on the grounds that the interested person was of Belgian nationality so when he came on to Belgian territory it was evident.

The Chairman: Thank you for your time. I am sorry that we kept you longer than we said we would. Is there anything any of you wish to add or think you should tell us that we have not asked yet? If that is not the case, there will be a transcript. After we have reflected on the evidence, should we have any further questions, perhaps we might write to you for a written response. We would be very grateful to receive your replies to that. Thank you very much indeed for giving the Committee your evidence. It was very helpful. Mr Hubert Szlaszewski: Thank you very much. It was a pleasure. If we managed to convey that we are the most interested in making sure that fraud is more and more limited, that will already be a strong message. We are the ones managing it so we feel acutely responsible, even if it is happening somewhere else.

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238)

Evidence Session No. 13 Heard in Public Questions 227 - 238

MONDAY 11 FEBRUARY 2013

Members present:

Lord Bowness (Chairman) Lord Anderson of Swansea Lord Dykes Lord Hodgson of Astley Abbotts ______

Examination of Witnesses

Commissioner Algirdas Šemeta, Member of the European Commission responsible for Taxation and Customs Union, Audit and Anti-Fraud, Valère Moutarlier, member of his Cabinet, and Corinna Ullrich, member of his Cabinet.

Q227 The Chairman: Commissioner, first of all, I welcome you to London and I also welcome your colleagues to this meeting of the Justice, Institutions and Consumer Protection Sub-Committee of the European Union Committee of the House of Lords. As you will be aware, we are currently conducting an inquiry into the Union’s fight against fraud on its finances. I should say that I am sorry that there are not more Members of the Committee here this morning, but Monday morning is not the easiest time for some people who live a long way away. It is probably made even more difficult by the weather, which you will think is nothing, but you will appreciate that for us it is a traumatic and shattering occasion when snow falls. There are a couple of formal things that I should say. Members’ interests are recorded in the Register of Lords’ Interests, and any relevant interests will be declared by Members during the course of the proceedings when they speak. The session is, as you know, on the record. 36

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238)

It is broadcast—webcast—live, and it will then be on the parliamentary website. We will send you a copy of the transcript for you to see if there are any inaccuracies, but I warn you that it will be on the website before you have that opportunity. I would be grateful when you, and indeed your colleagues, speak for the first time if for the record you could formally introduce yourselves, although of course we know who you are and the office that you hold. As I said, I am sorry that there are not more of us, but you will know that we were very anxious to have your personal evidence on this important issue, and I am really very grateful, as are my colleagues, that you should have decided to come to London to see us. Of course, all the Members of the Committee will have access to your evidence, and in that regard it will be fully taken into account when we come to write our report. Commissioner Šemeta, perhaps I could ask you whether you would like to make an opening statement and, if so, perhaps you could take the opportunity to introduce your colleagues, otherwise we will go straight to questions. Algirdas Šemeta: Thank you for that introduction. Of course, I would like to make an introductory statement and introduce myself and my colleagues. I am Commissioner Algirdas Šemeta. I am responsible for taxation, customs, audit, anti-fraud and statistics. Here we have Valère Moutarlier; he is a member of my Cabinet. On my left-hand side is Corinna Ullrich, who is also a member of my Cabinet. She deals with anti-fraud and issues related to the activities of OLAF, the EU anti-fraud body. Lord Chairman, honourable Members, I am very grateful for the interest you are showing in the fight against fraud affecting the EU’s financial interests. It is not always at the top of the list of priorities for national policy-makers. However, especially in these economic times, protecting taxpayers’ money should be a priority for all of us. The question you have basically been asking is whether the EU is on the right path and whether it is doing enough to protect both the expenditure and the revenue sides of its budget. My reply to this question would be: yes, we are on the right path, and yes, we can do more. Over the past few years, we have taken substantial measures to make our budgetary system more fraud-proof. One example is the Commission’s anti-fraud strategy, which we adopted in June 2011. This strategy upgraded the Commission’s supervision of EU funds at all levels and in all sectors, including through the smarter use of IT. It is based on the “prevention is better than cure” philosophy. Fraudsters are constantly trying to find new ways to get around the law, and we must have the best and most up-to-date tools in place to stay one step ahead of them. The reform of the European Anti-Fraud Office, OLAF, is another crucial step we have taken to improve our anti-fraud armoury. Over the past two years, OLAF has undergone a fundamental internal review. The objective has been to refocus it on its main task, its investigative activity, and to increase its efficiency. However, there are limits to what can be done within OLAF’s current legal basis. In particular, OLAF needs more transparent rules on the rights of investigated persons, more efficient mechanisms to co-operate with national authorities and clearer provisions on its accountability. Political agreement was reached on the OLAF reform in December last year, after almost eight years of discussions. I hope this agreement will be formalised very soon by the European Parliament and the Council. 37

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238)

While reviewing and tightening our anti-fraud instruments at EU level, the Commission is also aware of the need for a stronger and more unified stance against fraud amongst member states. After all, it is their shared budget that is at stake, and the threat of fraud rarely stops at national borders. A united EU approach is essential to stop fraudsters exploiting loopholes between national systems for their own gain. Unfortunately, we are currently faced with very divergent levels of commitment to the anti-fraud battle across Europe, and very different national approaches to protecting EU funds. I would just like to give you one example. Conviction rates for OLAF cases transmitted to member states currently range from 19% to 92%, depending on the member state in question. If we are only as strong as our weakest link, then these statistics are chilling. For that reason, last July the Commission proposed a new directive on the protection of the financial interests of the EU. It aims to establish harmonised definitions of offences related to EU funds and to sanction these in a comparable way across the member states. This will enable national prosecution services to operate more effectively cross-border and will create greater deterrents against fraud throughout the Union. Finally, I come to what is probably the most ambitious project in our anti-fraud agenda: the European public prosecutor’s office. The work that OLAF does in preventing and detecting fraud is crucial. However, it only has the mandate to carry out administrative investigations. So, OLAF—even in its reformed state—cannot solve the problem of poor judicial follow-up in the member states. Therefore, we need a body that can take evidence in one member state and submit it to a court in another one—a body that attaches high priority to prosecuting fraud against EU financial interests, no matter where this fraud takes place. This will be the European public prosecutor’s office that Vice-President Reding and I intend to propose this summer. Preparatory work on this proposal is still ongoing, but I am convinced that the EPPO will make the investigation, prosecution and bringing to justice of offences affecting EU funds more effective. To conclude, I have outlined the main institutional changes that we are proposing to better fight fraud against EU funds. In addition, we are tackling specific areas that have proven to be particularly problematic in terms of fraud. Prominent examples are VAT fraud and cigarette smuggling, both of which cause enormous damage to EU and member state budgets. I will be happy to explain more about these latter initiatives if you should have any questions on them. I am of course also happy to reply to any other question you may have. Thank you for your attention.

Q228 The Chairman: Thank you very much, Commissioner. Perhaps, as a first question, I could ask you this. You referred of course to OLAF, which we know is independent and for which you have some responsibility as Commissioner. Can you perhaps explain to the Committee how your role fits with OLAF and the respective responsibilities? Algirdas Šemeta: I, as the Commissioner, am responsible for anti-fraud policy in the Commission and other issues relating to policy matters, such as proposals for legislation and proposals to introduce an anti-fraud strategy. They are the subject of my responsibility and here I work in very close co-operation with OLAF, which actually has two sides: a policy side and an investigative side. I am responsible for dealing with the policy side—how to better address problems of fraud in terms of legislation and in terms of what policy actions are needed.

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238)

The other side—the investigative side—of OLAF’s activities is completely independent. I do not have any impact on the investigative activities of OLAF, nor does any other Commissioner or even the President of the Commission. It is very important to maintain a strong, thick wall between the policy side of our activities and the investigative side, because I think it would be very dangerous if politicians were to start to influence OLAF’s day-to-day investigative activity. That is how the work is divided, and for the supervision of OLAF’s investigative activity we have a supervisory committee, which is subject to appointment by all three institutions— namely, the European Parliament, the Council and the Commission. This supervisory committee monitors the investigative side of OLAF activity in general terms.

The Chairman: Are you responsible for the allocation of funds to OLAF for its work? Algirdas Šemeta: Of course, all the directors-general present their applications for funds, and the decision on the figures and complete amounts are made, first, by the budget Commissioner. We have a budget Commissioner who is responsible for that, and then of course we have a collegial decision of the whole college of the Commission on the proposal for OLAF’s budget. Then the budget itself is decided by co-legislators—by the Parliament and the Council. Of course, as the Commissioner who deals with OLAF issues, I can advocate in the college of Commissioners for the budget of OLAF. But as I said, the decision is made collegially in the Commission and by the co-legislators—namely, the Parliament and the Council.

Q229 Lord Anderson of Swansea: Commissioner, anti-fraud is but one of your several but related responsibilities. First, what proportion of your time are you able to spend on anti-fraud? You mentioned that you are clearly the policy person in respect of anti-fraud, but policy often stems from implementation. To what extent are you able to be hands-on in direct dealing with national Governments? Algirdas Šemeta: Concerning your first question, you are right that I have several responsibilities—I believe very important responsibilities—be they taxation, customs matters, statistics or anti-fraud, but of course I try to divide my time equally among these areas. If you look at the initiatives proposed throughout my portfolio, anti-fraud issues play a very important role. I have already mentioned in my introductory remarks the initiatives which either are already on the table or will soon be presented by myself, sometimes also with colleagues, so I believe that I really pay due attention to the area of anti-fraud. We have working arrangements between the Cabinet and the anti-fraud office. According to those working arrangements, I have regular meetings with the director-general, his directors and his staff in order to discuss anti-fraud policy matters but also to discuss in general terms the efficiency of investigative activity in OLAF. That is part of my regular job. I meet OLAF every month and sometimes even a few times a month to discuss these matters. In terms of member states, of course, when it comes to new initiatives and to gathering information about specific problems in terms of communication between member states’ authorities and OLAF, that is also part of my regular job. When I visit member states, several meetings a day are dedicated to discussions with the appropriate authorities about the relationship between OLAF and national anti-fraud authorities and how this could be improved.

Q230 Lord Hodgson of Astley Abbotts: Could I go back to the Chairman’s question? He asked whether or not you are responsible for the OLAF budget. I was not entirely clear from your answer whether you were or you were not. I think you said that you were 39

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238) actually responsible for the OLAF budget. If that is the case, in your opening remarks you stressed the need to separate policy from investigation. Is there not therefore an argument for OLAF being entirely independent and able to operate without fear or favour? Algirdas Šemeta: In terms of budgets, to be clear, as the Commissioner who is responsible for OLAF, I can defend the draft budgets in the college of Commissioners, but the decision on the exact amount of budget is taken by the college of Commissioners. That then has to be adopted by both the Parliament and the Council. By the way, OLAF is the body in the Commission that has a separate budget line, and the parliamentarians could watch the developments in that budget. On the other hand, the supervisory committee, according to the legislation, is entitled to give its opinion regarding the size of the OLAF budget, and it does so regularly. That is how the situation rests with the budget itself. The question was on— Lord Hodgson of Astley Abbotts: Separating policy from investigation. Algirdas Šemeta: OLAF and the Commission are separate institutions. We had this discussion several years ago, and we also had a debate in the European Parliament about what the better approach would be for the part of OLAF’s structure which deals with anti- fraud matters. After weighing the various pros and cons, it was decided that at least at this stage it is better to maintain OLAF within the Commission while, at the same time, providing a Chinese wall between its investigative and policy activities. That also allows OLAF to have much better access to information in general within the Commission. We have to remember that OLAF is responsible not only for external investigations—namely, in member states regarding EU funds—but also for internal investigations. Quite a significant part of OLAF’s work is dedicated to this activity, and we believe that this strongly prevents the Commission and the staff who work in the Commission from undertaking any potential corrupt activities and so on. That is the situation that we have now. We are looking at this issue with a new, fresh view within the framework of the preparation for our EPPO proposal—the proposal on the European public prosecutor. At this stage, it is probably too early to say what the final outcome will be of the design of this proposal, but OLAF is one of the bodies that are subject to assessment regarding its role within the new framework or within the framework of the European public prosecutor’s office.

Q231 Lord Hodgson of Astley Abbotts: The Commission’s annual report in 2012 suggested that there were 1,230 irregularities costing €404 million. The evidence that we have received from various people—Professor Spencer for one—suggests that the figure was possibly 10 times higher. The study, which I think you may have referred to, published by the Greens in the European Parliament suggested that that fraud was costing €100 billion a year, and some people say that missing trader carousel fraud has cost £170 billion, or twice the European annual budget. Do any of these figures ring any bells with you? Algirdas Šemeta: Of course, it is true that the report which we produce regularly every year presents figures on detected fraud in the member states. You rightly pointed out that this figure was €404 million for 2011. I think you understand that it is difficult to estimate the overall level of fraud because this would require some tools which at present are not available. We also openly say in our report that the actual level of fraud is higher than that of detected fraud, because normally not all fraud in member states is detected. There are many reasons for that, including some technical reasons—for example, member states do not need to report frauds if they are below certain thresholds in order to reduce the administrative burden on member states. There are also instances when member states do not follow up specific cases and they limit their action only to the financial recovery of funds.

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238)

They do not follow up with criminal proceedings because those are relatively burdensome and costly. But this money is normally recovered but it simply does not show up in the statistics on the level of fraud. I think it is important not to mix those kinds of figures, although it is true, for example, that from a study produced by the European Commission we estimate that the VAT gap amounted to €107 billion in 2006. However, one has to understand that a VAT gap does not necessarily mean fraud. A fraction of this might be associated with fraud but there are many reasons, including company bankruptcies, why this gap exists. Moreover, even when VAT fraud is taken into account, it mainly concerns the budgets of the member states, because we have to remember that we use a very small fraction of the total VAT collected in the member states as an EU-own resource. 0.3% of the supposed statistical VAT is used as an EU-own resource. All other amounts go to the member states and to the member states’ budgets. This means that it is member states who should be strongly interested in addressing this problem of VAT fraud. If you wish, I will list several very important measures which we are currently introducing in order to address the VAT problem. I just want to stress that it is true that not all frauds are covered by the PIF report, but I disagree with the expression that this is just the tip of the iceberg. I do not think that the level of fraud is extremely high in terms of using EU funds, and I think that it is also comparable with the situation in our member states. Member states of course also have a problem with fraud, and I do not believe that the EU budget is more prone to fraud than national budgets.

Lord Hodgson of Astley Abbotts: I have just one question, which goes slightly across a later question. You referred in your opening remarks to different levels of commitment and you said that being strong is the weakest link. Fraud is best dealt with by transparency, openness and publicity. Reading through the report, the feeling that comes across is, “Don’t let us be too honest; don’t let us be too frank. Let’s shade everything”. Are you able to be absolutely open and candid about the way that member states are behaving? Algirdas Šemeta: I do not know why you get such an impression. The report on the protection of EU financial interests summarises the various activities and the level of fraud detected in the member states. There is a very comprehensive and detailed annex to this report which presents the breakdown of the fraud in each member state under various expenditure headings. I completely agree that the more transparency we have in fighting against fraud, the better results we achieve. With our anti-fraud strategy, we are implementing various measures, starting with the specific strategies of directorates-general on fighting fraud. Of course, a stronger relationship between the member states and the Commission and the anti-fraud office could also help to improve transparency in this issue. I do not think that there is any intention by anybody to hide any kinds of fraud which still exist in our member states.

Q232 Lord Anderson of Swansea: I am impressed by the current debate about the horsemeat fraud in the UK, but when the Romanian Government was mentioned, the President of Romania intervened because a national state was specifically mentioned. Do you find that you have to be very diplomatic and prudential and that you have to pull your punches in respect of naming defaulting member states? Algirdas Šemeta: First, regarding the specific horsemeat fraud, I have to be clear that my responsibilities are limited to the protection of EU financial interests, namely—

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238)

Lord Anderson of Swansea: I mention simply that someone at the highest level felt impelled to intervene because a country was named, and therefore possibly publicity followed. Do you feel constrained about criticising member states? Algirdas Šemeta: Well, I do not think that I am somehow constrained. If you look at the report itself, it names member states. For example, some member states regularly report very low levels of detected fraud and they are named in the report. France is mentioned, as are some other countries. When we feel that it is appropriate—that there are specific weaknesses in the member states—we do not hesitate to name them. But I believe that naming and shaming is just one element in a whole range of measures which should be used in addressing fraud problems. Very specific actions in terms of improvements in legislation and improvement in the co-ordination of the activities of OLAF and institutions in the member states are very important elements which could improve the situation in fighting fraud.

Q233 Lord Dykes: Briefly, because of the time, let us go into these complexities. One can understand and sympathise with the problems faced by the European institutional set-up in dealing with member states and the tension that would exist between them. I just wonder how you can describe how vulnerable EU funds are to fraud and irregularities, but mainly fraud. Irregularities, as the Court of Auditors often reminds us, can be just simple administrative mistakes which are sometimes ironed out later but sometimes not. However, they might only be very small sums, so the problem is mainly with fraud. There are very complex systems of electronic payments due to the nature of the forms that people fill in in order to apply for money and whether it is certificated by the member state’s Government, which means that, to some extent, you are obliged to say that the member state’s Government has approved it and, in that case, it is all right and you are proceeding on that basis rather than intervening yourself. One does sympathise with that. Do you find that this is a problem with certain member states? Please do not feel that you have to name them, although you may wish to—that is your choice. Also, because of internal financial and cultural traditions, there is often an unfair attack on Mediterranean countries. I think that it is grossly exaggerated when it is suggested that they do not keep proper accounts and that northern countries are supposed to be stricter on these things. Can you and your office do more to combat fraud? Is it being a bit complacent to say that it is happening on a very small scale, so we will not do too much, as we do not want to annoy the member states too much, and so on? How do you explain this? Do the modalities of the payment system encourage the use of fraud and the lack of detectability of fraud? There are now a lot of very sophisticated forces in the international community. They use their computer systems and are often several steps ahead of the public authorities throughout the world. How vulnerable do you feel about the vulnerability of the European Parliament?

The Chairman: Commissioner, before you answer Lord Dykes’s question, can I add to it, partly in the interests of time? You made it clear in your opening statement or in answer to one of the questions that you consider VAT fraud and VAT carousel fraud to be a fraud against the EU’s financial interests. In terms of Lord Dykes’s question about whether more could be done, is it proposed that VAT fraud will be within the scope of the proposed new directive on protecting financial interests? Indeed, you said that you had some ideas about changes that could be made to the VAT system to minimise its vulnerability to fraud. Algirdas Šemeta: This is a very complex question. Regarding vulnerability, I do not think that EU funds are more vulnerable than national funds. I think that all member states experience national problems in terms of spending their own budgets, and the use of EU

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238) funds corresponds very well to the situation on fraud through the use of national funds. Of course, certain areas of spending are more vulnerable to fraud than others. Here, I could mention structural funds, which are the most vulnerable to fraud. According to the latest reports, between 50% and 60% of cases were detected in the area of structural funds, and 70% of recoveries have also taken place in the area of structural funds. That is probably also explainable because of the large amounts of the EU budget which are used in the area of structural funds. In terms of actions and whether we could do more in order better to address this problem, first, it is very important to implement properly the anti-fraud strategy which we adopted in 2011. I have to say that we are perfectly on track because of the new legislation proposed for the next financial framework. By the way, the overall MFF was approved just last week by our Heads of State. Within all the legislative proposals on implementation of the next multiannual financial framework, we introduced provisions which specifically address the issue of fraud and create a legal environment to act in all the areas of EU spending. The strategy also envisages that all directorates-general will have to adopt specific strategies on how to fight fraud in their specific area. OLAF is co-ordinating this activity. The biggest spenders have already approved their strategies, which also foresee a lot of preventive actions. It is very important not only to detect the fraud when it happens but also to prevent it happening, and we concentrate a lot of our efforts on the prevention side. For this year, the strategy foresees the important area of public procurement. According to various estimates, public procurement is the area where the risk of fraud is quite high. We proposed new legislation for public procurement and I hope that our co-legislators will adopt it. With simpler and clearer rules, I think that we could better address this problem. Of course, it is important that our member states agree with the proposals which we have already tabled. The first is our proposal on the protection of EU financial interests by means of criminal law. This is a very important directive which, if adopted, will allow us to harmonise definitions of various frauds and will allow us to introduce minimum sanctions for various frauds. It will also introduce the mandatory statutory limitation and many other important things. This debate is currently ongoing in the Council and the Parliament. Some member states are questioning the legal basis of this proposal, but I do not think that that is the best way of addressing the proposal. It is very important that it is finally adopted. Turning to VAT, it is true that the proposal also contains a VAT element. The proposal is based on the case law of the European Court of Justice, which specifically referred to the link between VAT collection in general and the European Union’s own resources. That case law allowed us also to include the provisions relating to VAT in the proposal on the protection of EU financial interests. Some member states still do not agree with this but the negotiations are ongoing.

Q234 The Chairman: Can I interrupt you, Commissioner? Do you think that that is going to be accepted by all member states? We have had evidence from Ministers here, in the public domain, who seem to think that it was really nothing to do with anybody except Her Majesty’s Revenue and Customs. Algirdas Šemeta: As I said, we are in the process of difficult negotiations. At this stage, not all member states agree with this approach, and the United Kingdom is one of them. However, we also have to look at the substance. Everybody speaks about the need for a better fight against fraud in various areas, be it EU funds, VAT or other taxes which public coffers do not collect, but when it comes to the concrete actions and proposals of the

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238)

Commission, then quite frequently the member states tend to disagree with some of those elements. In our opinion, VAT should be subject to this directive because it is part of EU-own resources—it is part of the revenue of the EU budget. That is why we should introduce measures to protect the EU financial interest, be it expenditure - everybody agrees that that expenditure has to be protected - but we consider that the revenue side is as important as expenditure and that we have to really address this subject. Regarding other measures in the fight against VAT fraud, we are currently discussing in the Council our proposal for a quick reaction mechanism dedicated specifically to address the problem of carousel fraud. Here as well, all member states agree in principle that this is a good measure to address the problem of carousel fraud, but when it comes to the specifics of the proposal, some member states tend to disagree, at least at this stage. That is the problem. So I think it is important not only that we talk about the need to address fraud but that we adopt the necessary legislation and implement that legislation. That will address the problems in practice. The Chairman: I think that we should now press on to Lord Anderson’s question, number six.

Q235 Lord Anderson of Swansea: Regarding the annual report and the agricultural funds, in your opening statement you appeared to indicate that you wanted to say something about cigarette fraud. The Chairman may stop me on this but can you say a word or two about that before I go on to the general agricultural matter? Algirdas Šemeta: Of course, cigarette fraud is an important threat for the European Union. According to various estimates, our member states and the EU budget lose around €10 billion a year because of cigarette smuggling. That is why we consider that it is important seriously to address this issue. In 2011, the Commission adopted an action plan dedicated to cigarette smuggling problems at our eastern border. This action plan is currently in implementation and it has already produced some results, as we can see that the level of cigarette smuggling throughout our eastern border has reduced slightly. But we are now seeing the emerging phenomenon of cigarette smuggling taking place in other places. Lord Anderson of Swansea: It is a diversion. Algirdas Šemeta: It is taking place through the Mediterranean member states and at other points. That is why we are currently working on the overall strategy to fight cigarette smuggling. It will cover all member states and will be adopted in April this year.

Lord Anderson of Swansea: May I turn to what the annual report says about agricultural funds? It is stated that the UK and other big spending departments—and here I quote— “continue to report a very low number of irregularities as fraudulent”. Should you and the Commission be concerned about this? The report also says that member states do not respond in giving explanations. Is that still the case or has there been an improvement? Algirdas Šemeta: After the report was published, my services had contact with those member states which report a low level of fraud. It appears that there are different reasons for that. As I mentioned in my introduction, some member states prefer to look at the financial aspect of cases and to recover funds but they do not continue with the criminal cases, and that sometimes reduces the figures for reported fraud. According to my information, the problem with the UK in this particular case was that there were problems 44

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238) with IT communication with the Commission. The problem was also that the people responsible for the reporting were absent for some time. That also caused some under- reporting. However, as far as I know, new people have already been appointed and they will be subject to training in order to improve the situation, specifically the reporting of—

Lord Anderson of Swansea: Have the IT communications been technically improved? Algirdas Šemeta: Sorry? Lord Anderson of Swansea: You said there were two reasons. One was IT and the other was the fact—although it seems rather absurd—that people were absent from their posts or not appointed. You have given an explanation for the second reason, but has the quality of the IT communication between the UK Government and the Commission been improved? Algirdas Šemeta: The problems were with the firewall systems. I was informed by my services that these problems had already been addressed, and for the next report the problems with this particular issue should be resolved. Lord Anderson of Swansea: So one should expect a larger number of irregularities to be reported? Algirdas Šemeta: It is very difficult for me to forecast the exact impact of these improvements, but at least the technical problems which were related to this under- reporting have already been solved.

Q236 Lord Hodgson of Astley Abbotts: We could think that OLAF is struggling to make an impact. That is not its fault because it has different levels of commitment among the member states, as you have said; it has complexity of finances to audit; and it has difficulty in distinguishing between, as Lord Dykes said, mistakes, technical irregularities and outright fraud. But undoubtedly a great deal more than €404 million of fraud has been uncovered in the last OLAF report. If we make you king for a day, what powers do you wish to give OLAF to ensure that we do better in the future? The Chairman: Before you answer, Commissioner, I will go to Lord Dykes, because I think that these questions go together. Lord Dykes: When we visited and had a very interesting meeting with OLAF, we saw distinct evidence of tremendous tension and problems between the supervisory committee and OLAF. I am not saying that the arrival of the new Italian director-general is the reason for it—far from it—but what is the situation now? Has it been resolved? Has it all calmed down? It was quite a serious problem when we were there. Algirdas Šemeta: I think that in the EU we need a balance of powers. We cannot create super-powerful institutions, and I hope that that will never be the case. But of course, we need some additional elements in the legislation, and I believe that some additional elements will come into force with the adoption of OLAF regulation, because it introduces the requirement for all member states to establish co-ordinating structures in those member sates. At present, for example, in the UK we do not have a co-ordinating structure to deal directly with OLAF, and that is also true for all so-called old member states, because new member states were asked to introduce these co-ordinating structures when they joined the European Union. The new regulation provides more powers for OLAF to ensure follow-up of its investigations in member states in terms of reporting on the progress achieved in those member states. Of course, within that, we need even more, and that is why we are currently

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238) working on this overall proposal on the European public prosecutor’s office and on procedural criminal law in the EU. One of the problems is that evidence is collected by OLAF during its investigations and then the report is sent to the member states, but quite frequently this evidence is not used as evidence in the national member states. So it means that they start the process from scratch after the OLAF report is presented. We think that this is an issue because a lot of work has already been done to address this problem. In terms of the collection of evidence and efficient prosecution, the European public prosecutor’s office will be able to collect evidence in various member states quite easily and it will be able to co-ordinate the exchange of information among the member states. We believe that this will significantly improve the situation in the fight against fraud in the European Union. That is why we are working very hard on this proposal, and we will come forward with the proposal in June this year. In terms of the relationship between the supervisory committee and OLAF, first, I have to say that the present supervisory committee is quite new. It was appointed in January 2012. At the beginning it was quite difficult to find the appropriate relationship between the committee and OLAF, but after working arrangements were agreed by the supervisory committee and OLAF in, I think, September 2012, the situation started to improve. According to my information, the latest requests made by the supervisory committee were fully met by OLAF, but of course I would like to see a better relationship. I think it is important that the supervisory committee performs its functions well. I have had some meetings with the previous chair and the new chair of the committee and have discussed how we can improve this relationship. I intend to go to regular meetings of the supervisory committee to discuss this issue once again. It is very important that we also have good will on both sides in order to ensure that the supervisory committee is able to perform its functions well, but not by intervening in the daily work of OLAF. It is important that the supervisory committee takes a strategic view in the investigative issues of OLAF and that it does not interfere daily in specific cases, as that would probably not be to the benefit of the efficiency of OLAF. The Chairman: Was that situation made worse by the procedural disagreements surrounding the resignation of the Maltese Commissioner? Algirdas Šemeta: I would not link that to this specific case. There were tensions from the very beginning, and one of the problems was that for many years there were no working arrangements between the supervisory committee and OLAF. Of course, in such a sensitive field it is very difficult to work constructively if there are no clear rules as to how this relationship should be organised. I believe that after this agreement on the rules and with a bit more good will on both sides, the relationship between the director-general and the supervisory committee will improve. The Chairman: Lord Anderson, perhaps you could put both your questions, numbers 8 and 9, as they go together.

Q237 Lord Anderson of Swansea: Commissioner, you have now been in your post for several years—long enough to reach a general conclusion about the effectiveness of the several crime-fighting bodies. Following the question put by Lord Hodgson, if you were king for a day, would you alter the structure of OLAF, Eurojust and Europol? Do you see any way in which the whole crime-fighting structure might be improved? How well in your judgment do the relevant national authorities interact with the three crime-fighting bodies? Perhaps I should add as a postscript that you seem to indicate that you would favour from the UK’s perspective a single point of contact to improve relations between OLAF and the UK 46

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238) national authorities. Perhaps you could deal with that first. Is it your judgment that such relationships would be improved with a single point of contact? Algirdas Šemeta: These three bodies—OLAF, Eurojust and Europol—have different functions which of course could complement each other. OLAF is responsible for the fight against fraud. Eurojust’s main responsibility is to co-ordinate the activities of the member states in the area of serious crime and serious organised crime in particular. Of course, this could be linked with the issue of fraud. Lord Anderson of Swansea: But you are content with the structure that you have inherited. Algirdas Šemeta: Yes. Currently I am dealing with the structure which existed for many years. Of course, the role of Europol is to provide intelligence for police systems in our member states. First, I think that the situation will improve when the new legislation is adopted, specifically for the administrative arrangements between OLAF, Europol and Eurojust for fighting against fraud. On the other hand, I think that we will have a completely new picture when it is possible to implement the proposal on the EPPO, the European public prosecutor. The treaty states that the EPPO has to be developed from Eurojust. As I said previously, we are currently working on the exact arrangements which we will propose in terms of an interconnection between Eurojust and OLAF. That is the current situation with these three institutions. From a daily work perspective, they co-operate, and co-operate quite well. From time to time the director-general of OLAF also has meetings with Europol representatives. They are currently discussing the possibility of exchanging personal data between themselves, but there are some data protection issues which have to be addressed in this area. So I think that we have quite a high level of co-operation between these institutions but it will be improved when the new legislation on OLAF enters into force and when the proposal on the EPPO is adopted. Lord Anderson of Swansea: And there will be a single point of contact? Algirdas Šemeta: I see it as a problem that we do not have a single point of contact in many member states, as I mentioned previously. A lot of actors are responsible for this specific problem, and of course it becomes much more difficult for OLAF to ensure efficient communication in specific cases when there is no single point of contact.

Q238 The Chairman: Thank you very much, Commissioner. I am afraid that time is catching up with us. I was going to ask you about the European public prosecutor’s office. I do not want to put words in your mouth but I think it is fair to say that you clearly favour such a proposal. You have told us that preparatory work is going on. I will not ask you what form it is going to take because presumably we have to wait and see what emerges. Can you simply say what sort of timescale there is? When do you expect a proposal to be made? Algirdas Šemeta: Currently we are finalising our impact assessment. This evaluates various possible models for the European public prosecutor’s office. One of the objectives is not to increase costs with the creation of this new structure. We would like to use, as much as possible, existing funds allocated for various EU institutions for the financing of the European public prosecutor’s office. These various options are currently being assessed, and our intention is to finalise our work during the spring and to present an official proposal in June this year. Of course, we are completely aware that this will not be an easy dossier and that we will have very lively discussions everywhere.

European Commission – Commissioner Algirdas Šemeta—Oral evidence (QQ 227-238)

The Chairman: To say nothing of the referendum in the United Kingdom. Thank you very much, Commissioner. I am sorry to draw this to a close but we do appreciate you and your colleagues coming and answering our questions so fully and frankly. If there is anything that you feel we have not asked you or that you would wish to add, please do feel free to write to us and it will be included within the evidence. Meanwhile, thank you very much indeed for taking the trouble to come to London to see us.

European Court of Auditors—Written evidence

The above mentioned Call for Evidence initiated by the House of Lords European Union Committee, Sub-Committee on Justice, Institutions and Consumer Protection has come to the attention of the European Court of Auditors (the Court).

The Court would like to draw the Committee’s attention to the fact that as the EU’s external auditor the Court contributes to the protection of the EU’s finances.

One of the main objectives of the Court’s work is to express an opinion on the overall reliability, legality and regularity of the EU accounts. However, when performing its audits the Court also examines the effectiveness of the internal control systems, both at the Commission and in the Member States, including whether these are likely to prevent or detect and correct instances of fraud against EU finances. In this context the Court issues observations and recommendations on how to improve the systems.

While a specific audit may uncover instances of suspected fraud, such as within procurement procedures, it is not the Court’s task to investigate such suspicions in detail but the Court’s responsibility to report such instances, without delay, to the European Anti-Fraud Office (OLAF).

The Court is also responsible for auditing the performance of OLAF and the co-operation between Member States and OLAF in the context of protecting the EU’s financial interests. On this subject the Court has issued a number of Special Reports, i.e. Special Reports No 2/2011, 8/2007, 11/2006, 1/2005 and 3/2004, which can all be found on the Court’s website.

The Court also issues opinions on proposals for new regulations. In this context the Court considers whether the relevant regulation involves risk of abuse of EU funds and whether the control systems foreseen adequately address such risks. A number of opinions related to the protection of EU’s financial interests can also be found on the Court’s website, i.e. Opinions No 3/2012, 6/2007, 7/2006, 6/2006, 8/2005 etc.

While the formal deadline for contributing evidence to the inquiry initiated by the House of Lords European Union Committee, Sub-Committee on Justice, Institutions and Consumer Protection, expired on 14 September 2012, the Court would be pleased if the Committee could include this short submission to the inquiry in order to have a full picture of all the institutions involved, directly or indirectly, in the protection of the EU’s financial interests.

Yours sincerely,

(s) Henrik Otbo Member of the Court 12,

19 September 2012

Eurojust—Written evidence

1. By a letter to its President dated 11 July 2012, the House of Lords’ Sub-Committee on Justice, Institutions and Consumer Protection invited EUROJUST to respond to a Call for Evidence on EU policies and actions to combat fraud against the financial interests of the EU.

2. EUROJUST welcomes the opportunity to contribute to this inquiry and offers its replies to questions of specific relevance, based on EUROJUST’s casework and expertise.

a. What is the distinction between fraud and irregularity? Is this distinction meaningful? How much is lost from EU funds through irregularity?

The concept of irregularity is broader than that of fraud, because it also includes negligent conduct detrimental to the EU’s financial interests. Irregularities are administrative, not criminal offences and therefore do not fall under the scope of competence of Eurojust. b. How much of a link is there between fraud and organised crime? Eurojust’s statistics show that links can appear between fraud against EU’s financial interests and organised crime. Based on the cases registered in the Eurojust’s Case Management System, the following data could be provided: A total number of 53 cases dealing with offences affecting the EU’s financial interests have been recorded by Eurojust from 1 January 2004 until 31 December 2011. Figure 1 below shows the dissagregation of the cases by year:

Figure 1 Total cases of Criminal offences affecting the EU financial interests (2004-2011)

Total cases of Criminal offences affecting the EU financial interests (2004-2011) 10 10 8 8 77 7 6 6 6 4 2 2 0 2004 2005 2006 2007 2008 2009 2010 2011

2004 2005 2006 2007 2008 2009 2010 2011 Case Analysis Unit Of these, 8 cases were committed by organized crime groups. Figure 2 below shows the dissagregation of these cases by year

Eurojust—Written evidence

Figure 2 Total cases of Criminal offences affecting the EU financial interests and Participation in a criminal organisation (2004-2011)

Total cases of Criminal offences affecting the EU financial interests + Participation in a criminal organisation (2004‐2011) 3 3

2 2

111 1

0 0 2006 2007 2008 2009 2010 2011

2006 2007 2008 2009 2010 2011

Additionally, a total of 254 VAT Fraud cases have been registered at Eurojust in the period 1 January 2004 and 31 December 2011. Figure 3 below shows the dissagregation of these cases by year:

Figure 3 Total cases VAT Fraud cases (2004-2011)

Total cases VAT Fraud cases (2004‐2011)

45 42 40 39 40 40 34 35 28 30 25 20 20 15 11 10 5 0 2004 2005 2006 2007 2008 2009 2010 2011

2004 2005 2006 2007 2008 2009 2010 2011 Case Analysis Unit

Eurojust—Written evidence

Figure 4 Total cases of VAT fraud and Participation in criminal organisation (2004-2011)

Total cases of VAT fraud + Participation in a criminal organisation (2004-2011) 6 6

3 3

22 2

0 2004 2005 2006 2007 2008 2009 2010 2011

2004 2005 2006 2007 2008 2009 2010 2011 Case Analysis Unit

In order to illustrate the complexity of cases dealt with by Eurojust, two cases are presented here below. The first case shows the link between a large VAT fraud case and an organised crime group, as well as the role played by Eurojust in facilitating the cooperation and coordination of investigations initiated by national judicial authorities from several Member States. The second one is a complex case of corruption in Public Procurement involving various EU funds, several EU Member States and third States. Eurojust’s assistance in this case was paramount to facilitate the required judicial cooperation from a third State.

VAT Fraud committed by OCG – Case registered in 20101 In 2010, Eurojust registered a large international VAT Fraud case. The fraud has been operated for two years by an organized criminal group which consisted of three nationals of an EU Member State and possibly two other individuals still to be identified. One member of the criminal group was involved with two companies registered in the European Union. The criminal group made fraudulent refund claims for VAT in several Member States, based on the arrangements provided for in the Eighth Council Directive 79/1072/EEC.

1 This case was included in the Eurojust’s contribution (8 February 2011) to the European Parliament’s study on “How does organised crime misuse EU funds?” (31 May 2011).

Eurojust—Written evidence

The investigation showed that the suspects have attempted to obtain VAT refunds through forged invoices for non-existent purchases. The suspects have used forged invoices of companies established in 14 Member States for fraudulent purposes. From the investigations so far it has been established that: ‐ The criminal acts have been conducted in an organized form, the group being structured hierarchically ‐ Forged documents have been used by the criminal group in their attempts to obtain VAT refunds ‐ The fraud by way of application for undeserved VAT refunds amounts to several million euros ‐ There is material to suggest that substantial amounts from the proceeds of the VAT Fraud have been laundered ‐ At least 4 Member States have already executed refunds of VAT claimed by the two companies registered in the EU. For the purpose of this investigation, the investigative judge addressed letters of request to the authorities of six Member States. These letters of request have been sent in order to obtain information and documents with regard to possible requests for refund introduced by the criminal group in these countries. At the same time, the MS involved were requested to provide all material that could make possible the identification and location of the two suspects that might have also been involved in the same organized criminal group. The two non-identified suspects have been mentioned as contact persons of the two companies on several forged invoices used in some Member States. A letter of request has been also sent to a third state (jurisdiction outside the European Union), as the investigations so far show that one of the bank accounts provided by the organized group for the refund of VAT was a bank account opened by the companies there. The investigating judge has also issued a European Arrest Warrant against one of the suspects who is allegedly the head of the criminal group. Due to the complexity of the case and to the difficulties and delays in the execution of mutual legal assistance requests, the investigative judge requested the assistance of Eurojust in order to facilitate the cooperation and coordination of investigations. Eurojust organized a coordination meeting in October 2010 to enable the exchange of information and facilitate the execution of MLA requests between the countries involved. The meeting was also organized to establish possible links of this case with other countries and whether criminal proceedings against the same suspects/criminal group for the same crimes had been initiated in other countries involved. The investigating magistrate has sought the assistance of Eurojust in pursuing the organised crime group, and the case continues.

Corruption in Public Procurement involving EU Funds – Case registered in 20062

In 2006, Eurojust registered a complex case of corruption in Public Procurement involving various EU funds (EUROPEAID, TACIS, ECDELUKR). This corruption case concerns an EU official having requested and accepted, directly or by interposition of persons, a bid, a promise or an advantage of any nature, for his own benefits or the benefits of a third party.

2 This case was included in the Eurojust’s contribution (April 2012) to a study for OLAF on the development of an EU Evaluation Mechanism in the area of Anti-Corruption with a particular focus on identifying and reducing the cost of corruption in Public Procurement involving EU Funds.

Eurojust—Written evidence

More specifically, this official – procurement officer within an EU delegation in a third State – is accused of having interfered with the award of several contracts by favouring the bids submitted by certain participating companies in exchange of specific amounts of money (between 2.5 % and 6% of the total value of the awarded contracts). Eventually, the accused person admitted having exclusively created an e-mail account in order to have parallel anonymous contacts with certain companies competing for the award of several public contracts by the EU. The companies contacted by the accused were identified on the basis of the indications contained in an Excel table saved on the accused person’s USB key.

Due to the complexity of the case, involving various Member States and third States, the competent judicial authorities requested the assistance of Eurojust in order to facilitate the transmission of two letters of request to the third State in which the suspect had been operating. Both letters of request were successfully transmitted and executed.

On 6 May 2011, a first verdict was reached in this case:

The competent criminal Court sentenced the accused to 18 months imprisonment and 5,000 EUR fine, with suspended sentence for 5 years regarding the 18-month prison sentence for the period exceeding the duration of the preventive sentence, and for 3 years for the amount exceeding 1,000€ of the 5,000€ fine sentence. The sentenced person is forbidden to exercise his duties for 5 years. If not paid within the due legal deadline, the 5,000€ fine can be replaced by a subsidiary prison sentence of 3 months. The sentenced person is due to pay additional compensations and taxes amounting to 506.48€. The sentenced person introduced an appeal against the decision of the Court of 1st instance. The Court of Appeal will examine the case in October 2012.

a) Who is responsible for detecting frauds and irregularities, enforcing the law, and recovering misappropriated money? What are the roles of the Commission/OLAF, Eurojust, the Member States? How good is cooperation between the EU bodies and national authorities?

Eurojust’s role in detecting frauds and irregularities, enforcing the law, and recovering misappropriated money: The criminal offences affecting the EU’s financial interests are dealt with by Eurojust mainly when such cases have a transnational dimension and require specific and well-coordinated investigations between two or more EU Member States. The intervention of Eurojust is therefore mostly provided in cross-border cases, when the facilitation of mutual legal assistance or when a coordinated investigative action is requested by a national authority of an EU Member State or of a third State, under the specific conditions laid down in Article

Eurojust—Written evidence

27b of the Council Decision on Eurojust3. Therefore, many cases of fraud or misuse of EU funds are not referred to Eurojust, because they are investigated only at national level. Eurojust’s experience shows that criminal files opened by the Member States in cases against the EU’s financial interests are often very complex and often contain large quantities of documentation for transmission. Secure electronic transmission systems are being developed to facilitate this information exchange. Frequently Eurojust receives only the material which is relevant to the assistance it is to provide, rather than the entire evidence in a case.

Eurojust has identified obstacles to judicial cooperation in the field of fraud (including VAT Fraud). The most common problem is delay in the execution of requests for mutual legal assistance. Several Member States have referred to this problem which is frequently linked to lack of resources. Domestic fraud cases typically involve dealing with very significant amounts of documentary material. The execution of letters of request in such cases demands significant resources both in time and personnel that have to be diverted from other pressing national tasks. Additionally, execution of international requests for judicial cooperation may still not be seen as a positive local result4. To the contrary, Eurojust experience shows that international judicial cooperation is indispensable to the success of national investigations, especially in this crime area, in which mutual legal assistance is essential to obtain relevant information (e. g. bank account information), and even a single day of delay can make criminal assets disappear. Eurojust plays an important role in facilitating judicial cooperation in such complex cases. Eurojust assists national authorities in their efforts to confiscate and repatriate the proceeds from crime, and to help resolve some of the difficulties encountered (e.g. reaching an agreement on asset sharing, difference in legislation with regards to non-conviction based confiscation etc.). Considerable amounts of assets (e.g. real estate property, luxury goods) and money have been confiscated in 2011 in cases registered at Eurojust5. Throughout the years, Eurojust has assisted Member States in recovering misappropriated money in different types of fraud cases and in particular in VAT fraud cases. For instance, in 2010, € 140,000 was confiscated in a large VAT fraud case where Eurojust had provided assistance6. In 2011, in a VAT fraud and money laundering case, Eurojust set up a coordination centre allowing for real-time exchange of information and evidence between police and the competent national judicial authorities and, in fine, for the seizure of €300,000 in assets7. How good is the cooperation between the EU bodies and national authorities? The reply here below focuses in particular on cooperation between Eurojust and respectively OLAF and Europol. Eurojust has cooperated with OLAF for many years on complex and sensitive cases combating organized crime and involving a large number of EU countries. To build on this cooperation, a new Practical Agreement on Arrangements of Cooperation between Eurojust and OLAF (hereinafter “Practical Agreement”) was concluded in September 2008. Similarly, a revised Cooperation Agreement with Europol was signed on 1 October 2009. Co- ordination between Eurojust, Europol and OLAF is now improving, mainly in the area of exchange of information about ongoing investigations and prosecutions.

3 Council Decision 2002/187/JHA as amended by Decision 2009/426/JHA 4 These paragraphs are taken from the contribution of Eurojust (8 February 2011) to the Parliament’s study on “How does organised crime misuse EU funds?” (31 May 2011). 5 Eurojust Annual Report 2011. 6 Eurojust Annual Report, 2010. 7 Eurojust Annual Report 2011. 55

Eurojust—Written evidence

Following the entry into force of the Practical Agreement, the exchange of case-related information between Eurojust and OLAF has increased: for instance, in 2011 OLAF transmitted eight cases to Eurojust, compared with a total of five cases in the period 2004- 2009. The follow-up of ongoing cases has become more regular. While these figures may appear low, they should be seen in light of three considerations. The first consideration is that Eurojust works with criminal investigations and prosecutions, while OLAF’s work is focussed on administrative investigations and actions. The second consideration is that Eurojust normally works with cases involving two or more Member States, while OLAF does not. The third consideration is that OLAF was invited to eight Eurojust coordination meetings in 2011, a particularly encouraging figure in light of the number of case referrals made overall. Ways to improve cooperation between Eurojust and OLAF are constantly being refined. In 2011, criteria for the selection of common cases involving criminality and cross-border elements were agreed and a common list of cases has been developed and is regularly updated; a secure communication network between the two bodies became operational, as did Eurojust’s access to the Customs Information System (CIS); and agreement to exchange liaison officers was reached in principle. Four liaison meetings per year are organised between OLAF and Eurojust especially to exchange information on new cases and follow-up of ongoing cases and meetings between the heads of Eurojust and OLAF take place bi- annually to assess the ongoing cooperation. In addition, efforts are ongoing to ensure mutual participation in strategic meetings and seminars, such as Eurojust strategic seminars or the annual JIT expert meeting. If a specialised European Public Prosecutor’s Office (EPPO) is established according to Article 86 of the Treaty on the Functioning of the European Union (TFEU), OLAF and Eurojust will need to build even stronger cooperation and coordination since their respective roles in the EPPO will become even more complementary and interlinked (see also reply to question d)). Similar foundations for good co-operation have also been established with Europol. . Europol now attends one-third of Eurojust’s casework co-ordination meetings, including those meetings related to VAT fraud. The creation of Europol’s AWF on Missing Trader Intra- Community frauds (a development influenced by Eurojust casework), and the subsequent association of Eurojust with this AWF illustrate solid co-operation between the two bodies. Europol has also participated in Joint Investigation Teams which were initiated at Eurojust. At the same time, Eurojust provides extensive and detailed contributions based on its casework and analysis of judicial co-operation to Europol’s Organised Crime Threat Assessment (OCTA). Eurojust has carried out an important strategic project on VAT Missing Trader Intra-Community fraud and has hosted a seminar organized jointly with Europol in March 2011 on this topic. Co-operation with Europol could be nevertheless extended, in particular by developing further mutual involvement in operational cases, fostering common participation in JITs and sharing analysis of organised crime phenomena and trends, and ways to fight organised crime.

b) What is the role of Eurojust? Should it focus more on fraud cases? How could the proposed European Public Prosecutor’s Office improve the fight against fraud?

Eurojust—Written evidence

Eurojust is a key player in the judicial dimension of the fight against serious and organised crime, including crimes affecting the EU’s financial interests, and is the only EU judicial body ensuring coordination and cooperation between the competent authorities of the Member States. Eurojust deals with cases concerning fraud (including VAT fraud and, specifically, VAT carrousel fraud), corruption and any other criminal offence affecting the EU’s financial interests, and has built up expertise in this field. As mentioned above (see reply to question c)), the intervention of Eurojust has consistently provided added value in concrete cases, in particular by coordinating the steps to be taken in investigations and prosecutions and by facilitating the exchange of information, the prompt execution of letters of request, and the freezing and seizure of the profits of crime. For instance, Eurojust assists the national competent authorities by preparing and facilitating the execution of mutual legal assistance requests, by organising coordination meetings, by handling very urgent requests, in particular when national time limitations are about to expire. Although, as also mentioned above (see reply to question c)) Eurojust’s assistance is essentially requested in cross-border cases where two or more Member States are involved, Article 3(3) of the Council Decision on Eurojust8 provides for the possibility for Eurojust to assist in investigations and prosecutions concerning only one Member State and the Union, upon request either of a Member State or of the Commission. In this regard, making further use of the existing legal basis could help strengthen Eurojust’s action in the fight against the crimes affecting the EU’s financial interests. In addition, Articles 13 and 13a of the Council Decision on Eurojust trigger a more proactive role for Eurojust not only in gathering information from the Member States, including on fraud affecting the EU’s financial interest, but also in providing operational feedback to the national investigating and prosecuting authorities. Finally, the Lisbon Treaty provides the opportunity for an enhanced role of Eurojust. Article 85(1)(a) TFEU, which provides for the strengthening of Eurojust’s role in the fight against transnational organised crime in the European Union, specifically indicates that the tasks of Eurojust may include initiating criminal investigations as well as proposing the initiation of prosecutions conducted by competent national authorities “particularly those relating to offences against the financial interests of the Union” . Therefore, the future reinforcement of Eurojust on the basis of Article 85 TFEU could also entail making crimes affecting the EU’s financial interests a priority for Eurojust.

Moreover, with regard to the European Public Prosecutor’s Office (EPPO), Article 86 TFEU provides for the possibility of establishing the EPPO “from Eurojust”, thereby clearly recognising a privileged and unique role for Eurojust in the establishment of the EPPO, and, consequently, for the relationship between the two.

Of course, if an EPPO is established, interaction and complementarity amongst all EU players acting in the area of freedom, security and justice (EPPO, EUROJUST, OLAF, EUROPOL and EJN) will be essential.

8 Council Decision 2002/187/JHA as amended by Decision 2009/426/JHA 57

Eurojust—Written evidence

In particular, close coordination will be needed between the EPPO and Eurojust, which will have a role to play in complementing and supporting the European Union’s action in the fight against crime affecting the EU’s financial interests. The creation of the EPPO from Eurojust could build upon both the legal framework and the practical experience of Eurojust, e.g. its organisation and technological infrastructure, for the processing and exchange of information with national authorities and other bodies, the role in coordination and cooperation with third States and international organisations, and the relationships with other European bodies and institutions, such as OLAF and EUROPOL. For instance, if the competence of the EPPO is restricted to crimes affecting the EU’s financial interests, Eurojust could play a role in coordinating the efforts of the EPPO, on the one hand, and the competent authorities on the other hand, in cases where an offence affecting the EU’s financial interests is closely connected to other types of offences falling outside the sphere of competence of the EPPO and in which the coordination of Eurojust is needed.

If the EPPO is to be created by enhanced cooperation (by a minimum of nine Member States according to the Treaty), Eurojust would be in a position to enhance and facilitate judicial cooperation and coordination between the EPPO and the national judicial authorities of the Member States that will not take part in the EPPO. Moreover, Eurojust could provide its support in facilitating judicial cooperation and coordination between the EPPO and third States. In any event, coherent and complementary solutions to issues raised by the creation of the EPPO and the future “new” Eurojust under Article 85 TFEU will have to be found with a view to optimising resources and exploiting synergies between the two bodies.

14 September 2012

Eurojust—Oral evidence (QQ 100-120)

Evidence Session No. 7. Heard in Public. Questions 100 - 120

WEDNESDAY 7 NOVEMBER 2012

Members present

Lord Bowness (Chairman) Lord Dykes Lord Rowlands Lord Stoneham of Droxford

______

Examination of Witness

Carlos Zeyen, Vice-President, Eurojust

Q100 The Chairman: Mr Vice-President Zeyen, thank you for agreeing to come and see this Committee and answer our questions. As I am sure you know, we are the Sub- Committee of the House of Lords Select Committee on the European Union which looks after justice, institutions and, latterly, consumer protection. We are conducting this inquiry into combating fraud in the European Union, and I would guess that our emphasis is on fraud against European Union funds. For the record, perhaps I may say that, as you have probably been advised, this meeting is on the record. You will be sent a transcript and you will be able to correct any obvious inaccuracies. It will be published and will form part of the evidence of our inquiry. Members of the Committee will declare any interests that are relevant when they first speak, and of course their other interests are set out in the House of Lords Register of Interests. I shall readily declare my interest as a practising solicitor. I do not know whether you wish to make an opening statement, but if you do so or when you first address the Committee, I would be extremely grateful if you could introduce yourself by stating your name and your position so that we have it on the record. 59

Eurojust—Oral evidence (QQ 100-120)

Mr Carlos Zeyen: Thank you. Let me first thank you for your interest in Eurojust and for inviting Eurojust to contribute to your inquiry. My name is Carlos Zeyen and I have been vice-president of Eurojust since June of this year. Previously I had been in private practice as a lawyer for 20 years. In 1998 I joined the District prosecution office in Luxembourg with the specific mission of setting up the Luxembourg Financial Intelligence Unit. I headed that unit until I joined Eurojust in 2006. The Chairman: Thank you. Would you like us to go straight into the questions? Mr Carlos Zeyen: I would suggest that we do so. The Chairman: That is fine. Mr Carlos Zeyen: Eurojust has already produced written answers to your questions so the context of Eurojust is known. I am absolutely prepared to answer all your questions.

Q101 The Chairman: Thank you so much. Again, just for the record and by way of introduction, perhaps you could give us a brief outline of what Eurojust actually does, what is its role, whether it deals with many cases of fraud and what they are. Where do you see yourself positioned in the fight against fraud? Lastly, are you called upon on many occasions by Member States to assist? Mr Carlos Zeyen: One should take into account the fact that Eurojust has limited competency in the sense that we are not competent to deal with what is known as petty crime. Eurojust has been set up to deal with serious trans-border crime, particularly when it is organised. That is the general context of our competency. Within that our four main missions are, first, to facilitate mutual legal assistance; secondly, to co-ordinate investigations and prosecutions; thirdly, to help in the resolution of conflicts of jurisdiction; and, lastly, to intervene at the request of Member States. More generally, Eurojust also intervenes in terms of information exchange with Member States and gives feedback.

The Chairman: What about fraud? You have talked about serious cross-border crime. How much fraud features in that definition? Mr Carlos Zeyen: It is a fact that the main type of crime that Eurojust is involved in at the request of Member States is fraud. Generally speaking, fraud and swindling is the main type of crime for us. I would say that roughly 30% of the cases that we deal with on a yearly basis are fraud cases, and of course those cases include fraud against the financial interests of the European Union. The Chairman: But not exclusively. Mr Carlos Zeyen: Of course not. When we look at the figures, we can see that over the past five years we have had between 50 and 60 cases that deal directly with the financial interests of the European Union, but in addition there have been over 200 cases of VAT fraud, in particular of carousel fraud. It is one of the main areas of fraud that Eurojust deals with.

Q102 The Chairman: If you receive a call for assistance from a Member State, such as from the United Kingdom, who does that call for assistance come from? Looking through the telescope the other way, as it were, it has been pointed out to us that we have three jurisdictions in the UK. Some things go to the Crown Prosecution Service, other things go to the police forces while others go to SOCA. Who within the UK jurisdiction makes the approach to you? And, indeed, in reverse, if you need the assistance of the UK, what is your

Eurojust—Oral evidence (QQ 100-120)

Mr Carlos Zeyen: Eurojust as such is not in direct contact with the UK authorities either on a requesting or on a requested basis. Everything goes both ways via the national member. It is the national authority, be that the Crown Prosecution Service or at the police level, that will make direct contact with the UK national member. That also applies to Scotland. At the UK desk there is always a prosecutor especially from Scotland because of the differences in your legal systems. The UK desk is normally composed of a variety of prosecutors from the different areas. Everything is channelled through the national desk. So when the UK authorities make a request to another Member State to secure, for example, the speeding up of the execution of a letter of request, they first talk to the national member for the UK who would then contact his counterpart at Eurojust of the other involved country. It is exactly the same the other way round. For example, in Luxembourg an investigating judge would send me a letter of request and would task me to notify that letter to the UK authority. According to the Eurojust Decision, I would then notify the original sender of that request to the UK national member, who would then forward it to the competent authority in the UK.

Q103 Lord Rowlands: You also have an advisory role in either creating or amending the existing legislation. Is that true? Mr Carlos Zeyen: That is true, but it is an accessory to our activities. It is not our core business and it only happens from time to time. For example, it can happen on a recurrent basis. We may discover that we continually have the same problem with a specific Member State. Then we could of course put forward a proposal for improvement or change to national legislation. However, that is not our day-to-day core business.

Q104 Lord Rowlands: This morning the Director-General of OLAF described the complications of the relationship between OLAF and the national authorities, and how quite a large number of cases have been handed over but do not proceed. We would be very interested to learn, from your experience and the role that you have played, your thoughts and ideas of how that relationship could be improved. Could the procedures be improved or does it require new legislation to create a better and more effective relationship between national authorities and OLAF? Mr Carlos Zeyen: Actually, I have no insight into the relationship between OLAF and the Member States. OLAF is in direct contact; it does not need Eurojust to establish such contacts. For example, if OLAF starts an investigation and notifies the Member State in order to start criminal proceedings, that is not something that Eurojust would necessarily be involved in. I cannot express an opinion on the relationship between OLAF and the Member States.

Lord Rowlands: I understand that better. Our notes say that in the future there is the possibility of a European public prosecutor’s office to be established from Eurojust. If we went down this road, what would happen to Eurojust? Mr Carlos Zeyen: That is the question at this stage. Of course, Eurojust does not express an opinion on whether or not there should be a European Public Prosecutor’s Office. The reason is very obvious: the 27 national members work under the direct authority, guidance and surveillance of their national prosecutors and in their day-to-day work they have to follow their instructions. For the time being, there is no consensus among the 27 national members which act on the instructions of their own authorities whether or not there 61

Eurojust—Oral evidence (QQ 100-120) should be an EPPO. Where we are all in agreement is however that should an EPPO be established, it should come from Eurojust. Lord Rowlands: When you say “come from Eurojust”, what do you mean? Mr Carlos Zeyen: Established from Eurojust—the “from” was a political compromise. There is no clear view on what exactly the “from” means. As not all the 27 Member States will participate, this makes saying “in the future Eurojust will be the EPPO” almost impossible. Some of the Member States would participate in the EPPO on the basis of the so-called enhanced co-operation; others would not. Some national members would have two hats—a variable geometry—as with the fighter planes; others would not be involved, and that would make it difficult for Eurojust to become the EPPO. On the other hand, Eurojust’s position is that anyway there needs to be a very tight relationship between Eurojust and the EPPO, for several reasons. For example, it is clear that for many investigations or prosecutions, the first competence of the EPPO would be the financial interest of the European Union, but normally there are other crimes involved at the same time. I do not know the exact word for it, but there would be a “nexus of connectivity” between the offences, and that could be one of the roles for Eurojust, to facilitate and co- ordinate the investigations between the EPPO, which will be dealing with the financial interest offences, and the connected offences. Another role for Eurojust, if an EPPO had been created—which not all the Member States would participate in—would be to facilitate the mutual legal assistance and investigations with those countries that are not participating in the EPPO.

Q105 Lord Dykes: Presumably there would be some recruitment of individuals— functionaries and officials—from Eurojust to get the EPPO set up, as well as input from the national Member States’ judicial authorities and others, would there not? Mr Carlos Zeyen: The EPPO could benefit from Eurojust’s experience. It could establish itself as a section within Eurojust. That is conceivable, although, looking at some declarations made by a representative of the Commission during the stakeholders’ meeting on 18 October 2012, organised by the European Commission, he was very clear to say that the EPPO will have an integrated structure, meaning that investigation and prosecution would be together. At this stage Eurojust does not have investigators so it is conceivable that, for example, some of the OLAF investigators would join the EPPO.

Lord Dykes: Earlier you said that the channel of communication was the national judicial or police authorities contacting the national Member State in Eurojust. Does that apply to everyone? For example, do Europol investigators always go through the national Member State where the crime is first detected or do they generally go to whoever they know in Eurojust? Mr Carlos Zeyen: I think I understand the question. If it is for a specific case or specific Member State, then Europol addresses the national member.

Lord Dykes: Are there any big exceptions to that approach? Mr Carlos Zeyen: Of course, Eurojust has a co-operation agreement with Europol. We have a means of secure communication with Europol but that would not necessarily mean that Europol would contact Eurojust. If the message came through the secure link, it would be forwarded by our case analyst to the national Member State.

Lord Dykes: So it is always a coherent approach.

Eurojust—Oral evidence (QQ 100-120)

Mr Carlos Zeyen: Yes.

Q106 Lord Stoneham of Droxford: Could we go into a bit more detail on the relationship between Eurojust, Europol and OLAF? A report done for the DG for Internal Policies of the Union described the relationship between Eurojust and OLAF as “difficult”. Do you have a view on that and what the issues are? Mr Carlos Zeyen: I do not know whether, in that context, one should make the distinction between relationship and co-operation. Eurojust has always co-operated with OLAF on complex and difficult cases, and together with OLAF we have been successful. In the mean time we have a Practical Agreement for better co-operation. There are high-level meetings. Eurojust has an OLAF team that meets with OLAF representatives on a regular basis and looks into more complex cases which can be handled together. I have dealt as a Luxembourg national member with several cases where OLAF was involved. That is obviously on the Luxembourg finance level and taking into account all the EU civil servants working in Luxembourg. Therefore we have dealt together with cases on a working level. I do not remember ever having any problems in dealing with these cases. On the other hand, generally speaking, there are sometimes aspects where national authorities have several aspects—I will not say problems— to be taken into account when a file comes from OLAF. It primarily does an administrative investigation, not only with the aim of criminal proceedings but often with the disciplinary aspect of an investigation. The prosecutions offices dealing with criminal investigations sometimes have difficulties—that is recognised also by OLAF—in transposing, one to one, the findings that come out of the investigations by OLAF. I remember colleagues in Luxembourg telling me that the investigation has not been done by someone who does not have to go to the Court of Auditors with the result—although that is certainly not perceived as a negative aspect.

Lord Stoneham of Droxford: So are you saying that that makes it more difficult to prosecute? Mr Carlos Zeyen: Yes. Lord Stoneham of Droxford: That causes a tension, does it not? You recognise that, and they do not. Mr Carlos Zeyen: I did not say that and I would never use the word “tension”. I have never encountered in my operational work any tension towards OLAF. Also, there is a difference in the sense that Eurojust intervenes only, or almost only, when the case has a trans-border aspect. In the majority of cases, OLAF is concerned with investigations related to only one Member State. That is also a difference but has nothing to do with our co-operation. In the mean time, we also have a secure link to OLAF. Eurojust is connected to the customs information system. Therefore, on a daily basis and from an operational point of view, I do not see a problem.

Q107 Lord Rowlands: You are not an investigative body, so may we perhaps have a flavour of Eurojust? What skills, qualifications and competences do Eurojust staff have? Mr Carlos Zeyen: We have first to make a distinction between national members, deputies and assistants and staff of the administration . According to the Eurojust decision, national members have to be a prosecutor, a judge or a police officer of equivalent competency. Some 95% of the national members here are prosecutors from their home countries; I think that we have one or two who are judges or with a judicial background. We once had someone who was a police officer, but that was an exception. When it comes to our staff, 63

Eurojust—Oral evidence (QQ 100-120) they are EU civil servants paid by the EU. We national members continue to be paid by our national offices. That is the major difference—we are not under the EU hierarchy. Our staff cover all areas: we have a legal service with highly qualified persons with a legal background; we have case analysts who have a police or investigative background; and we also, of course, have IT experts. Our staff cover all necessary areas.

Lord Rowlands: But the core would be people with essentially a prosecution background. Mr Carlos Zeyen: Yes, they are doing the core business. The national membership is 27, but this year the number of deputies and assistants is about 50. Altogether, in terms of our administration, the number is, for the time being, 220. That is just to give you an indication of the proportions. We cover everything, but we are mainly prosecutors. In our core business, the co-ordination of ongoing investigations and prosecutions, our prosecutorial experience is unique.

Q108 Lord Dykes: Sadly, of course, one hears people in your field, in various countries, in Brussels and in the various institutions of the EU, saying that the single market of the criminals is always one step ahead of the single market in trying to deal with them. Do you find more and more, when the national representatives in Eurojust are getting together, not just two but three or four of you, that as cross-border crime spreads—fraud, VAT crime and other criminal offences—it is difficult for authorities to control, both nationally and among the European institutions? Mr Carlos Zeyen: It is obvious that we are always one or two steps behind.

Lord Dykes: By definition. Mr Carlos Zeyen: When you consider the main reason for the creation of Eurojust was —

Lord Dykes: Rumour. Mr Carlos Zeyen: ... because the freedom of capital, services and so on was taken advantage of not only by other states but also by criminals. Lord Dykes: Money. Mr Carlos Zeyen: It takes a couple of seconds to move money from, say, Luxembourg to the Caribbean or wherever. Following this trail by mutual assistance takes time. Yes, it is obvious but, on the other hand, I do not think that it becomes more complicated every day to deal with these cases. When I look at our infrastructure, particularly at the willingness of the 27 to work together, we do not need to be afraid of the future.

Q109 Lord Dykes: Does the background of ferocious budgetary discipline, austerity, cuts and so on in the national Member States, and centrally in the European institutions, inhibit the physical progress of Eurojust activity and that of the other related agencies? Mr Carlos Zeyen: Until now, no. Of course, one can always see things from different perspectives but, until now, Eurojust had the status of a young EU body. It is clear that the newly created bodies, agencies and so on are provided with more money than, for example, the older ones. Until now we have had that status, and I can say that Eurojust is the Rolls- Royce. We have been provided with excellent working tools. Our IT and IM are state of the art and we have not suffered in that context. We also need that in order to fight crime. Now our budget is not progressing and we have to save money. Of course there is a risk, although I cannot elaborate too much on this, that we may have to cut back in that area. I

Eurojust—Oral evidence (QQ 100-120) discuss this with my colleagues, but I do not think that we can in future save money only on our administration. For example, our service at Eurojust was offered because we said that no one should take advantage of money, because we are organised to co-ordinate action in various Member States—for searches, seizures or arrests to take place at the same time. Until now, Eurojust paid for the national authorities coming to Eurojust. For example—again, there is the same argument—we also provide services because no one should take advantage of the language problems. We also provided for simultaneous translation. I cannot exclude the possibility that we will also have to look into budget cuts.

Q110 The Chairman: Can you go back over two points of detail from your evidence? This is clarification for my own benefit, really. You say that one of the three things that you do is help in conflict of jurisdictions. Do you have the power to resolve disputes about jurisdictions? How many cases may fall between two stools because that conflict of jurisdiction cannot be resolved? Mr Carlos Zeyen: We do not have the power to resolve conflicts of jurisdiction. For the time being Eurojust can only issue an opinion on how this should be handled when requested. I will elaborate a bit. On trans-border crime, every third or fourth case I deal with on the Luxembourg desk, particularly when it is from a smaller country, has a conflict of jurisdiction aspect. The big advantage of Eurojust is that we normally do not have to take the formal route. We solve conflicts of jurisdiction by talking to each other and our home authorities. More than 90% of the cases involving a conflict of jurisdiction aspect are solved on the ground, in situ, by our contacts on a daily basis. There are only a minority of cases in which Eurojust is requested to issue a formal opinion. I remember one at the beginning of Eurojust’s existence, which was the famous Prestige case, in which an oil tanker in the Bay of Biscay created a huge oil spill. There were hundreds of victims in France and in Spain. Of course, Eurojust was the first called to co-ordinate the investigations which of course all ended up in a conflict of jurisdiction. Both France and Spain were competent. Obviously, we had a discussion about that. The question then became who should prosecute. It was also clear that French victims would prefer to present their case to a French judge, and the Spanish in their home country. Eurojust was asked in that case for a formal opinion. It came to the conclusion that Spain was best placed. There was some reluctance on the French side. Of course, it was a high-profile case and certainly their prosecutors would have preferred to do it in France. However, finally, France accepted our proposal. I do not know of one case where a formal opinion issued by Eurojust on competent jurisdiction has not been followed. Of course, we will be able to go further in that area in the context of Article 85 of the Lisbon treaty.

Q111 Lord Dykes: So that is a useful precedent to be used in the future, but it has not been used yet, other than in that case? Has the precedent of France agreeing to do that in Spain been copied in other examples since then? Mr Carlos Zeyen: You mean the formal opinion that we issued? Lord Dykes: Their accepting your suggestion. The Chairman: Mr Zeyen is saying that he does not know of any cases where it has not been followed. Lord Dykes: Oh, right; sorry.

Q112 Lord Rowlands: Broadly speaking, in fraud, is the current leader the cohesion fund? Is that one area? VAT is second and smuggling is third. Is that reasonable? 65

Eurojust—Oral evidence (QQ 100-120)

Mr Carlos Zeyen: I am not sure whether I understood your question correctly; I apologise. Lord Rowlands: Where does the majority of fraud occur? Reading our reports, I understood it to be in and around the cohesion funds; the abuse of spending or dealing with cohesion funds. Mr Carlos Zeyen: I can agree with that, yes. Lord Rowlands: The second one you mentioned was all these VAT cases. Mr Carlos Zeyen: Yes. Lord Rowlands: The third is probably the smuggling of one kind or another, such as tobacco? Mr Carlos Zeyen: Yes. Lord Rowlands: If you were forced to prioritise within those three categories, where is the greatest challenge in combating them now coming from? Mr Carlos Zeyen: First, we serve our clients in the sense that our national authorities take the initiative. We cannot force them, but they take the initiative to come to Eurojust and say, “Listen, I need help”. We always try, and we always do. I could not imagine myself telling a Luxembourg investigating judge, “The crime type that you are dealing with is not within Eurojust’s priorities”. I would also have problems in telling him, “Listen, the amount at stake does not really justify it”, but that might be the case in future. We already theoretically have the situation that, for example, fraud as such is not on the Council’s priority list. Fraud against the financial interests of the European Union is, but fraud in general is not. I would not see myself telling a judge, “No, it’s not on the priority list”. I hope that it will stay that way.

Q113 The Chairman: Can I ask you another point of clarification? You said that almost all your cases involve cross-border crime, and you were talking about co-operation with OLAF. You said that the majority of their cases that came to you only involve one Member State. Maybe I misunderstood you, but OLAF’s report seems to be full of cases that cover more than one Member State. Did I misunderstand you; or, if not, perhaps you could explain what you meant by their cases being “only one Member State”. Mr Carlos Zeyen: In that sense, we have to look at Eurojust and OLAF. I am not talking about the co-operation between them, but specific cases. I said that normally—there is only one category of exception—Eurojust only deals with cases having a trans-border dimension. I do not have their figures, but OLAF regularly has investigations where only one Member State is involved. It happens that sometimes, in other cases, there are trans-border elements. That is still a fundamental distinction. OLAF does not mainly deal with international co- operation or mutual legal assistance; that is our core business. The Chairman: I have to say, when one reads their report and examples of its good work, OLAF sounds rather more cross-country than has been suggested.

Q114 Lord Stoneham of Droxford: I still do not quite have a feel for the resources behind your organisation. Can you tell us about your budgetary resource and staffing? Mr Carlos Zeyen: Again, the group of national members’ deputies and assistants continue to be paid by their home states. There are big differences. I do not know the salaries or budgetary—

Eurojust—Oral evidence (QQ 100-120)

Lord Stoneham of Droxford: So that I can understand it—you have a small office in The Hague, yes? Is that right? Mr Carlos Zeyen: Myself? My office is on Eurojust premises. Eurojust provides me with my working tools. I have an office and a secretary. In order to handle my cases, I can rely on the legal service, case analysts—

Lord Stoneham of Droxford: Whose legal service? Your country's legal service? Mr Carlos Zeyen: No, no, Eurojust’s legal service.

Lord Stoneham of Droxford: How many are they; how big is it? Mr Carlos Zeyen: It is between 15 and 20.

Lord Stoneham of Droxford: So it is small. Mr Carlos Zeyen: Yes. Again, they intervene only when it comes to the interpretation of EU aspects. For example, the Eurojust legal service would not be competent because I am paid to know Luxembourg law and to deal with all those issues. I could not go to the legal service of Eurojust and say, “Listen, can you help me with the interpretation of Luxembourg law?” I can give you one illustration of a case in which I recently went to the Eurojust legal service, just to show the difference. Luxembourg was requested by Norway in a very important case involving the financial interests of the European Union. It involved import duties. The amount at stake was €24 million. The background was the importation of biodiesel that came from the United States and Canada but, on the basis of forged documents, the impression was created that it had Norwegian origin when it was imported into the European Union. Of course, the import rates were different, so the total amount defrauded was €24 million, as I said. Norway came with an active request for searches and seizures to be operated in Luxembourg at short notice on a specific date. It was clear that the background was Customs. I do not want to go too much into the legal details, but in the protocol to the 2000 convention, Article 50 Schengen, relating to Customs had been repealed. The new text on which co-operation in that area could be based had not yet come into force, so we needed confirmation of a legal basis for that co-operation because both Norway and Luxembourg wanted to co-operate. That is an issue on which I would go to the Eurojust legal service.

Q115 Lord Dykes: I go back to your previous point about what was obviously a considerable success and triumph for you when the French agreed to take that case through the Spanish prosecutors and the Spanish court case system. This committee’s investigation has to be strictly objective and therefore does not grind any axes, but there are individuals here or elsewhere in the British Parliament who would wish Eurojust all fair wind and success in future, in whatever modern form it might be—if the EPPO comes along as well. Could you also cite any examples since then where the British prosecutors and judicial authorities agreed for another country next door or somewhere else in the European Union to take up the case on behalf of the British, or did they always insist on keeping the case themselves? Mr Carlos Zeyen: I cannot tell you. I know of no such cases. From my desk, I was never involved in such a case. Let us put this way, it is not known within Eurojust that there would 67

Eurojust—Oral evidence (QQ 100-120) be exchange of views between colleagues saying, “You never get a conflict of jurisdiction case solved with the UK”. I have never heard such things. I think that we are all on the same page.

Q116 Lord Rowlands: Do you have any role in tracking trends in fraud or criminal activity affecting the financial interests? Do you see a trend? How does one then react to it? Mr Carlos Zeyen: Eurojust has not been created primarily to discover trends and do the analysis. That is the major difference between Europol and Eurojust. Europol has been created to do the analysis. It is not directly involved in investigations; its main task is analysis. It does it through what until now was called AWF, analytical work files, in specific areas. Now they will all be put together in three—now it will be called focal points. That is Europol's core business, whereas Eurojust has been created to work with files—to do casework. Of course, to fulfil this task, we have analysts, but it is not their prime task. They do analysis on a file. From time to time, to help national prosecutors we publish reports and issue action plans—we recently issued one relating to the trafficking of human beings; we did so also in the drug-trafficking area—but that is not our core task. To give you an example where we have not yet succeeded, the idea is that Eurojust should be associated with all Europol’s analytical work files but, in the mean time, we are associated with a majority but not yet with all. For example, we are not yet associated in the main terrorism areas, which are Dolphin and Hydra, so that is something which can still be improved, it being understood that it is not Europol's fault that we are not yet there. There are Member States who oppose Eurojust being associated. If Europol could take the decision, it would do it tomorrow. To explain the difference, we have an analytical capacity, but it is not our prime function.

The Chairman: I am sorry, I did not catch the organisations you referred to there. Mr Carlos Zeyen: Europol. The main purpose for its creation was analytical.

Q117 The Chairman: Do you and your colleagues in Eurojust feel that Member States take advantage of the resources that it offers, as much as they could, or is there a reluctance to push things upwards, as it were? Mr Carlos Zeyen: I would not put it that way. They come when they need us, when they do not have any other solution and when help is needed. That is from the requesting side. Of course, it also depends on the magistrates, but they do it on a voluntary basis. Sometimes, there is no other solution. I can imagine that they have instructions from home to see whether they can deal with the case themselves or whether it is necessary in the first instance to go through the European judicial network, for example, when just the establishment of contact in another country is needed. That is the reason for Article 13 of the new Eurojust decision. When they come only on a voluntary basis due to an absolute need, all our capabilities and resources are not exploited to their full extent. That is the reason why, in certain crime areas, it is compulsory for the Member States to inform Eurojust of certain cases, with certain conditions always being fulfilled. The first context in which this had to be done was the Council decision of 20 September 2005 in the terrorism field, where Member States had to inform both Eurojust and Europol of all investigations, prosecutions, court decisions and legal assistance requests. This will fulfil us in a better way.

Q118 Lord Dykes: On a slightly broader theme, I think that January 2010 was the start of the single bank payment system throughout the European Union, although there are apparently still enormous disutilities and rigidities in achieving that genuine market in proper, 68

Eurojust—Oral evidence (QQ 100-120) free or inexpensive transfers for ordinary customers and for corporate customers perhaps to lower expenses imposed by the banks. Has the increase in bank account transparency both for individuals and corporations helped Eurojust and the other similar agencies dealing with cross-border crime and money-laundering? Has the reduction in the banking secrecy laws in Luxembourg, for example, been a considerable help in achieving this general objective? Mr Carlos Zeyen: We are not acting in a supervisory role. In a more general context, Eurojust has observer status. We know quite a bit about what is going on with money- laundering and terrorism—the background. I have seen no difference since January 2010 when it comes to our work. That being said, I do not see in that context where Luxembourg should be specifically involved. Bank secrecy was never opposable to criminal justice. Not everyone agrees with this, but let us take the protocol to the 2000 convention, the so-called money-laundering protocol, which until now has left it to countries either to have the system of the central bank account register or just to organise by other means so that you can have the same result as the famous all-bank search—that is just the alternative. According to the protocol to the 2000 convention, it is still up to the Member States as to which system they opt for. Let us say that there are 10 Member States which have a central bank register or will do it on the basis of the all-bank search. Some national members at Eurojust are of the opinion that it goes quicker when you have a central register. That is something that we have also noted in our previous Annual Report. As I say, national members could disagree on that.

Q119 The Chairman: Leaving to one side the question of whether there is a European public prosecutor’s office, is there anything that you would like to see changed about Europol and its roles and powers to make it more effective in combating fraud? Lord Dykes: Eurojust. The Chairman: Eurojust, I am sorry. Mr Carlos Zeyen: I was obviously asked whether Europol and Eurojust should merge.

The Chairman: No, no, no. Sorry. I said, leaving aside the question of the European public prosecutor’s office, is there anything in Eurojust’s role that you think could be changed? What additional powers could it be given that would make it more effective in the fight against fraud? Mr Carlos Zeyen: A certain number of issues have been dealt with within the new Eurojust decision but have still not been implemented in all the Member States. It is my opinion that implementation in all the Member States has to be done. I can understand why some Member States choose not to implement at this stage. Another aspect of Article 85 is that the Commission has promised a draft regulation for next year changing Eurojust’s structure. So some Member States ask why we should have a new law now when we will have to change it again in one year. I see the solution in Article 85, when Eurojust will have the power to decide on the initiation of investigations and the power to propose the initiation of prosecutions, as stated in Article 85; that will be a giant step further.

Q120 The Chairman: Mr Zeyen, before I thank you for giving us your time and answering our questions, is there anything else that you would like to say to us that we have not asked you? Mr Carlos Zeyen: No, not at this stage. I hope that I have not abused your time with my sometimes lengthy answers. 69

Eurojust—Oral evidence (QQ 100-120)

The Chairman: No, not at all. We are very grateful to you for coming to see us here in Brussels. I thank Eurojust for inviting us to The Hague. That would have been delightful, but it was remarkably convenient and helpful to us that you came to see us in Brussels. If we may, when we have considered evidence that we have taken both here and elsewhere, we will write to you again with further questions which I hope you will feel able to answer. In the meanwhile, thank you once again for you help. Mr Carlos Zeyen: You are most welcome. Maybe you will have an occasion to come and see us in The Hague. We received a note yesterday according to which the second sub- committee has been appointed to inquire into the famous “opt-out” possibility in 2014. Maybe, in that context, we will have the occasion to invite you. The Chairman: We shall not be tempted into saying anything. Thank you nevertheless.

European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139)

Evidence Session No. 9. Heard in Public. Questions 132 - 139

THURSDAY 8 NOVEMBER 2012

Members present

Lord Bowness (Chairman) Lord Dykes Lord Rowlands Lord Stoneham of Droxford

______

Examination of Witnesses

Jens Geier MEP, Ingeborg Grässle MEP, Monica Macovei MEP, Bart Staes MEP, Michael Theurer MEP and Derek Vaughan MEP, European Parliament Committee on Budgetary Control (CONT)

Q132 The Chairman: Thank you, Mr President. As I said earlier, we as members of the Committee are grateful to you and your colleagues for agreeing to give evidence to our Committee in this inquiry. This discussion has been very interesting. I hope you will forgive us if in the formal part of the meeting we ask questions that in effect invite you to say some of the things that you have just been saying, because we would like them on the record. I emphasise that from now on your comments will be on the record. We will let you have a transcript of what has been said through the officials of your committee, and you will have the opportunity to make any minor corrections in the interests of accuracy if that is necessary. I also have to comply formally with our own House of Lords rules and point out that Members have declared interests in the register of interests, and that they will declare the relevant interests the first time they speak or pose a question in this part of the inquiry. In so far as it may be considered relevant, I am a practising solicitor, which may be relevant to some aspects of this inquiry. 71

European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) If we may now proceed to the questions, I again apologise if we invite you to repeat what you said before. We have noted the committee’s responsibility for oversight of the budget and its relationship with the Court of Auditors. We would be interested to hear from you what your experience is of fraud and irregularity and, if you are able to offer a suggestion, how much that fraud affects the EU budget. What is your experience of the Court of Auditors itself? What role does it play in fighting fraud and irregularity? Does it have the power that it needs to do that job? Mr Michael Theurer: (Translation) Perhaps I can reply to that first and then ask my colleagues to add anything that they feel needs to be added. There are basically two components to your question. First there is the question of fraud and then there is the question of irregularities. I am not a lawyer, but legally there is the question of intent, whether there is any criminal intent. That is the case with fraud, where you have a deliberate attempt to damage the European Union’s interests. When it comes to errors or irregularities, it may be a case where people through negligence or in good faith have not filled in an application correctly or have made mistakes in a procedure. According to the Commission Communication, the level of fraud in 2011 was €404 million. That compares to an overall budget of €191 billion, so it is not a huge amount. When it comes to irregularities, at the rate calculated by the Court of Auditors, we are talking about a much bigger financial volume. For errors, if we simply use the statistical method of the European Court of Auditors, we end up with a much higher volume. There we need to clarify whether these were simply errors that were made in formal procedures—perhaps incomplete documentation or errors being made when someone is filling out an application—and then there is the question of whether that actually damaged the Union’s financial interests, which can be difficult to determine in individual cases. If we look at the statistical error rate, in the agricultural area and in rural development, it is 7.7%, which is very high; for cohesion policy, it is 6%, still high although it has dropped somewhat. The European Court of Auditors report showed that in those two parts of the budget, the main cause was problems with the tendering procedures, so there is a possibility of simplifying the procedures and in that way bringing down the error rate. You talked also about the relationship with the Court of Auditors. The European Court of Auditors is a central control and audit instrument. We do not have direct access to the administration ourselves because of the separation of powers. That is the way it is organised, and quite rightly so. The Parliament can make use of two instruments for its budgetary control activities. First, there are the internal auditing procedures in the Commission. The Commission works with a risk-based auditing system and, for financial reasons, it makes sense to look at where the economic interest is greatest and to carry out the most auditing in those areas. Then the Court of Auditors uses its sampling and statistics-based method. The advantage of that is that cases come up that might be missed using the risk-based system. However, the statistical method looks only at a few individual cases and cannot necessarily be used to extrapolate for the entire budget. In our political assessment here in the House, we feel that there is a need for further investigations in the different policy areas in the Commission. That is the general reply that I can give. I do not know whether any of my colleagues have anything that they would like to add.

European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) Mr Jens Geier: (Translation) What does the Court of Auditors do in the fight against fraud? The simple answer is that it does not have that mandate. The Court’s audits are sample- based. If it comes up against a case where there is a suspicion of fraud, it then passes that information on to OLAF. In doing that, the Court of Auditors has done its job. The sole task of the Court of Auditors is to check the regularity of budgetary procedures—that is what our colleagues there do. On your question about our experience in the fight against fraud and irregularities that affect the budget, our task is to find political means of defending the budget and the financial interest of the European Union, and to fight against fraud and deal with problems of error and irregularities, but those are two different, separate methods. In the fight against fraud, we have the problem that co-operation with national authorities leaves significant room for improvement. The question of what constitutes fraud comes under national legislation and therefore a national definition, so the first problem is defining exactly what constitutes fraud. Secondly, there is the problem of what the national authorities communicate to the Commission and the methodology behind it. Every year this committee does a report on protecting the financial interests of the EU, which is based on a document issued by the Commission. Derek Vaughan is the rapporteur on that subject this year. There we come up against the problem of methodology—the fact that we are not able to say exactly how much fraud there is against the European Union’s budget. What the member states define specifically as fraud varies, and it is therefore difficult to get an overall picture. That is an unfortunate situation, but we will be able to tackle it only if we have a common European definition of fraud. I will come back to that point later. On the question of our experience of irregularities, these are our daily bread and butter issues here. On how we can reduce the error rate in the implementation of the budget, I come back to something I said earlier: it is mainly a question of principles—how much precision we go for versus how much simplification we try to achieve, and how much auditing we carry out to detect cases of fraud. Do we intensify the controls and auditing procedures in order to reduce cases of fraud? If we do that, we automatically increase the administrative burden for the administrations because the procedures become more complicated. If we try to relieve the burden on national authorities by simplifying those procedures, we run the risk of seeing funding from the European budget not being used for its proper purpose. So that is the difficulty that we are faced with. If we uncover a specific case, of course everyone calls for the intensification of auditing and controls and the tightening up of procedures, but very quickly you will find interest groups coming along and saying, “The control procedures are far too lax and it is therefore the task of the political authorities to step up the controls”, but you will immediately get the reaction from the member states that, “Once again this is the centralisation of everything in Brussels and we are faced once more with the situation where Brussels is imposing additional red tape on us”. The more rules that have to be respected, the higher the error rate is going to be; if I have to respect only one rule, it is easy to do that, but not so easy if you have to respect 75 different ones. In the latter case, it is possible that I will overlook something—but here I am talking about errors, not fraud. Mr Derek Vaughan: You mentioned in your earlier contribution that this week the committee received the annual report from the European Court of Auditors. The figure that it has come up with overall is an error rate of 3.9% in payments made from the EU’s budget. It is worth emphasising that it has identified only 3.9% in errors; that is still too high, but there is a difference between error and fraud. The other problem with the reports that we 73

European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) sometimes get from the Courts of Auditors is that they do not distinguish between the errors—for example, if someone is underpaid, that is counted as an error, or it could be a minor error in filling out a document, or some documents or information could be missing and that will still be counted as an error. Sometimes we need to try to find a way of distinguishing between the different types of errors and cases of fraud in the reports that we receive. On the question of looking after the financial interests of the European Union—the so-called PIF report—as Jens said, I am lucky enough, if that is the right word, to be the rapporteur for the coming year. The way in which that system works is that the Commission gets quarterly reports from each member state on incidences of fraud. As Jens has indicated, though, each member state has a different method for measuring what fraud is. We therefore find that some member states say that they have high levels of fraud while others say that they have no fraud at all. Again, we need to improve that and find a way of achieving uniformity in the reporting of fraud by the member states. Perhaps you could take that on board as well. Recently we had some research done for us on how journalists across the EU reported cases of fraud in the EU budget. It will not surprise you that a large percentage of cases were reported in the UK press, which takes a keen interest in fraud and the EU budget, much more than any other country.

Q133 Lord Stoneham of Droxford: I would like to ask about the bodies that are fighting fraud in the EU and dealing with irregularities. I wondered if you could tell us whether the relevant bodies—OLAF, Eurojust and Europol—co-operate effectively. Do they provide a coherent and effective structure at EU level in the fight against fraud? What improvements do you think that they could make in their co-operation? Mr Michael Theurer: (Translation) Perhaps I could give you a general introduction. Here in the European Parliament, we have several committees that look at this matter, because it is central. The control of the EU budget spans the competences of a number of different committees, but it is the European Commission that comes forward with legislative proposals, particularly on this matter of the European public prosecutor’s office, a point that has been tabled. We think that the co-operation between the different bodies is not always optimal and that co-operation between the decisive instruments at European level could be improved. When it comes to the management of the process, the way in which the different European institutions co-operate with the national authorities in the member states could also be improved. That is something that is being discussed at European level at the moment as well. However, we work essentially with OLAF as the main antifraud authority, so the questions relating to Eurojust and Europol are really beyond our remit. Personally, I cannot answer for those two bodies, but perhaps other colleagues who are on other committees may have something to say about Eurojust and Europol. Ms Ingeborg Grässle: (Translation) Thank you very much. My name is Ingeborg Grässle and I am the rapporteur for the OLAF regulation, which we are now reviewing. I am also the co- ordinator within the European People’s Party here in the European Parliament. I can say that Europe is of course made up of its member states. If a criticism is levelled against Europe, then it is levelled against some of the member states. As such, the legal basis that exists for OLAF and the co-operation between the different bodies is an important question.

European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) We have seen within the member states how difficult it is to bring these points of view together. If member states do not want co-operation to take place, we have major difficulties in improving the fight against fraud in the member states due to that lack of co- operation. Member states simply tie our hands in trying to improve the fight against fraud. Member states sometimes take the view that they should be in possession of all the knowledge and be the only ones who should be responsible for co-ordinating their own activities. There has recently been an attempt to overhaul the co-operation between OLAF, Eurojust and Europol to try to fill the gaps and plug the loopholes in the system. There are situations where Europol and Eurojust can work together, tackling cross-border crime, without OLAF knowing about it. There are situations where OLAF is not aware of the work that is going on in the other two bodies. That is something that needs to be improved. If an individual member state wants to work on a question of cross-border crime where European Union money is at stake, it should address the matter to OLAF. That body is now going to be revised in its structure. If the member states refer a matter to OLAF, then it turns to Eurojust with the case if it is a question of cross-border crime, and often Eurojust has to go back to the member states’ authorities, even though they were the originator of the request, in order to get things rolling properly. So there is a lot of bureaucracy in the process that can be removed. That means in practice that if OLAF detects a case, it gets the documents together and tries to meet with its colleagues in Eurojust or Europol, where applicable. We need to ensure that the bureaucratic approach is abandoned and that we improve the smoothness of the process. We know that it is very cumbersome at the moment and it is difficult to make improvements there without having to call upon the member states at each and every interval to get authorisation. It is extremely difficult for that reason. It would be very welcome to have greater co-operation. By the way, I am very pleased to see you here today to help us fight against fraud. I apologise for arriving late—I had another engagement—but we are very committed to fighting against corruption in member states and cases of fraud. If we can all work together, we can do this in a much more efficient and effective way. At the European level, we have Europol, OLAF and Eurojust. If they do not work together effectively because the member states require authorisation at every stage of the process, we simply cannot make any progress. That is what those bodies have been tasked with and that is what they need to be able to do. A further major problem that we have in co-operation between OLAF, in the fight against fraud, and member states is that when we have a legal follow-up to an OLAF case, we never get any feedback about what happens in the member state. OLAF detects a case; it conveys it to the member state; the member state deals with the case as it sees fit; but this investigative work that is taking place in the member state needs to be reported back on. We need to know whether a judgment is actually obtained at the end of the case. We desperately need two-way co-operation, so that we know what has happened with individual cases that have been detected by OLAF. OLAF should have the right to ask what has become of an individual case that it has detected earlier. If we are to fight against fraud effectively, this needs to happen. At the moment we cannot see a light at the end of the tunnel. We can try to work here at European Union level to improve the situation in the institutions, but in the member states there is too little awareness that this kind of bureaucracy needs to be removed and that authorisation needs to be given in advance to the institutions. The system as it stands does not work properly.

European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) I am coming to a conclusion. I should say that we have good news on the question of organised crime and how things are working and improving. It is likely that if there is a case of misuse of public funds that comes to light and it does not get sentenced or judged in an individual member state, it can be dealt with elsewhere. I think it is unacceptable for the cases that come to light that are worthy of suspicion not to go to court in the member state. That needs better co-operation with the member states.

Q134 Lord Stoneham of Droxford: Could I ask a specific question? Are there any additional powers that you would like to see OLAF have? Are there any problems with OLAF remaining part of the Commission, or should it be more independent? Ms Ingeborg Grässle: (Translation) OLAF is responsible for administrative investigations. What we need as a next stage—and perhaps as a proposal for a directive that member states would have to implement, rather than a regulation—could be making the penalties for fraud more uniform. At the moment, we have great difficulty in getting fraud cases dealt with in the same way in the member states. We need greater standardisation of the penalties that exist for fraud so that any abuse of EU financial interests should be dealt with in the same way across the EU and not left up to the subsidiarity principle so that member states can interpret things as they see fit. This is an extremely important step so that we can get some standardisation for the work that OLAF does when it detects cases. We get cases that are dealt with by the de minimis procedure, a regulation that is used not just when it is a financial interest that is being abused but when various other crimes associated with fraud are involved. As the next step, we have to have member states being forced to implement a directive that standardises things. If we had a European public prosecutor’s office that could co-ordinate cases detected by OLAF, that would be a decisive step forward. On the question of whether OLAF should remain within the Commission, I would say yes. If it stops being part of it then it will have lost a huge part of its decisiveness. It needs to be able to carry out investigations in an effective way. At the moment it takes part in inter- service consultations within the Commission, so OLAF has the possibility of working preventively where it sees the danger of abuse taking place. When it sees potential fraud on the horizon, it can already intervene in a preventive sense. OLAF has to be independent in cases relating to EU officials and so on, so this internal investigative procedure should take that into account, otherwise it would lose in effectiveness and influence within the work that it does. If it were outside the Commission, it would lose all that influence and effectiveness. Ms Monica Macovei: Thank you. Coming back to OLAF and national authorities and the outcome of OLAF investigations, over 50% of OLAF investigations are not followed by convictions in the member states. OLAF goes through a certain stage and then sends the documents about the investigations that it has done to the member states, and over half— maybe 60% or 70%—are not followed by indictments and people are not sent to trial. In cases where there are indictments, the percentage of convictions is high, but the problem is that there is a gap here between OLAF and the indictment—the finalisation of the investigation in the member states. For instance, I know that in some member states prosecutors claim that they cannot directly use the investigation done by OLAF but have to do everything themselves. That is a problem that we have now. I would say that for European funds, OLAF should finish the investigation and indict, and then send it to the national courts. We could have a European prosecutor which could finalise the investigation. That would be mandatory for the member states, and then you would go to court only for the trial. I apologise that I have to leave because I have a meeting with judges from the Constitutional Court.

European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) Q135 The Chairman: We understand, thank you. Before I ask Lord Rowlands to continue this discussion about OLAF, which is clearly very important, we saw OLAF yesterday as well as the Supervisory Committee. I would be interested to hear, as I am sure would my colleagues, your view about what, to put it mildly, appears to be a serious dispute between those two organisations and how you see that being resolved. There seemed to be no meeting of minds, certainly yesterday morning when we were there, as to whose mandate said what and who was entitled to do what. I suspect that this, if one is entitled to make a judgment on one visit, is not awfully helpful to the efficient working of the organisation. Mr Michael Theurer: (Translation) Perhaps I can say a little about this by way of introduction. In a Budget Control Committee meeting on Tuesday, we had the OLAF Supervisory Committee in with us. All members of the Supervisory Committee were present, and it was their wish to make a report to Parliament. Compared to the hearing that we held a number of months ago, it is clear that there has been no improvement in working procedures, that is something that the committee takes a serious view of. Apart from the Supervisory Committee, the statute of OLAF ensures that OLAF is independent. It is important that we have an independent body for dealing with fraud, but at the same time an independent body cannot operate without any control being exercised over it if we are to respect democratic principles. This is why we have the OLAF Supervisory Committee, which has a very strong role to play in that respect. However, it seems that we need to clarify the role of the Supervisory Committee vis-à-vis the OLAF director-general. My view is that such a Supervisory Committee can do its job properly only if it has the right working conditions. Currently its employees are part-time, so they need expertise to back them up. We have just heard that eight posts are now going to be cut to six, and it is clear that this makes it very difficult for them to carry out proper monitoring. We also need to look at how the Supervisory Committee can get access to individual OLAF investigation results and see whether things have been done in the proper way. Monitoring is worth while only if the Supervisory Committee is completely free in deciding which reports it wants to look at, and the director-general apparently takes a different view on that. I think that that issue, and this is also the committee’s view, urgently needs to be resolved. I am sorry that I am also going to have to leave at 12:30. Ingeborg Grässle has also asked for the floor, and perhaps I can ask her then to take over chairing the meeting as well. Ms Ingeborg Grässle: (Translation) As a member of the committee since 2004, I have been observing these problems between the Supervisory Committee and the director-general for a long time. There have always been problems and conflicts, but it has always been in the interests of both sides to resolve those conflicts. Now we are contending with a new element—I want to be quite frank about that. There have been various attempts by the committee—these are all professionals, lawyers, judges and so on, people of good will—to resolve those conflicts, but it did not amount to anything. That is a problem that really worries me. The committee is dependent on our support, and as rapporteur I have been observing the situation for almost a year, since it has been in place. I am not prepared to let the director-general have a say on this. Eight people on the secretariat is enough. The previous committee wanted to have 10 people. Then an agreement was reached with the previous Supervisory Committee and the director-general to have eight people and, on the selection of staff, that the secretary-general would be selected by the committee itself and that it would have the right to issue a call to all institutions, so that it would not have to choose the person that the director-general had chosen for it to carry out monitoring—that is obviously not a serious form of monitoring. 77

European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) So we had agreement on the procedure, on the salary that people should get, what kind of staff they should be and how they should be selected. It was extremely difficult to get that agreement and there was a big dispute between the committee and the previous director- general. The current director-general is refusing to accept that. He is saying, “I am here now and things have to work differently”. That is very regrettable and is a very un-European attitude. A lot of people are concerned about the elephant in the china shop. It really does not help us for people to be acting in this way. I have taken various initiatives behind the scenes to try to get agreement on this, because it is not in anyone’s interests to have this quarrel. The Supervisory Committee is selected according to a very complicated procedure between the Council, the Commission and the Parliament. If these people are telling us after a number of months that they are not able to do their work properly because they are being prevented from doing so, we have to make it clear to the director-general that he is not the only one who has a say. I think that the way in which this is being dealt with is highly regrettable. We need the Supervisory Committee to do efficient work. That is not happening. The Parliament as a budgetary authority has to tackle this problem and I promise you that we will do that. To my mind, it is quite clear: this has to have consequences, we cannot let things continue, we have to ensure that the Supervisory Committee is able to do its work properly and carry out its tasks. Under the new OLAF regulation, it will have additional tasks. It will not be able to complete those if things do not change. It cannot do the work that it is supposed to do at the moment. It needs access to closed procedures. A complex procedure was agreed for that; we managed to get agreement on that. Things that we thought had already been settled are now being rolled back on. The conditions were sent to us and to the Council and were in the Official Journal. All of that was agreed with our approval. The law must be applied. It is either applied or not, and I am in favour of it being applied. If it is not, we have a big problem here in Europe.

Q136 Lord Rowlands: You have already explained to us some of the changes that you would like to see happen to OLAF under its review. First, would you like to add anything to what has been said? Secondly, we are very interested in the proposed Directive on the protection of the EU’s financial interests in criminal law, and wondered whether you now feel that the draft as it stands is satisfactory, powerful enough or good enough for the task that it is meant to serve. Ms Ingeborg Grässle: An interesting question from someone from Great Britain. (Translation) On the question of the European public prosecutor’s office, a lot more could have been done on this, for example if we had an EPPO that could address these matters to the national courts and represent the European institutions here. That would be a very good instrument, but that is not something that we intend to achieve. Member states try to promote improvements in their own area, but without looking at the bigger picture so that we can make progress at European level. In the PIF report, a lot more could have been done, there is no question about that, but what we have on the table is remarkable. There are attempts there to achieve a common definition of what constitutes fraud. In a single market with full internal liberalisation, what use is it to have the free movement of goods if there is a different situation in France, Germany or Italy—where crimes are dealt with in different ways in different countries? If problems cannot be resolved in a common way from one country to another, the proposals end up being much less valuable. 78

European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) I do not want to undermine what has been proposed, but we could have done a lot more and we should be doing more. We have limited ourselves to the financial interests of the European Union, but there is no general approach to try to tackle fraud and organised crime in general, because that would have caused uproar in the member states. We hope that this approach of dealing with the abuse of the financial interests of the EU spreads out from the EU to the member states and develops into something larger and more effective. We need to make sure that our efforts go in that direction and put work into that. We see cases, such as in Greece, of what is not working and how the justice systems are failing us. I have seen this since 2004: if the justice authorities are not working properly, everything starts to crumble. The justice pillar is key. It supports so many other elements of a country and of the economy. If we don’t have a coherent justice system we really have no economic future at all.

Q137 Lord Rowlands: We had better say that in the United Kingdom there is one concern about the directive, which is about the mandatory sentences, which is novel in the UK. We ought to make that point because we as a committee will be scrutinising this document and will have to make a recommendation on it. You kindly sent us a detailed submission; do you mind if I pick up a couple of points you make? In paragraph 10, you say that in 2011, the Commission put forward more than a dozen legislative proposals and new initiatives in this field. I am not sure that we are fully sighted on these; I do not know whether you are able to elaborate on them for us. Ms Ingeborg Grässle: (Translation) I could send you a list of those dozen proposals. I could list all of them with perhaps a reference—then you could look them up—but I cannot really list them from memory. But I will certainly send it to you afterwards.

Q138 Lord Rowlands: Thank you. In paragraph 11, you tell us of a change in the regulation that we would not have seen—it would not have come before us—on financial regulation, in which you say that the reporting duties of member states, especially on the use of structural funds, have been tightened and better defined. Would you like to say anything about that proposal? Ms Ingeborg Grässle: (Translation) Exactly which point is that? What paragraph?

Lord Rowlands: It is paragraph 11 of your submission to us, in which you say that there is a legislative initiative to change or revise Regulation (EC, Euratom) 1605/2002 on financial regulation, which is scheduled to be adopted by the European Parliament in October. You say that one of its purposes is to place reporting duties on member states regarding the use of structural funds. Could you elaborate on that? Ms Ingeborg Grässle: (Translation) The financial regulation of the EU is a framework law for all the regulations that we are now producing for the specialised funds. In the European Union, there are currently 65 of these. I shall come to the structural funds and the reporting duties in a moment. First, I should like to give you a general overview. With the new reform that is going to come into effect, hopefully, on 1 January, we have tried to free up the small grants up to €60,000. We have tried to bring in flat rates up to €60,000 so that they do not have to be itemised. That means that the burden is reduced on small beneficiaries and the bureaucracy is removed up that level. We have attempted to set up a situation for the control procedure for the next framework period, which is such that, in areas such as agricultural policy, we would have a reporting system whereby the member states’ authorities would have to create these reports and create synergies between the different 79

European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) funds that are applied for. We could try to merge the administration that they have to enter into in order to apply for these funds. That has been received unfavourably by the member states because they wanted things to remain separate. In two or three years, how will things work in the UK, for example, with the revised CAP? Do you think that the synergies will be created or that things will remain separate as they are now? We had new elements in the financial regulation that were not there previously and some were removed. For example, flat rates for larger sums, up to millions of euros, are in some cases possible. The intention was to create better innovation. We wanted to put a sum at the disposal of beneficiaries for certain types of expenditure. For example, if the programme is to send a robot to the moon, several million euros could be included in a flat-rate package without detailed itemisation of expenditure. With that provision, we will hopefully avoid a situation which I am personally quite worried about where the danger of misuse of funds increases. We have also looked at innovative financial instruments. In the current regulation, there is reference to the structural funds. In the new regulation, we are trying to close a loophole where member states might actually use the money that has been allocated under structural funds for something completely different. We have created a general system where it is possible for the Commission to allocate money based on credit facilities within its overall framework package. We have taken this general legal situation and have said that there are no provisions for opt-outs for individual specialised funds. With that, we have tried to improve the very cumbersome process that exists. Our colleague from the budgetary control committee also worked a great deal on this to make sure that there are no opt-outs from the individual provisions, so that all the individual funds would be covered by the same standards and the improvements could be brought through the synergies that I have mentioned. On management declarations and the reporting duties, what we have seen with the structural funds to date is that the possibility exists for a member state to receive money and spend it on a project. If they then note that there is a problem with the money that has been allocated, they say, “Well, we will use national money for this particular project and the European money for something else”. In fact, that may even then be passed on to a third project and, at the end of the day, we have lost track of where our money is being spent. We wanted to have things limited in a simpler process. We did not manage to achieve that; the member states were against it; and our colleagues in the competent committee (i.e. REGI committee, which deals with the MFF-related regulation for structural funds) were against it, too, because we wanted clarification of exactly where our money was going. We wanted management declarations to be compulsory and to track exactly where money was being spent and had ended up, but unfortunately our colleagues from the member states were against that.

Q139 Lord Dykes: Very appropriately, it is a pleasure to see two Members from the nation state of Germany, which has an excellent reputation for financial controls and discipline. Bearing in mind the recent answers—we thank Frau Grässle for giving us some very helpful information—are you both convinced that it is possible to construct at the highest quality the necessary Europe-wide legislation, with the European Parliament and the Council of Ministers working together, perhaps not just on Directives, which we are expecting next year, but more on Regulations, which have also been promulgated, to get the necessary strength of that legislation, dealing particularly with the priority of transnational crimes and misdemeanours such as financial fraud as well as serious irregularities, and indeed the cases in between where the national member state does not feel that it wants to do it on its own for some reason and wants to invoke the aid of the Europe-wide legislation as well? I would be interested in your answers to that question.

European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) Mr Jens Geier: (Translation) I am not sure if I have fully understood you. I think that your question was more about the principle than about a report based on a specific experience. I think that all of us in the committee are aware that, when it comes to prosecution, we are taking a step that to a great extent encroaches on member states’ competences, because you may end up with a competing law enforcement system at the European level. I understand that this is a question of principle that a lot of national authorities and national parliaments want to limit. I can therefore answer your question, as I understood it, very simply. You asked whether we are convinced that our draft legislative Acts are strict enough. No, absolutely not, because there are too many member states, and I fear that you come from one of them, which are reticent about this and feel that this competing system is a step too far. We see that then in the practical negotiations. The member states in their representation in Council do not send officials who are looking for a solution but officials who set up barriers and obstacles. That is the mandate that they have been given by their Governments. Can I just talk to you about the financial instruments? The Council was of the opinion for quite a long time that every cent that came back to the EU budget must be passed back to the member states. Another principle then was a desire for innovative financial instruments. We explained that a revolving fund could not function if the money that went back into it was paid back to the member states. I understand the mandate that is given to your representatives in Council, but we have no mandate to respond to that. We have to intervene at a very high level in Germany to try to get a change here and to make the point, “The things that you are trying to achieve here are simply irreconcilable. If you want innovative financial instruments, you have to accept that money that is paid back into the EU budget stays there, otherwise the revolving fund cannot work”, but the official sitting in Council for the German Government was responsible for advising the Presidency. It was the poor Danish presidency that had to try to make sense of this and the Danish Permanent Representative understood our point, but we have to try to break down opposition first on the German side and get them to recognise that this is not going to work. That is the only way we can get a solution, but we came up against opposition for weeks and weeks. Why am I telling you this story? Well, it is because I fear that, if we want to achieve effective European law enforcement, we are going to come up against exactly the same problem and there will not be the willingness at member state level to accept a second, competing system of prosecution and enforcement at EU level. If that is the situation, the only reply that I can give you is no, we are not going to get legislation that is strict enough. It is in our common interest to have an effective enforcement system, but the technicalities of how that works out run up against this problem of there being a difference of views and of principle between the European Parliament and the member states. If that is the case, then no, we are not going to get legislation at the European level that is effective enough to allow us to tackle cross-border fraud and crime. Ms Ingeborg Grässle: I have just one remark. (Translation) Jens is right, but Rome was not built in a day. It is a first step; it is a beginning. I am optimistic that, at the end, we will get what we need, but not straightaway. That is always the way it happens in Europe. We have to take the long way around; we waste a lot of time; but, at the end of the day, we achieve what we need to achieve. You will see that people have misgivings about this, but we will eventually get there. Member states have so much to gain from the European Union. Our group always goes to visit the authorities in the various member states. When we went to the south, we heard people say, “We are really happy that Europe exists, because, for the first time, we are actually getting national rules on the granting and paying-out of subsidies. We didn’t have those previously and we’re only getting them now because of European rules”. My response to that is, “Wonderful”. We are confident; it will take time; but we

European Parliament Committees, Budgetary Control Committee (CONT)—Oral evidence (QQ 132-139) hope that we will achieve this and hopefully with your help. On behalf of the committee, I would like to thank you very much for the consistent interest that you have shown and for the wonderful, thorough work that you are doing in this area. It is wonderful that we have people from your island who are asking the right questions and who are prepared to put some thought and reflection into what we are doing here. Thank you very much for the interest that you have shown. We would be very happy to continue this exchange of views with you and to contribute to the work that you are doing. We are certainly on your side when it comes to the protection of the Community’s financial interests. Thank you very much for attending. The Chairman: On behalf of my colleagues, I would like to bring the formal part of our inquiry to a close and thank all members of the committee, both those who are still here and those who have contributed to the meeting but have then had to go elsewhere, which we entirely understand, for answering the questions. Your evidence will be particularly valuable as it gives a parliamentary insight, from a European Parliament point of view, into the matters into which we are inquiring. As I said at the beginning in the informal part, I know that we will want to continue the contact with your committee on matters of joint interest. Thank you very much. I will formally close our inquiry, although I suspect that, procedurally, Mrs Grässle should actually close the meeting.

Europol—Written evidence

1. Europol’s focal points relevant for the EU’s financial interests Europol is the European Union’s law enforcement agency (LEA) responsible for criminal intelligence analysis. Within its Operations department, the Criminal Finances Unit hosts three analytical focal points responsible for assisting Member States’ investigators to target organised criminal groups (OCGs) which threaten the financial interests of European Union. Each of these teams consist of analysts and specialists who collate, process and disseminate criminal intelligence to the Member States as appropriate to the needs of these investigations, as well as co-ordinating existing investigations where links or areas of common interest have been identified.

Under the umbrella of an overarching analysis work file (AWF) which focuses on Serious Organised Crime and which currently contains in excess of five million entity records in its analytical i-base database, these distinct Focal Points (FP) have the following areas of responsibility;

FP Smoke targets OCGs engaged in the illegal manufacturing and smuggling of tobacco products. A 2011 study commissioned by the tobacco manufacturer Philip Morris International and conducted by audit firm KPMG estimated that the annual consumption of illicit cigarettes in the EU was 65.3 billion cigarettes, equivalent to 6,500 40 foot containers per year, each of which is capable of transporting 10 million cigarettes, with an estimated annual EU-wide tax loss due of €11.3 billion. Her Majesty’s Revenue and Customs (HMRC) estimated the 2011 United Kingdom (UK) illegal cigarette market at about 11%, whilst the illegal hand rolling tobacco market was about 49%. This resulted in a UK revenue loss of £2.2 billion. To put this in context, the total UK tobacco revenue in 2011 was £8.8 billion.

FP Copy counters infringements linked to intellectual property crime and piracy cases. Almost any type of goods, from perfumes and other luxury items to daily consumer goods, such as washing powder, tea and razor blades, are subject to counterfeit. More frighteningly, life-saving pharmaceuticals are increasingly being counterfeited, some even entering the legal supply chain. The European Commission, DG TAXUD, 2011 statistics of customs seizures at EU borders record 91.245 cases involving a total of 114.772.812 seized counterfeit articles, an 11% increase on 2010. The seized articles represent a total domestic retail value of €1.272.354.795.

FP MTIC deals with Missing Trader Intra Community fraud, which results in the evasion of Value Added Tax (VAT). Methodologies range from the carousel trading of mobile telephones, computer chips and precious metals to fraudulent trading in intangible items, such as carbon credits, gas and electricity and green energy certificates. According to the European Commission’s own website (“Questions and Answers: Value Added Tax” MEMO/11/874 6 December 2011), the VAT ‘tax gap’ was estimated to be €106.7 billion in 2006, which equates to an EU average of 12% of the net theoretical liability, with many of the individual Member States suffering losses in excess of 20%. A more recent report by Dutch, German and Belgian Courts of Auditors (Algemene Rekenkamer, Bundesrechnungshof and Rekenhof Intra-Community VAT fraud joint report, March 2009)

Europol—Written evidence

likewise estimated losses to exceed €100 billion. By way of comparison, the EU Budget for 2011 was €141.9 billion.

There can be no doubt that organised crime is responsible for most, if not all, of the major cases investigated by the Member States. In June 2010, the United Nations Security Council investigative body, the Group of Experts, reported that millions of dollars in illicit tobacco revenues are reaching Al-Qaeda, the Taliban and other terrorist organisations. The report went on to state that illicit tobacco funds are financing Congolese rebels for the recruitment of child soldiers, and to commit mass rapes and murders, whilst in the UK such activity is known to have funded paramilitary activity in Northern Ireland. For many years, Italian mafia groups, such as the Camorra of Naples, have been active throughout Europe in importing, distributing and selling counterfeit power tools manufactured in China, posing serious health and safety risks to users. Likewise, VAT criminal groups based in the UK, but controlled by masterminds in Dubai, are known to be actively creating networks of companies throughout the EU to establish fraudulent trading chains, whilst simultaneously establishing accounts on financial trading platforms established outside the EU and the attentions of financial regulators.

2. Europol’s cooperation with OLAF and Eurojust Whilst Europol works predominantly with investigators and intelligence agencies of the Member States and its Third Country partners, it also collaborates with the European Anti- Fraud Office (OLAF) and Eurojust.

The three focal points, however, enjoy differing relationships with OLAF. FP Smoke has very good cooperation with the Mutual Legal Assistance / Intelligence team at OLAF, although this collaboration is limited to one or two Joint Customs Operations (JCO) per year. These are organised by OLAF in conjunction with a lead MS and target tobacco smuggling in one form or another. Likewise, FP Copy has staffed OLAF’s Operational Control Centre in Brussels during operations such as “Diabolo”, which represented a joint approach by customs authorities from all 27 MS and 16 Asian countries, co-ordinated by OLAF, to target counterfeit consignments within maritime traffic between the Far East and the EU. During JCOs, Europol deploys a “mobile office”, enabling secure and remote access to Europol data to assist in targeting and risk profiling.

On the other hand, FP Smoke has a strained relationship with OLAF’s tobacco investigation team, Task Group Cigarettes (TGC). Both teams assist tobacco investigations, which has led to competition for the same intelligence. This was not helped by the fact that until 01/01/2010 there was no legal gateway for the organisations to exchange information. FP Smoke has previously offered collaborating with TGC and requested their assistance on several matters, but this has not led to any concrete improvements. Europol hopes that this relationship can be better organised and based on differing powers of the two entities.

The situation for FP MTIC is even more complex. In the operational VAT fraud arena, several Member States refuse to work with OLAF on the grounds that there was no competence for the Commission/OLAF. Europol FP MTIC thus had to comply with the views of such members or risk disengagement with them. OLAF was thus limited in its support to the MS in the area of administrative co-operation. The legal stance on this position appears to have changed following the decision of the European Court of Justice (C-539/09 - OJ C 25/08 of 28 January 2012, Commission v Germany), which concludes that

Europol—Written evidence

there is a direct link between the collection of VAT by MS and the availability to the Union budget of corresponding VAT resource due to be paid by MS to the EC. Hence a shortfall in VAT collection by MS as a result of fraud results in a reduction of the, in general, 0.3% payment by MS of their national harmonised VAT base to the EU budget. And as OLAF do have competency for protecting the financial interests of the EU budget, it will be interesting to see how MS react. This may allow FP MTIC to develop opportunities with OLAF counterparts.

Co-operation between the concerned Europol teams and Eurojust has been, by comparison, much more straightforward. Eurojust is a member of each of the three FPs, with operational coordination meetings regularly being held at Eurojust’s premises. A typical example was Operation Tsar, a French led case targeting an OCG smuggling cigarettes into the EU from Ukraine. In June 2011 an operational coordination unit was established at Eurojust with FP Smoke deploying the mobile office. This supported 2 days of action by 150 customs, police and judicial officers in 5 different countries. This resulted in 5 arrests and 13 house searches. Similarly, of FP MTIC’s five currently formalised Joint Investigation Teams with Member States, Eurojust is also formally entered as a signatory into three.

3. Future cooperation with EPPO Europol, in principle, supports the establishment of the European Public Prosecutor’s Office (EPPO). However, its mandate and scope needs to reflect a holistic and balanced solution. This would mean that it needs to go hand in hand with Europol’s developments and, at the same time, take into account the current arrangements and developments at the institutional/agency level. Otherwise, an institutional imbalance may be created in the JHA field between judicial and police cooperation arrangements.

Europol is explicitly mentioned in article 86 TFEU, in which it is stated that the EPPO shall be responsible for investigating, prosecuting and bringing to judgement, where appropriate in liaison with Europol, the perpetrators of, and accomplices in, offences against the Union’s financial interests. Accordingly, the legislator has foreseen a role for Europol with regard to the EPPO. Europol believes that any future EPPO will have a close relationship with Europol.

7 September 2012

Dr Inge Gräβle MEP—Written evidence

General remarks: Fight against fraud – where do we stand?

1. With the euro crisis, sensitivity has grown for the performance of EU programmes and the performance of Member States' administrations. Allow me to recall that 80 % of these funds are spent by the authorities of the Member States. This growing awareness also concerns the fight against fraud. As rapporteur for the legal basis of the European Anti-Fraud Office OLAF (revision of Regulation (EC) 1073/1999, interinstitutional file COD/2006/0084), I would like to draw your attention to the lack of cooperation between the Member States' judicial authorities and the lack of follow-up on OLAF cases in the Member States. On a lot of OLAF cases transmitted to the national judicial authorities we do not have any news about what measures have been taken (in February 2009, I counted 93 % of OLAF cases fizzling out in the Member States' justice systems). Therefore we need more action, and more support for the Union's action in the fight against fraud in the Member States, also in the UK.

The crisis and the budget cuts in the Member States threaten the fight against fraud even more because a lot of national civil servants had to suffer cutbacks of up to 25–30% of their salaries. This poses new challenges where big amounts of EU money are handled. With rising challenges we also need more support from our colleagues in the national parliaments. I would be pleased to provide you with further information on these questions. Thank you for the opportunity to present my point of view.

Fighting fraud in the EU – overall recent developments

2. In 2011, the Member States reported 1 230 irregularities as fraudulent (suspected and established fraud) to the Commission, with an estimated financial impact of EUR 404 million. Compared to 2010, this is a decrease of more than one third for both figures (1883 and EUR 643 million, respectively). In the years 2007–2010 the number of suspected fraud cases had constantly remained at around 1 800. However the recent decrease has mainly statistical reasons, in particular the introduction of a new Irregularity Management System and the cyclical nature of the Cohesion Policy programmes.

3. As to the non-fraudulent irregularities, the number dropped slightly in 2011 compared to 2010 from 13 210 to 10 974 cases, with a total financial impact of EUR 1 493 million (EUR 1 578 million in 2010).

A closer look at specific policy programmes: agriculture and cohesion

4. As in the previous years, most of the fraudulent irregularities concern the areas where most of the EU money is spent, namely, agriculture (139 cases) and cohesion policy (276 cases). Along the same lines, most non-fraudulent irregularities were found as well in the areas of agriculture (2 256 cases) and cohesion policy (3 604 cases). The total financial impact was EUR 77 million (agriculture) and EUR 204 million (cohesion) for fraud, the

Dr Inge Gräβle MEP—Written evidence impact of non-fraudulent irregularities amounts to EUR 101 million (agriculture) and EUR 1 015 million (cohesion), respectively.

5. As to the fraud cases in agriculture, the number reported in 2011 dropped from a high in 2010 back to the long-term level. However, the financial impact increased by EUR 8 million. This increase can be explained by two big cases reported. The number of cases differs considerably between and within Member States. In 2011, Bulgaria reported the highest number (37), followed by Romania (25). On the contrary, big-spending countries such as the UK, France, Germany and Spain constantly report astonishingly low numbers.

The non-fraudulent irregularities showed an increase of 829 cases compared to the previous year, the related amount rose by EUR 39 million. These findings correspond to an increase in spending in 2011.

In 2011, the highest overall numbers of irregularities were reported by Italy (590), Spain (267) and Hungary (239), while the highest financial impact falls upon France (110 cases amounting to EUR 71.6 million).

6. As to the fraud cases in cohesion, both the number and the amount decreased significantly in comparison with the previous year, dropping from 464 to 276 and EUR 364 million to EUR 204 million, respectively. Similarly to the previous years, Poland, Germany and Italy reported most of the cases, while Germany remains the most successful country at imposing sanctions. Fraud cases often took the form of inclusion of ineligible expenditure or the ineligibility of the beneficiary.

The non-fraudulent irregularities also fell considerably by 2 994 cases compared to 2010, with the related amount also decreasing slightly by EUR 171 million. The main reasons for this decrease are statistical, as outlined above. The majority of irregularities concern infringements of public procurement rules and eligibility rules. The highest numbers were reported by Poland (674), Spain (376) and Portugal (367), with the by far highest total financial impact being reported by Greece (EUR 309 million).

Recovery of funds

7. The recovery situation concerning the European Agricultural Guarantee Fund (EAGF) remains unsatisfactory: Member States recovered from beneficiaries EUR 173 million during 2011, which means that by the end of the financial year only 44 % of the EAGF debts since 2007 had been recovered. The remaining total amount to be recovered by end 2011 was EUR 1.2 billion. However, the amount outstanding to the EU budget is lower because Member States have already paid back non-recovered sums of EUR 450 million out of their national budgets by applying the "50/50 rule". It bears mentioning that Italy accounts for almost 43 % of the funds to be recovered (EUR 515 million).

Moreover, the Commission implemented, via conformity clearance procedures, financial corrections of EUR 822 million on a total of EUR 1 068 million decided.

8. In the area of cohesion policy, the Commission completed in 2011 financial corrections for EUR 624 million out of EUR 673 million decided. However, there remained an outstanding amount of EUR 2.5 billion from the previous years, which corresponds to a 87

Dr Inge Gräβle MEP—Written evidence cumulative recovery implementation rate of 72 %. The public contribution recovered by Member States in 2011 amounts to EUR 133 million.

New initiatives and legislative proposals in the area of fight against fraud

9. I welcome the Commission's proposal for a Directive on the fight against fraud to the Union's financial interests by means of criminal law, which has been adopted by the College on 11 July 2012 (Commission document COM(2012)363final, interinstitutional file COD/2012/0193). This directive will for the first time establish common definitions of criminal offences related to the EU budget. Given that up to now fraud with EU money has hardly been liable to prosecution in some Member States, this is a considerable improvement.

10. Further to that, in 2011 the Commission has put forward over a dozen legislative proposals and new initiatives in this field. They comprise extended exchange of information between the police, customs, tax authorities, etc. across the EU. Furthermore, the loss in customs revenue due to cigarette smuggling amounting to an estimated EUR 10 billion a year, the Commission launched an action plan to fight smuggling of cigarettes and alcohol along the EU's eastern border. Finally, the reform of OLAF, for which I am the rapporteur (see paragraph 1), will lead to a strengthening of the independence, effectiveness and efficiency of the Office.

11. Another legislative initiative that will improve management and control of EU funds is the revision of Regulation (EC, Euratom) 1605/2002 on the Financial Regulation, which is scheduled to be adopted by the European Parliament in October. This new Financial Regulation (interinstitutional file COD/2010/0395), for which I am the co-rapporteur, will for the first time provide a coherent legal framework for new policy instruments such as project bonds, incentive prizes or public private partnerships. Reporting duties of Member States, especially for the use of structural funds, have been tightened and better defined. Another novelty is the possibility to issue, on a voluntary basis, a management declaration of assurance at national level. Parliament would have preferred an obligatory provision, but unfortunately the Council was strongly against. Furthermore, audit rules and sanctions will be streamlined, with the aim to reduce the complexity and number of rules. The rules on receiving funds have also been simplified, e.g. VAT will be eligible for reimbursement in direct management mode.

September 2012

JURI (Legal Affairs) Committee—Oral evidence (QQ121-131)

Evidence Session No. 8. Heard in Public. Questions 121 - 131

THURSDAY 8 NOVEMBER 2012

Members present

Lord Bowness (Chairman) Lord Dykes Lord Rowlands Lord Stoneham of Droxford

______

Examination of Witnesses

Tadeusz Zwiefka MEP, Evelyn Regner MEP, Françoise Castex MEP and Francesco Speroni MEP, JURI (Legal Affairs) Committee

Q121 The Chairman: It is a pleasure for me and my three colleagues to be in the European Parliament today. We are also extremely grateful because, although you have kindly welcomed us as visitors, we are conscious that you have all volunteered to formally answer our questions in connection with the inquiry that we are conducting. We are all Members of the Sub-Committee of the House of Lords European Union Select Committee dealing with justice, institutions and consumer affairs, and we are conducting an inquiry into combating European Union fraud. This is our second day in Brussels. We have seen OLAF and its supervisory committee. We have seen representatives of Eurojust and the Commission and another of your colleagues from the European Parliament. This morning we have the opportunity to put questions to you, and I think that you have had notice of them. I say to you formally that this session is being recorded. You will receive a transcript of the same and there will be an opportunity for you or your officials to correct any minor inaccuracies. The evidence that you give in answer to the questions will be published with our report. I should also point out, since this is a meeting of our Committee as much as 89

JURI (Legal Affairs) Committee—Oral evidence (QQ121-131) yours, that Members will declare where necessary any relevant interests that they have in addition to those that they have already declared in the House Register of Members’ Interests. In passing, I record that I am a practising lawyer, in so far as that may be relevant to some of the issues that are raised here. Madam Vice-President, would you or colleagues like to make any opening statements, or shall we move directly to the questions? Ms Evelyn Regner: I would welcome giving the floor to Mr Zwiefka, as he deals with this topic in the European Parliament. Then, if you agree with this procedure, we will go into your questions, since you have prepared some quite precise ones and I am sure that you have an emphasis on several aspects and topics that we should maybe deepen. I give the floor to Mr Zwiefka. Mr Tadeusz Zwiefka: (Translation) I welcome you again to the European Parliament. Thank you for giving us this opportunity to meet you and exchange opinions, because that is what I think we are going to do, especially as you are already engaged in the work of the Sub- Committee. As the chairman mentioned, we have just begun work on the report that I will be drafting on the directive on fraud affecting the financial interests of the European Union. It is clear that we would like to introduce regulations that would help to combat not only fraud but the causes of fraud. The situation is sensitive because, as you are probably well aware, the EU has limited, if not minute, competences in the area of penal law. These activities are in the hands of the member states, and our hands are often tied, which is not to say that it is completely impossible for us to act but that in certain areas we need to act together and impose standards that would be common for all. The main problem is the question of sanctions and penalties, because of course the value of money is different in different member states and we have different approaches individual member states to fraud that affects the financial interests of the EU. We would like to come up with instruments that we can establish together with the Council. We are well aware of that not only in our committee; I am also a member of a temporary committee on money-laundering and corruption. This committee has a mandate to work for one year and we are attempting to carry out a thorough analysis of what is going on in the EU and in our neighbours. We have had a number of meetings in the Parliament and in the neighbouring states in order to introduce controlling and co-operation mechanisms that would help us to effectively combat those problems. I do not think that we will be able to block those negative activities completely, but the idea is to understand, control and contain those problems, especially through co-operation. The European Commission has carried out an impact assessment and consultations, and you will be aware that its conclusions are that it is absolutely necessary to combat fraud at EU level, and that we have a number of diverse regulations in the individual member states and therefore have to come up with common regulations. The main principle is that penal law should be used as a last resort, on the basis of the principle of proportionality. Ms Evelyn Regner: Thank you very much, Mr Zwiefka. I give the floor now to Lord Bowness to come to our detailed questions for our guests, and of course to have exchanges with our members from the different political groups in the European Parliament. I would like to stick to that because, as I mentioned at the beginning, our timescale here is restricted, so I do not give the floor to our colleagues to say general words but simply to reflect on the questions.

Q122 The Chairman: Thank you very much, Madam Vice-President. It would be very helpful if we could hear from your colleagues in answer to each individual question. That 90

JURI (Legal Affairs) Committee—Oral evidence (QQ121-131) would be helpful from the point of view of the evidence. Thank you very much for the introduction and information about the committee’s work. Can I be rather more specific in opening and ask: what is the committee’s experience of fraud and irregularity affecting the European Union’s finances? Have you any feel for how much that fraud affects the European budget? Have you any feel for how vulnerable the programmes are to fraud and irregularities and which sectors are the most vulnerable? Mr Tadeusz Zwiefka: (Translation) Thank you so much; I want to answer. I will speak from my own experience, obviously; everyone can have a slightly different experience, although there will not be much difference. My experience is as follows. I think that the Legal Affairs Committee has a very specific job in the European Parliament. This job does not relate only to analysis of fraud and irregularities in places where they can identified. That would be the job of the Budgetary Control Committee, a different committee. There you could find both activities that would relate to data analysis and data capture, first of all, and then drawing certain conclusions that would then be presented to the European Parliament at the Plenary Session. We may well be interested in and deal with certain issues, but only where certain reports of the Legal Affairs Committee relate to a greater or small extent to the issues of fraud and irregularity. Our core business, if you like, does not mean that we would deal with such issues or do such analyses. Ms Evelyn Regner: Mr Speroni, perhaps you would like to add something. I completely agree, but perhaps you would like to add something. Mr Francesco Speroni: (Translation) Thank you. First, I thank our UK colleagues for having come here today and taken part in the meeting. I think I am right in saying that in certain cases, the House of Lords has a jurisdictional power as well so it is particularly competent in this area. I echo what Mr Zwiefka said about our rather limited competences when it comes to penal law. I add that the issue of penal law in the European Union is one that has arisen quite recently, following a ruling by the Court on maritime pollution. This is the first time that the Court has said that European Union law can be used to strengthen other laws. That is something that has come out of the new treaties. Therefore, it is legitimate for us to act on a legal basis when it comes to penal law. I think that that is correct. Our political group is rather critical or sceptical towards Europe and therefore is not very much in favour of European Union interference when it comes to member state law, but if there is fraud which is detrimental to the Union—and this is what we have with our new competences—naturally, we can support it, provided that each member state has liberty to act itself. We have heard a brief analysis of this from our services—I do not know if it is just our services or also the House of Lords services. This brief analysis shows a huge difference between the laws enforced in different countries. I was elected in Italy, and I remind you that Italy has recently approved a new law on pollution. We also have to remember that there are certain features that are specific to one country’s laws and which have no equivalent in other countries, so standardising this could be helpful in some cases. I ask my British colleagues, particularly given that, on the single currency and on many other issues they tend to be quite critical towards the European Union, what their position might be or what would be the position of the UK Government if there were to be a law along these lines.

JURI (Legal Affairs) Committee—Oral evidence (QQ121-131)

Q123 The Chairman: Madam Vice-President, I say to your colleagues that we are not in a position to answer for Her Majesty’s Government. This is a parliamentary inquiry. I did not indicate the political parties represented by the four Members here today. We find that most of our inquiries in the House of Lords proceed on a consensus basis and votes are not taken, so I hope that your colleague will forgive me if I do not respond, in conducting an inquiry, by replying to the question. Perhaps I might counter the question that he addressed to me by asking, in view of his last comments, what his and your colleagues’ view is of a European public prosecutor’s office. Ms Evelyn Regner: I give the floor to Françoise Castex. Mrs Françoise Castex: (Translation) Thank you very much for asking that question, because that is the point that I wanted to address. I echo the words of my colleagues by saying that, for the time being, we have very limited possibilities to intervene in questions relating to criminal law at European Union level. Having said that, the possibility of having harmonisation of criminal law legislation is out there. I think that Article 27 of the treaty makes provision for the possibility of a European public prosecutor, so there would be a possibility of referring to a European public prosecutor in cases of criminal law. Regarding the matters that Mr Zwiefka brought up, our competences relate only to areas that are of direct interest to the EU’s finances, so fraud relating to the European budget or to the programmes approved by the EU, such as structural programmes or the CAP, the common agricultural policy—so only where these directly relate to the European Union's budget. In cases beyond that limited remit, we have to rely on the member states to come to a decision. That is where our powers are limited in the scope of this directive. If a jurisdiction is created to try to fight against fraud at European level using a platform or a prosecutor set up at European Union level, this would be a precursor to the possibility of establishing a European-level penal law. As for our group, the socialists and democrats within the Legal Affairs Committee, I would say that we are favourable to that idea of creating a European-level public prosecutor.

Q124 Lord Rowlands: Do you think that the distinction that has been made between fraud and irregularities is now still meaningful? Mr Tadeusz Zwiefka: (Translation) Thank you for that question. Yes indeed, irregularity and fraud would be two distinct aspects, and that distinction needs to be maintained. This does not mean that irregularity should not be sanctioned, obviously, but we should ask ourselves which sanctions should be applied to irregularity and which applied when it comes to fraud. Forgive me; I shall not be answering clearly yes or no to your question, because we are only just starting to work on this important document in our committee. If you will allow us, though, and if you are satisfied with my answer, I would like to move on to answering another question relating to the European prosecutor’s office, something that Madame Castex has mentioned. It is definitely worthwhile to think about the creation of such an office, but there would be one condition. We have to ask ourselves what competences such a person should have, especially taking into account the following. Today we have several platforms of co-operation when it comes to the application of criminal procedure law at prosecutor level, court level and police level. It boils down to bilateral or, in some cases, multilateral co-operation, but still with a strong sovereign accent, so there will not be a Community method here; it is mainly a method exercised by individual countries that we are trying to co-ordinate. If we think about the creation of a general prosecutor’s office in Europe, such an institution should be well equipped with strong competences that would

JURI (Legal Affairs) Committee—Oral evidence (QQ121-131) relate to aspects of breaches of law in terms of European law, so anything that led to breaches of certain European Acts or pieces of legislation, not individual aspects of the criminal codes of Germany, France and so on—this would be an issue related to a given country. When it comes to something related to the functioning of, for instance, European funds or the EU institutions in general, in such cases it would be worth while to have such an office. Obviously, though, the relationship between the institutions and such an office would have to be well defined, and I think that the general prosecutor should not interfere with the work of individual national prosecutors, apart from in a very well defined area of interest. Ms Evelyn Regner: Mr Zwiefka was more or less sticking to the key points of your questions, putting on the table that question of fighting against fraud and corruption means also doing something effectively, leading to the question of the European prosecutor. Mr Speroni wanted to add something, and maybe then we can ping-pong back to our colleagues from the House of Lords. Mr Francesco Speroni: (Translation) Thank you, Chair. On the difference between fraud and irregularity, it is not that simple; it is rather a grey area. Perhaps you could say that fraud falls under penal law and irregularities fall under administrative law, but it is not so easy to distinguish between the two. There is also a problem pertaining to the new European law, because there will probably be some kind of committee dealing with this and there is likely to be an overlap between European law and national law. Fraud is not just a single crime. For instance, if you are committing fraud, you might have to get documents falsified so therefore you would also be committing the crime of falsifying documents, but that is not provided for under the European law. There might also be false witness; again, that would fall under national law. The European public prosecutor’s problem would be that in a normal trial the crime would be heard in one court, and each court would have its own prosecution. Now there is going to be an overlap in prosecution; there will be a European prosecution but it will be tried in a national court. At some point down the line, it will be difficult if we have European public prosecution unless we want to do what they do in the United States where they have federal crimes and state crimes. We could have two parallel systems of justice, the body of inquiry and the body of judgment, and they would be separate for different crimes depending on whether it was a European crime or crimes governed by national criminal codes. I therefore do not think that the introduction of this figure of a public prosecutor is a good idea.

Q125 Lord Rowlands: If I may briefly pursue the issue of irregularities, yesterday the Commission gave us evidence that it put out a Communication to try to simplify procedures and the processes by which some of these programmes are delivered, because it feels that these irregularities arise from the complexity of the rules and procedures governing the various projects delivered thorough European funds. Has your committee seen this Communication, and has it taken a view on it? Mr Tadeusz Zwiefka: (Translation) I say again that the issue of irregularities falls under the remit of the budgetary control committee of the European Parliament. We do not receive the same documents that that committee does, so in this area we are essentially laymen. We have some information but we do not have the necessary source documents in order to draw conclusions. Ms Evelyn Regner: I shall repeat what Mr Zwiefka said. Forgive us if we focus on the topics that the legal affairs committee deals with and is responsible for. Some of our answers will overlap with the responsibilities of other committees.

JURI (Legal Affairs) Committee—Oral evidence (QQ121-131)

Q126 Lord Rowlands: May I try another question? How effective do you think the bodies—OLAF, Eurojust and Europol—are in co-ordinating and co-operating to deliver the best results on fraud? Has your committee taken a view or received any evidence on the question of the success or otherwise of the co-operation between these three bodies? Mr Tadeusz Zwiefka: (Translation) We have regular meetings with the three bodies that you have mentioned—although perhaps not so much with Eurojust, and we do not really have too many meetings with OLAF, so we cannot really speak about its effectiveness. We have meetings with Eurojust every six months or so, and in our opinion it is quite effective in what it is doing.

Q127 Lord Rowlands: The reason why I raise this is that there appears to be an issue of law here, in one respect. Evidence was given to us by Europol that it has encountered considerable difficulty in co-operating with OLAF over operational VAT fraud issues. Member states have said that they refuse to work with OLAF on the grounds that there is no competence for the Commission. Recently there has been a European Court of Justice ruling that appears to shift this. I assume that that is within the competence of the committee, and I wondered if you could bring us up to speed on how you think this rule is going to change the whole issue of the relationship between OLAF and Europol in dealing with the issue of VAT fraud. Ms Evelyn Regner: Before Mr Zwiefka answers, I would like to give the floor to Madame Castex. Mrs Françoise Castex: (Translation) There is a regulation that governs OLAF which is currently being revised. This regulation is subject to co-decision between the European Parliament and the European Council. The S and D’s position here in the European Parliament is that the new regulation will provide a better framework for OLAF to work more effectively against matters of fraud and so on. It provides a better framework for the Commission, Council and Parliament to intervene. Mr Francesco Speroni: (Translation) I want to clarify the fact that the European Parliament does not govern VAT. So, whatever we wanted to do, we would have to wait for a proposal to come from the Commission. If we wanted to change OLAF in any way and increase its competences, it is only up to us if and when the Commission puts a legislative text before us. Otherwise, we can have resolutions, questions and other things but we do not have any direct impact on the law before then. If the treaties were to change a law, then we could have the right to initiative because the Parliament can propose an amendment to the treaties. In that case, we would be able to act, but at the moment there is no real movement towards that in the Parliament. Mr Tadeusz Zwiefka: (Translation) To add to what my colleagues have said, if you look horizontally at the work of the European Parliament in the Legal Affairs Committee, the Budgetary Control Committee and the temporary committee on fighting corruption and money-laundering, you can be sure that at the end of the work currently being done we will have conclusions that should translate into pressure that we can then exert on the European Commission to take initiatives. As you know, we as the European Parliament cannot initiate certain legislative processes. However, once we have the conclusions of the work, it will soon have to translate into something more material: legislative initiative at the request of the European Commission. Why? You are absolutely right to say that the level of coordination between individual institutions is not right, especially with institutions such as OLAF, Eurojust and Europol. We totally agree and often hear voices saying exactly the same when we speak to people directly involved. When we talk to people in the member states— 94

JURI (Legal Affairs) Committee—Oral evidence (QQ121-131) judges, policemen, prosecutors and representatives of various organisations—many of them say that we do not at the moment have an adequate model of co-ordination not only between those highly specialised institutions, but between those institutions and the member states. Taking this as a basis, if we fail to draft certain legislative Acts that would remedy this situation, whatever Acts we work on nothing will happen in reality. It will not translate into anything because, at a certain point, they will be blocked because of this lack of coordination. This is a conclusion that we have been thinking about for some time already. I hope that it will be remedied soon. Ms Evelyn Regner: I give the floor to Mrs Castex to replace me because, as was already announced at the beginning, my time is limited. I wish you a successful continuation of your work in the final 15 minutes. Thank you for your patience. The Chairman: Thank you for coming, Madam Vice-President. We are very grateful, and we hope that we will continue this exchange on other subjects between your committee and ours on relevant topics. Ms Evelyn Regner: Thank you. Goodbye.

Q128 Lord Stoneham of Droxford: Could I ask a specific question about OLAF, which we have just been talking about? Does the committee think that OLAF has the necessary powers to act? Should it remain part of the Commission or become a more independent body? Mr Tadeusz Zwiefka: (Translation) Actually, there is no single answer to your question. The competences that have been defined for OLAF are sufficient at the moment, so when it comes to the remit there is no problem. When you move on, though, certain questions appear. The competences seem sufficient but one aspect is missing: it cannot engage in proper investigation. It does not have the character of an investigation office, but at the first stage of the procedure it would be useful if it had such competences. It can ask certain questions, but it has to ask for the investigation proper to be done in individual member states. I am talking about the right of inquiry—that is the part that is missing. With regard to other aspects, the number of cases that OLAF should be dealing with is on the rise, perhaps not even because there are more criminals or more irregularities or examples of fraud but because they are much more easily identified now than before. The people working in OLAF say that it is not feasible to deal with all these cases, due to personnel problems—basically, they do not have sufficient human resources. This means that the turnaround time for individual cases, which has its own financial implications. Whenever we have broached the subject in the Legal Affairs Committee, whenever we say that the control institutions in the European Union should be strengthened to work more efficiently, there are always budgetary indications. We have been talking for a long time about the European Court of Justice, new positions for judges, reducing bottlenecks and reducing the turnaround time of individual cases. However, the Council has said no because it would basically mean more money. Unfortunately, the same applies to OLAF. So on the one hand we believe that the competence of OLAF as defined at the moment is adequate, but on the other we have the impression that its field of activity is somehow limited, due to the reasons that I have just described. Mr Francesco Speroni: (Translation) I can echo what my colleague has just said. I do not think that the law on OLAF should be changed in any substantial way. The issue of resources is an issue for all institutions and not just the Union. In my country, the judiciary, police forces and public prosecution all have problems as well. The issue is not one of structure; it

JURI (Legal Affairs) Committee—Oral evidence (QQ121-131) is actually of personnel, of funding and of means. That is an issue for many organisations and not just OLAF.

Q129 The Chairman: In terms of who takes what seriously, perhaps you could deal with just the condition of the Parliament and the member states. Mrs Françoise Castex: (Translation) Before I hand you the floor, sir, for the next question, I just wanted to add something to what my colleague has said. When it comes to the competences of OLAF, if the European public prosecutor could request OLAF to investigate a case, then there could be this required separation of powers between the judicial decision- making and the investigative part. But go ahead for the next question.

Q130 Lord Stoneham of Droxford: It is a general question on whether you think the Commission and the Parliament are taking fraud sufficiently seriously. Are they allocating enough attention and resources to it and will the new proposed directive help the fight against fraud? Mr Tadeusz Zwiefka: (Translation) Yes, the answer is unequivocal. The European Parliament attaches great importance to fighting fraud. I suppose that your mailboxes are full of information on fraud or irregularities from different member states. We also get such signals from the United Kingdom which clearly stimulates us to work. The Directive is a step in the right direction. If, at the end of the day, we establish the right office and the right system of sanctions in the case of fraud against the financial interests of the European Union, including the establishment of the European prosecutor’s office, it will be a good document. There is then the question of implementation, because how effective and fast that is is equally important. Madame Castex mentioned new relations between OLAF and the European prosecutor’s office. If that happens, we could then think about conducting inquiries at the European level if the European prosecutor’s office is established, but we still have to think about how this should pan out.

Q131 Lord Dykes: Thank you very much indeed for this interesting discussion. It is a very complicated area, but I think that everybody is trying to make progress. Can I return to the comments made by all three, including Madame Castex, who is now chairing, on an understandable atmosphere of hesitation about getting too deeply involved in this area? Obviously, the European Parliament is motivated by the need for common-law and surrounding regulations that will deal with the problems that have a European characteristic—that is understandable—but because the nature of resistance from member states might be stronger in this area because of the power of the law in each country and the power of lawyers, judges and so on, do our colleagues on this committee agree with me when I say that this is precisely why you need strong legislation at the European level? We see, for example, more Regulations coming through, with the Council of Ministers and the Parliament agreeing on many different areas, and I welcome that myself as a keen supporter of those developments, but, in this particular field, a Directive is planned in one significant area, coming soon. We are going to see what happens to the EPPO proposals at the end of June next year. It is very complicated, but I think that there ought to be much more commitment to the European Parliament having strong common legislation, approved by the member states, to make sure that the trans-border and transnational cases of fraud and irregularities are dealt with satisfactorily and do not fall in between the margins of the member states. Mr Francesco Speroni: (Translation) I thank my colleague for the question. As we have shown, the Parliament is very much open to looking at whether we need a law to try to 96

JURI (Legal Affairs) Committee—Oral evidence (QQ121-131) combat these cross-border, transnational frauds that are damaging to the European Union. If they harm private individuals or individual member states, obviously we have to follow the laws that are in force nationally under penal law. The Parliament’s confidence also has its limits. Obviously we can pass laws and, unlike many national parliaments, every year we have a report on the implementation of Union law so that we can check whether what has been decided at European law will actually be applied by individual member states. We do not have ability to impact directly on member states; that is done through the infringements procedure with the Commission. Nor can we check whether the individual financial police or penal police in member states are applying the law correctly or whether each court is doing it. We cannot follow up every single ruling to see whether Union law is being applied, but, generally speaking, through this annual report, we have oversight of the implementation of Union law in member states. Mr Tadeusz Zwiefka: (Translation) No state will give up control over its finances. The European Union’s budget is quite considerable, so it needs to exercise oversight over that budget. The control is not sufficient, and there is quite a lot of evidence to that effect. We are not talking just about projects conducted in the member states but also about transnational cases. We are dealing mainly with those cases, although I regret to say that our powers are limited mainly to civil and commercial law and with regard to penal law in certain respects. For example, crime against the natural environment is the only area where we have a common penal law regulation, but we need it in other areas as well, especially in fraud damaging the interests of the European Union. Therefore, coming back to your previous question, I say again that we are determined to combat fraud, and we are doing that, but it is not good enough. We are one or two steps behind and we may be overtaken by all kinds of situations and phenomena that are ahead of us, but that is the problem faced by all legislators. They must face up to the challenges of society. We can only say that we will exert every possible pressure on the European Commission, which is the only institution that has legislative initiative in the European Union, to progress in this area. Mrs Françoise Castex: (Translation) Thank you very much. I shall hand you the floor again just to conclude. Unfortunately, we have great time constraints, because this meeting room is going to be used for a meeting after this. None the less, I thank you for having been here and for having listened to us. This discussion will, I am sure, have enriched both parties and will allow us to develop our positions further. The Chairman: Madam President, thank you very much indeed to you and your colleagues for agreeing to this meeting and agreeing formally to give evidence to the inquiry that we are conducting. As I said to your vice-president as she left, we will want to maintain contact with your committee in a perhaps less formal than an inquiry on a number of issues. If some of your colleagues felt that some of the questions were not particularly relevant to your committee this morning, I say that part of this inquiry is actually to establish who is worried about fraud and doing something about it, so we are asking the questions of anybody who may have an interest. Thank you so much.

Timothy Kirkhope MEP, European Parliament Special Committee on Organised Crime— Oral evidence (QQ 79-90)

Timothy Kirkhope MEP, European Parliament Special Committee on Organised Crime—Oral evidence (QQ 79-90)

Evidence Session No. 5. Heard in Public. Questions 79 - 90

WEDNESDAY 7 NOVEMBER 2012

Members present

Lord Bowness (Chairman) Lord Dykes Lord Rowlands Lord Stoneham of Droxford

______

Examination of Witness

Timothy Kirkhope MEP, European Parliament Special Committee on Organised Crime

Q79 The Chairman: Mr Kirkhope, we are delighted to see you again and thank you for seeing us. You are involved with, and vice-chairman of, the special committee. Can you give us some sort of indication of what the committee’s role is and how its work is developing? Timothy Kirkhope: First of all, it is a special committee. That of course means that it is has either very specific functions, like a sub-committee in the Lords or anywhere else, or it is time-limited, or a combination of both. In this particular case, it is a time-limited committee. My staff PA will intervene if necessary, but certainly the original aim of this committee was to be established for one year, although subsequently there have been moves for a rather longer period, because it is patently obvious that on a subject such as major organised crime it will not be possible to carry out the work satisfactorily in one year. Having said that, it is clearly a committee of evaluation—first, evaluating what the problem is. This is a matter that came a little unexpectedly to most of us. There was a perception in parts of the EU that there was a need to look in particular at organised crime and major criminality and to see precisely how much of this crime was going on and what the new areas are in which crime is

Timothy Kirkhope MEP, European Parliament Special Committee on Organised Crime— Oral evidence (QQ 79-90) being committed, taking into account technology, cybercrime and financial crime. Our remit was not specifically to look at the crimes that may be being committed against the EU or the EU institutions. We are going to get to a number of your questions, which talk specifically about financial matters linked to the EU and its resources. This was not the main purpose of this committee. Perhaps I may suggest that when one looks at the personnel on this committee, and who has been nominated from the political groups and so on, there was a certain, say, bias towards certain countries and their involvement and interests—in particular our Italian friends, who felt that the committee would be well served to look inter alia at parts of Italy where there is a major issue with organised criminality historically. To some extent, therefore, we are trying not to allow the work of this committee to become entrenched in one country or another, as opposed to looking at the overall position across Europe. So it is an evaluation committee, as well as a committee that is supposed to provide at the end of its work guidelines for the European Commission, so that it can then decide what, if any, legislative proposals could come from it.

The Chairman: Thank you for that introduction. I think we understand that you are looking at organised crime in the generality. Subject to my colleagues, we would probably like to explore your views and whether the committee will be looking specifically at whether there are links to organised crime in connection with fraud on EU funds. That is the focus of our inquiry. Timothy Kirkhope: Absolutely, and that may be why I cannot totally satisfy you, because the mandate of our committee does not specifically include this area.

Q80 Lord Rowlands: The carousel and all that is clearly big stuff. Does your committee have that in its sights at all? Timothy Kirkhope: It is very difficult to say that it would. On the other hand, the way that the committee is developing is a bit like Topsy, as they say; it is growing and a lot of matters are being brought in, despite that fact the specific mandate does not necessarily include them. However, the issues around the EU budget and organised crime relating to it are already being looked at as well by the Budgetary Control Committee and the ECON committee, which recently has been very much involved in this sort of work. It therefore has a more specific remit to look at these things. The trouble is that it is difficult to have a cut- off. Clearly, organised crime is a very wide area, and some organised crime must reflect itself thorough the resources of the EU. However, that is not specifically what we are looking at doing.

Q81 The Chairman: Have you talked yet to the EU organisations? We were advised that the Chairman had said that you were going to see various institutions and EU organisations with a view to developing this integrated and comprehensive strategy. I fully take the point you are making, but presumably the EU institutions would have an interest in that strategy being effective to deal with fraud against EU funds. Timothy Kirkhope: Yes, and my understanding is that we are going to be in dialogue with the institutions, but it has not happened yet on the programme. We are still hovering around an awful lot of evidence-taking from witnesses—people coming forward to talk to us about their theories, some of them academic, about what is a serious crime and what is not. We are rather stuck at the moment, in a way. I think that some of our activity was related to some elections that took place in Italy recently—in Sicily in particular—and we have been operating like that. One of the criticisms of this committee, if I may say this, is that it is not organised—I use the word “organised” again—as I would have liked it to be, from a useful 99

Timothy Kirkhope MEP, European Parliament Special Committee on Organised Crime— Oral evidence (QQ 79-90) point of view. Consequently, we may well be developing direction a bit more now, following a certain election activity.

Q82 Lord Dykes: Why was it not organised as much as you wanted it to be in that particular direction? Timothy Kirkhope: It was because of the mandate itself, the personnel who were controlling this committee and its membership, which tended to polarise thinking in a particular direction. We were quite concerned about this—not just the British representatives on the committee but those of other countries, who felt that it was getting into the hands of one or two countries rather too much.

Q83 Lord Rowlands: Would you have the concept of the European public prosecutor in your sights on this committee? Timothy Kirkhope: Yes, a European public prosecutor would be discussed, but it is not a major issue to us—except that I know the British attitude towards having this prosecutor is one of concern, as I understand it.

Lord Dykes: Not with everyone

The Chairman: We know the Government’s attitude. Timothy Kirkhope: I am here as a mere servant of the system, as it were. I am a Conservative representative and consequently the views of my colleagues in Westminster are always taken carefully into account. However, the question of whether the UK should be involved—whether there should be a European public prosecutor—is one of those things that also comes into the issues of 2014, as does the positive dialogue that I hope we will be having in the lead-up to 2014. Obviously, we are minded, as you know, to opt out of a whole field of things here, but we also wanted to ensure that there was a discussion on the form and a discussion of the institutions, including the issue of the European public prosecutor, in time for whatever model we end up with after 2014.

Lord Rowlands: So your committee is not going not be taking evidence about whether you need one or not. Timothy Kirkhope: I do not think it will, will it? I think that that will not be a major feature to it because most of our colleagues, it is fair to say, take the European public prosecutor as read, do they not? They are quite accepting of it. A few countries, including the UK, are doubtful about it. In committee terms, it would not be regarded as important an issue as perhaps we would see it in UK domestic politics in the lead-up to 2014. The Chairman: Perhaps you will forgive us if we resist the temptation to ask you questions about 2014 and the opt-out or opt-in. Timothy Kirkhope: Protocol 36. I was saying just yesterday that it is something of a James Bond movie title. The Chairman: You may or may not know that two European Union Sub-Committees, of which this is one, are conducting an inquiry. Timothy Kirkhope: I do.

Q84 The Chairman: I think it is quite important that we do not say or do anything as part of this research that might, as it were, prejudice the outcome of our consideration of

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Timothy Kirkhope MEP, European Parliament Special Committee on Organised Crime— Oral evidence (QQ 79-90)

Timothy Kirkhope: Strictly, that is the case, but I cannot see it. In that context, I should say that I have also established a working group on Protocol 36 which I am chairing. We have been asked to feed in to London in the considerations and the Home Secretary wants us to assist on certain matters. We will be doing that from here. What you are doing is fantastic and you are ahead of the game, as it were, but we will also be doing work here.

Q85 The Chairman: When the inquiry gets under way, we probably will not be taking evidence. In fact, we plan not to start taking evidence until the beginning of the year, although the call for evidence has gone out. We shall be interested to receive the views of your committee. I do not want to labour the point, but on this whole business about fraud in the EU, while I take your point about the special committee and I understand that it is not under an EU mandate, you of course have the benefit of being a member of the Civil Liberties, Justice and Home Affairs Committee. Perhaps we can ask you some of these questions in your capacity as a member of that committee. As you serve on that committee, no doubt you will have a view about the work of OLAF and some of the other bodies like Europol and Eurojust. In terms of combating EU fraud, from your point of view on that committee, do you think that those organisations work effectively together? Timothy Kirkhope: There are signs of greater co-operation, but I would not say that it is absolutely perfect. Perhaps I may put this in context. When we talk about EU funding, let us ask where the vulnerability is. One of your questions concerned the question of vulnerability to crime in areas of funding. As you will probably be aware, the greatest problems we have seen have been in relation to regional funding and development funding. Often when people argue about the misuse of moneys here in the European Union, one has to remind them that a lot of the “misuse of funds” is misuse of funds in the nation states rather than through the institutions of Europe. It is an important fact to get across whatever people’s views on the subject of Europe might be. It is important to remind them of that. This is where government contracts of one kind or another have not been fulfilled or programmes have been abused; it is where there has been overcharging and insufficient evidence of the proper use of moneys and so on. I do not want to pick countries out too much, but in the cases of Romania and Bulgaria, where we still have considerable reservations about their ability to manage contracts and European resources—we had so many EU “buildings” which seemed to be being created—there was a clear question mark over whether in fact these things were being properly accounted for. In my submission, or in my view, that is the major area where we have a problem about the misuse of funding or the involvement of criminality. That is where it is mostly to be found. The Chairman: Forgive me, but just for clarification, are you saying that it arises mostly in those countries or in those areas? Timothy Kirkhope: It is in those areas, but I have picked those two countries as particularly bad examples because they were really bad. I am not saying that they are exclusively the countries where these problems arise, but I would say that the actual area of regional funding and development funding is the major problem as I understand it.

Q86 Lord Stoneham of Droxford: We had a meeting with OLAF this morning and a number of issues arose on which I would like to have your views, given your role on the LIBE Committee. The first was that there seemed to be quite an issue about OLAF

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Timothy Kirkhope MEP, European Parliament Special Committee on Organised Crime— Oral evidence (QQ 79-90) respecting suspects’ rights. The second was that there seemed to be a huge division between the supervisory committee and OLAF itself, which was quite remarkable. Indeed, they simply pulled out of our meeting. Timothy Kirkhope: Why was that?

Lord Stoneham of Droxford: They just do not seem to be talking to each other. Could we have your views on the accountability of OLAF? Timothy Kirkhope: I should say first that this is not about the right hand, the left hand and all the rest of it. What we need to see here is a greater level of co-operation on the part of national parliaments with the European Parliament. That combination is something we have been working on rather vigorously, but without total success. It is important in the sense that the national authorities obviously need to have referral made to them by agency directors and Commissioners, but there also has to be a link with the European Parliament. The accountability, shall I say, is probably the problem here. People often talk about the agencies and ask whether they are sufficiently controlled. Certainly their budgets have to be approved by us, as I understand it. Reports on finances are always made to us and we then have to approve the budgets. They also have to indicate in their reports that the functions and tasks which they have been allotted are being carried out effectively and properly. As to the supervision of OLAF therefore—how shall I put it?—because OLAF has rights in terms of the internals of the Parliament and the operation of EU institutions, a question mark hangs over who is really controlling OLAF. In theory it is being controlled, but for myself I am not absolutely convinced that it is always monitored in the way it should be in accordance with its statutes and so on. I am not really sure and I do not know what the OLAF representatives have told you, but presumably they said that they are being fully vetted and controlled in terms of reporting and so on. I must presume that. Lord Rowlands: Certainly the supervisory committee in effect would not have been allowed to. The supervisees were controlling both their budgets and their staff and, through that means, we have been challenging them on access to some of their material. We do not know if that is the case. Timothy Kirkhope: I am not sure about that, I am afraid, and it would be wrong for me to delve further into that area.

Q87 Lord Stoneham of Droxford: From your perspective, do you see OLAF as an effective organisation? Timothy Kirkhope: I shall hesitate for a moment while I think about that question. In some respects, OLAF is effective in the sense that it is the body that one looks to in terms of detecting fraud or attempted fraud against the institutions. It is the body which does that. Actually, it is better known now than it was. To be frank, that has come about as a result of certain problems that have arisen with Members of the Parliament. It is a bit like your business in Westminster. The behaviour of certain colleagues at one time would not have been detected or dealt with, but OLAF has been quite effective in picking up on these things, regardless of what it did with the institutions themselves.

Q88 Lord Dykes: Of course, the director-general would say the reverse of what was established just then by Lord Stoneham, that it is exceeding its mandate as laid down in statute. There we are: that is the clash, really. Timothy Kirkhope: It is a problem. With a lot of institutions and agencies attached to the European Union, you can sometimes question precisely how they are supervised and 102

Timothy Kirkhope MEP, European Parliament Special Committee on Organised Crime— Oral evidence (QQ 79-90) regulated and how effective they are. These things do not always match each other. For instance, I am a great supporter of Europol. I think it does a very good job. The fact that there is a British chief there, Rob Wainwright, is a good thing from our point of view—but that is outside what we are talking about. Often these agencies or institutions are doing things and you say, “What is your right to do these things?” In many respects it is based on co-operation with national authorities. To what extent OLAF is also working in co-operation with national authorities or agencies, I am not sure.

Lord Dykes: You as MEPs ultimately rely on the relevant Commissioner to answer a question like that, do you not? Timothy Kirkhope: Absolutely.

Lord Dykes: Do you have a good relationship with your Lithuanian colleague? Timothy Kirkhope: I do not think there is a particular problem there. We get the answers that we ask for. I have not got a problem with that at all.

Q89 Lord Rowlands: Perhaps I inferred more than there actually was, but the director- general spelt out the problems of this relationship, and how more than 40% of reports submitted to national authorities do not get acted upon. We started to explore that. Is there anything we can do to improve the relationship between national authorities and OLAF to make it more effective? Timothy Kirkhope: Obviously, you are asking the questions here but it would be helpful to know when, say, OLAF reports to our own national authorities what process is gone through at the national end. I do not actually know what that is.

Lord Rowlands: The national authorities do not necessarily have to explain themselves much. The Chairman: He also indicated that the United Kingdom is in a somewhat unusual situation in that there are three leading jurisdictions and the prosecuting authorities are not necessarily clear. OLAF has to deal with 43 police forces, sometimes with the CPS. It is rather more complicated than in the majority of member states, where it is clear who the prosecutor is. Timothy Kirkhope: What is the UK national authority’s reception point for OLAF’s reporting mechanism? I do not know the answer to that. Apart from your point about different jurisdictions, I am not absolutely sure where this reporting ends up. I would love to know, actually.

The Chairman: Of course, our inquiry will not just be directed at this side of the Channel; we will be questioning the authorities in the United Kingdom to see how they deal with things. Timothy Kirkhope: I look forward to the response to that. Our information is: “We report to national authorities”. Of course, it is up to the national people to set up what authorities they feel they would like. We have had this business in a whole lot of areas where the different legal systems have meant a different attitude. I do not want to veer too much away, but in terms of prosecution, for instance, we operate a system whereby we have a prosecution service which determines a lot of things, whereas in other countries it might well be that one has to deal with a judge or a magistrate. This is very different. It is one of the tricky bits that you just blithely wrap it up in the term “national authorities”. 103

Timothy Kirkhope MEP, European Parliament Special Committee on Organised Crime— Oral evidence (QQ 79-90) The Chairman: My colleagues will correct me if I am wrong, but we certainly got the impression from the director-general that as far as the United Kingdom was concerned, there is a variety of reception points and OLAF spends quite a lot of time working out which was the right one. Timothy Kirkhope: What, bits to different bits or the whole thing into lots of bits? The Chairman: No, as I understood it, depending on the nature of the case, it would refer individual cases to the CPS or maybe the financial authorities, SOCA or the individual police forces. Timothy Kirkhope: I would not be happy with that. I would much prefer there to be a central clearing house.

The Chairman: That is not the impression we got. It is certainly a question that we will need to ask on our side of the Channel. Timothy Kirkhope: We may well ask some more questions on that as well, actually.

Q90 The Chairman: One thing that we will of course be looking at in conjunction with this inquiry is the proposed directive on the protection of the financial interests of the EU by the criminal law. What is your view of that? Do you think it is necessary? Timothy Kirkhope: We have generally been very supportive of it. We think that it is an important thing to do. It is not really a financial thing. It may well recoup a lot of money but that is not really my major concern. My concern would be that it sends out the clear and simple message that fraud will not be tolerated in the EU. Often the things we do, under the directives, they have a particular purpose but there is a wider reason for them. The only problem is that we identified that the question of self-reporting is inherent in this. One or two countries—the UK and Germany, for instance—are very good at reporting. We do it marvellously, to the extent that often it is the countries that have the fewest problems with corruption that do the most reporting, whereas the countries that ought to be doing the reporting are the ones that do not and yet have massive amounts of corruption inherent in the system. If there is going to be some additional legislation on this, it has to move around this area and try to refine that point, the rather voluntary nature of it, where we are excellent and others are not.

The Chairman: I am conscious of the time. Thank you very much for receiving us and answering our questions. Before we close this session, is there anything that you want to say to us in connection with the subject of our inquiry that we have not asked you about? Timothy Kirkhope: No, I do not think so. Like all these matters, it is an important area because the public are constantly interested in what is happening to EU funding. There are a lot of misconceptions around this. If your work can produce clarity, it would be enormously helpful to everyone in the political process. Lord Dykes: David Williamson said that, too.

The Chairman: Thank you very much indeed. Timothy Kirkhope: Thank you very much.

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The National Fraud Authority—Written evidence

1. The National Fraud Authority (NFA), an executive agency of the Home Office, leads and co-ordinates the fight to reduce fraud affecting individuals and the voluntary, private and public sectors. The NFA’s strategic remit means that we would not engage in specific initiatives focussed on fraud against the EU’s finances. Some of our work can help those organisations who are responsible for managing fraud risks in the administration of EU grants. I have provided more details in paragraphs 13-15 below. I have also outlined the general challenges in estimating fraud losses and how we would have very low confidence in an estimate of fraud losses on EU funded grant expenditure.

2. It works in close partnership across all sectors of the economy and with law enforcement and regulators to deliver Fighting Fraud Together, the strategic plan to reduce fraud. This is a cross-sector strategy endorsed by 37 organisations which has the vision that:

“By 2015 our country will be demonstrably more resilient to and less damaged by fraud through: • Individuals, businesses, public and voluntary bodies detecting and preventing more fraud

• Law enforcement and other partners increasing risk of disruption and punishment to organised and opportunistic fraudsters, thus deterring potential criminal offenders” 3. The work under Fighting Fraud Together is structured under three strategic objectives: • Awareness: Preventing fraud by achieving a step change in awareness of fraud among the general public and organisations in the private, public and voluntary sectors and in their ability to protect and safeguard themselves.

• Prevention: Preventing more fraud through stronger systems and controls in our businesses and public and voluntary services.

• Enforcement: Strengthening our response to be tougher on fraudsters by disrupting and punishing them more efficiently and effectively. 4. The NFA’s own contribution to this work – over and above its leadership and coordination roles – is primarily focused on the first two objectives. Since we were established in 2008, we have worked to increase the emphasis on fraud prevention. We therefore welcome the emphasis which the Commission’s strategy places on fraud prevention.

5. The NFA has no investigation, prosecution or regulatory powers although it does operate Action Fraud, the national fraud and internet crime reporting centre. Action Fraud records reports of fraud and attempted fraud from victims, offers them advice and support and passes reports to the National Fraud Intelligence Bureau for further analysis by the City of London Police, the National Lead Force for Fraud. Action Fraud currently records around 9,500 crimes per month, more than any single police force. From April 2013 it will record all non-emergency fraud crime reports from individuals and businesses. 95% of reports are currently from individuals.

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The National Fraud Authority—Written evidence

The scale of fraud losses

6. The NFA produces the Annual Fraud Indicator which is a compendium of fraud loss indicators drawn together to illustrate the scale, prevalence and cost of fraud. The Annual Fraud Indicator brings together existing estimates of fraud in the public domain and new estimates produced by the NFA and others. There are large gaps in knowledge about fraud, and methods to measure fraud accurately across the spectrum are in their infancy. This is because fraud is a hidden crime. Fraud reported to the authorities is a small proportion of the fraud detected, which in turn is a fraction of fraud that remains out of sight. The Annual Fraud Indicator sets out different confidence levels for the various estimates.

7. The NFA strives to reveal this hidden fraud by working with stakeholders across all sectors, conducting comparative analyses of secondary sources and primary research in the form of surveys. The NFA seeks to estimate the full extent of fraud losses to a sector by extrapolating the trends identified in these surveys.

8. The Annual Fraud Indicator is not a set of crime statistics, but rather a best estimate of the real size of the problem.

9. The Annual Fraud Indicator includes fraud against Government expenditure and one of the categories is ‘Grant Fraud’. The Financial Secretary to the Treasury’s memorandum quoted our estimate of fraud loss to the public sector of £20.3 billion. Part of these losses includes losses to grant fraud which are estimated to be £488 million to central government and £41 million to local government ion 2010/11. The derivation of these estimates is explained in pages 33-34 of the Annual Fraud Indicator publication. I should stress that this estimate is one of those within the Annual Fraud Indicator in which we have the lowest level of confidence.

10. Following the Committee’s request for evidence we consulted HM Treasury on what proportion of overall grant expenditure in 2010/11 was EU funded and we were advised that £4.1 billion of the total £53 billion grant expenditure was EU funded (£3 billion of which were subsidies, mainly agricultural). Using the same percentage loss calculation used for grant expenditure overall, this would indicate a fraud loss of £41 million on EU funded grant expenditure in the UK. I should however stress again the low level of confidence we have in this estimate. The figures quoted by the Commission which are reproduced in the Financial Secretary’s memorandum refer to detected fraud across the whole EU whereas the Annual Fraud Indicator seeks to indicate the likely extent of undetected as well as detected fraud in EU grants administered in the UK.

11. The £20.3 billion public sector fraud loss figure also includes losses to the UK due to tax fraud (see page 49 of the Annual Fraud Indicator). However fraud against EU revenues is outside of the scope of the Annual Fraud Indicator.

Link between fraud and organised crime

12. The Financial Secretary’s memorandum refers to our estimate of £9.9 billion of overall fraud losses being perpetrated by organised crime and the submission from the City of London Police provides further detail. The derivation of the estimate is explained on page 29 of the Annual Fraud Indicator. The Committee should note that it is not possible to

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The National Fraud Authority—Written evidence identify the level of organised crime activity against each fraud type or victim, including Government (and therefore EU) expenditure and revenue.

Responding to the threat

13. As I indicated at paragraph 1, the NFA undertakes no specific activities focused on fraud against EU finances. However I would like to draw the Committee’s attention to cross-Government work to reduce fraud losses which is overseen by the Minister for the Cabinet Office who chairs the Fraud, Error and Debt Taskforce. The Taskforce comprises: Ministers and senior officials from the Home Office, HM Treasury, the Department for Work and Pensions and the Department for Communities and Local Government; a chief executive of a local authority; the National Audit Office and advisers from the private sector with expertise in countering fraud who voluntarily provide expert guidance.

14. The Taskforce’s work is set out in Tackling Fraud and Error in Government - A Report of the Fraud, Error and Debt Taskforce (Cabinet Office February 2012)9. Although there is no specific work undertaken by the Taskforce in relation to EU fraud, there are two areas of its work which will have an impact on EU expenditure fraud:

• work to strengthen fraud prevention and detection measures in the administration of grants. This work, led by the Cabinet Office, builds on an assessment of the problem and areas of good practice which could be adopted produced by the NFA in March 2011. That work identified prevention opportunities in the areas of the design of application forms, risk profiling of grant applications, the use of data analytics to speed up and improve background checking and information and intelligence sharing between awarding bodies and with law enforcement.

• the network of Counter Fraud Champions10 in central government departments who provide a focus for strengthening their departments’ resilience to fraud across all areas including grants. Their priorities include instilling an anti-fraud culture in their organisation, measuring fraud in their departments and publishing the figures for the first time and making sure new policies and programmes are fraud proofed by undertaking fraud risk assessments. The network is overseen by the Cabinet Office. 15. The Committee will wish to note that the Taskforce’s activities extend beyond fraud to reducing losses due to error. One of the Committee’s questions asked about the distinction between fraud and irregularity. While they are different, the outcome in terms of loss to the taxpayer is the same. The NFA has found that some techniques to identify and prevent fraud can also similarly reduce losses to error. For example data analytics techniques which identify inconsistencies in payments data will pick up payments made as a result of error as well as fraud.

14 November 2012

9 http://www.cabinetoffice.gov.uk/sites/default/files/resources/HMG-Fraud-and-Error-Report-Feb-2011-v35.pdf 10 http://www.cabinetoffice.gov.uk/news/counter-fraud-champions-help-crackdown-fraud

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National Fraud Agency and City of London Police—Oral evidence (QQ140-164)

Transcript to be found under City of London Police and National Fraud Agency

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OLAF—Written evidence

The Commission welcomes this new inquiry by the House of Lords. The House of Lords had already published a report with evidence on Strengthening OLAF (the European Anti- Fraud Office) in July 2004 as well as a report on the implementation of the Stockholm programme. This inquiry provides a good opportunity to inform the House of Lords of the latest developments and challenges in the area of the protection of the EU's financial interests. Without prejudice to further explanations to be given at the public hearings to be held in autumn 2012, the Commission would like to submit the following written answers to the questions raised by the House of Lords:

How much fraud affects the EU budget? What statistics are available and how reliable are they? How does the EU position compare with fraud against national budgets? According to the Commission’s 2011 annual report on the Protection of EU financial interests - Fight against fraud - published in July 2012,11 the estimated financial impact of irregularities reported as fraudulent is on average approximately 0.21 % of total expenditure allocations. This is less than in 2010, when there had been a sharp increase caused by the ‘cyclical’ effect of the closure of the 2000-2006 programming period for cohesion policy and by an acceleration in reporting following the introduction of the Irregularity Management System (IMS). The impact of both these factors has worn off. According to this report, cohesion policy funds are more prone to fraud than other sectors. The estimated financial impact of irregularities reported by the Member States as fraudulent in 2011 in cohesion policy (36 % of the total budget) was € 204 million, compared to € 77 million in agriculture (although agriculture accounts for more than 41 % of the total budget) and € 1.5 million in direct expenditure. The report includes information on each Member State and sector. A higher suspected fraud rate does not necessarily mean that more fraud is actually taking place in a specific Member State. This rate is calculated on the basis of (suspected) cases of fraud which have been detected and reported and therefore provides an indication that anti- fraud systems are effective and that reporting obligations are met. The reliability of the data depends on the information transmitted to the Commission by the Member States. OLAF does not have the statistics which would enable it to compare the fraud rate across national budgets. OLAF’s own statistics are included in its annual report;12 they refer to its investigations only.

What is the distinction between fraud and irregularity? Is this distinction meaningful? How much is lost from EU funds through irregularity? Fraud13 is an intentionally committed irregularity constituting a criminal offence. A case (irregularity/ suspected fraud) is qualified as fraud only by a final (most frequently criminal) court decision. When reporting an irregularity to the Commission, the Member State must indicate whether it gives rise to a suspicion of fraud or whether fraud has been established.

11 COM(2012) 408 final +SWD (2012) 227 to 230 final. http://ec.europa.eu/anti fraud/about-us/communities- reports/index en.htm. 12 http://ec.europa.eu/anti_fraud/about-us/reports/olaf-report/index_en.htm. 13 Fraud is defined in the 1995 Convention on the protection of the EC’s financial interests (see Article 1). OJ C 316, 27.11.1995, p. 49. 109

OLAF—Written evidence

In the report, cases of suspected or established fraud are indicated as ‘Irregularities reported as fraudulent’. An irregularity14 may be the result of a beneficiary's failure to comply with the EU rules and requirements governing the spending of EU funds, which has at least a potentially negative impact on EU financial interests. Irregularities are mostly the outcome of an infringement of a provision of EU law. This may include national provisions which directly or indirectly concern the eligibility, regularity, management or verifications/audit of operations and the corresponding expenditure, thereby giving EU legislation its full effect. In addition, audit and control authorities (namely the European Court of Auditors) report irregular transactions, including some that have been processed in breach of certain regulatory provisions, although not having a negative impact on EU financial interests. The main difference lies in the administrative or judicial nature of measures that are needed to counter irregularities or fraud effectively and act as a deterrent. Examples of fraud include a person deliberately falsifying the hours worked on a project for which EU funding has been granted or intentionally disregarding the rules with respect to a tendering procedure (e.g. requesting an insufficient number of offers or accepting offers from unqualified sources). It is the component of intentional conduct that distinguishes suspected fraud from irregularity. ‘Irregularities not reported as fraudulent’ by Member States are also included in the Commission's 2011 report referred to above..

The estimated financial impact of these irregularities represents an average of approximately 0.86 % of total expenditure allocations. Again, this was less than in 2010. In cohesion policy the estimated financial impact of irregularities not reported by the Member States as fraudulent in 2011 was more than € 1billion, compared to € 101 million in agriculture and around € 50 million in direct expenditure.

How much of a link is there between fraud and organised crime? OLAF has made a preliminary analysis of the extent and impact of organised crime on fraud cases under administrative investigation. Among the 375 cases examined, it would seem that 35 meet the criteria established by the 2008 Council Framework Decision on the fight against organised crime, according to which a criminal association means: - a structured association, established over a period of time, - of more than 2 persons acting in concert, - with a view to committing offences which are punishable by a prison sentence of a maximum of at least 4 years or a more serious penalty - to obtain financial or other material benefit.

However, the most important lesson of this analysis is that although these 35 cases represent less than 10 % of the total number of cases, their financial impact accounts for more than 43 % of the amount of misused EU funds involved in all 375 cases. Hence, more efforts are needed to identify relevant indicators and give priority to investigative measures in the fight against organised crime.

14 See Article 1 paragraph 2 of Council Regulation (EC, Euratom) No 2988/95, OJ L 312, 23.12.1995, p.1. (‘Irregularity` shall mean any infringement of a provision of Community law resulting from an act or omission by an economic operator, which has, or would have, the effect of prejudicing the general budget of the Communities or budgets managed by them, either by reducing or losing revenue accruing from own resources collected directly on behalf of the Communities, or by an unjustified item of expenditure). 110

OLAF—Written evidence

Who is responsible for detecting frauds and irregularities, enforcing the law, and recovering misappropriated money? What are the roles of the Commission/OLAF, Eurojust, the Member States? How good is cooperation between the EU bodies and national authorities? Article 28a(2) of the Financial Regulation applicable to the EU budget provides that the prevention and detection of fraud, errors and irregularities are objectives which are to be achieved through the internal management control process.15 This process is applicable at all management levels. This legal obligation is extended to all entities which are involved in the management of EU funds, that is the Commission and other institutions, bodies and agencies, but also the Member States and other implementing partners (such as third countries or international organisations). The Commission’s Anti-Fraud Strategy (CAFS), adopted in June 2011,16 defines fraud prevention and detection as the core of the Commission’s anti-fraud policies. However, the CAFS also emphasises the importance of other objectives: investigations of alleged cases of fraud, recovery of misused funds and the application of deterrent sanctions on fraudsters. Responsibility for recovering misappropriated funds depends on the applicable management mode. In the case of shared management (where Member States administer 80 % of budget expenditure), Member States are responsible for recovering any funds wrongly paid (including those affected by irregularities and fraud and revealed by an OLAF investigation). To ensure that the funds are used in accordance with the rules in force, the Commission applies clearance of accounts procedures or financial correction mechanisms in accordance with EU sectoral legislation. Where the funds are managed by the Commission, it is the responsibility of the latter to issue recovery orders. The Member States and Commission departments report back to OLAF on the state of play and the final results of their actions, following the recommendations it has made in its investigative reports (Articles 9 and 10 of Regulation 1073/1999). OLAF is an administrative investigative service at European level. Its cooperation with Member States' authorities, in particular the monitoring of the implementation of OLAF recommendations by national authorities, is covered in the OLAF annual report.17 OLAF in regular contact with all the competent national authorities (police, control bodies, judicial authorities, etc.) and is available to assist them on request. OLAF may sign arrangements (memoranda of understanding): the most recent one was signed with the Guardia di Finanza, in June 2012.

Eurojust is not an investigative body, but it may exercise functions of coordination and assistance to support national judicial authorities in cases of offences falling under its mandate, including offences which are to the detriment of EU financial interests. The Council’s conclusions on the annual reports of Eurojust give an indication of the level of cooperation with national authorities, including on cases of fraud and corruption. In 2008 Eurojust and OLAF concluded a Practical Agreement on Arrangements of Cooperation and have developed regular contacts.18

15 Council Regulation (EC, Euratom) No 1605/2002 of 25.6.2002 on the Financial Regulation applicable to the general budget of the European Communities (OJ L 248, 16.9.2002). 16 COM(2011) 376 final. 17 See section 3.4 of that report. 18 See section 7.4 of the OLAF report 2011. 111

OLAF—Written evidence

The main people responsible are the national anti-fraud services, who are the competent authorities for management, audit and investigations in all fields of EU fraud, in particular indirect management.

Do Member States take their responsibilities seriously? Are the doubts as to the commitment and capacity of national authorities to pursue fraud and irregularities, and the effectiveness of national actions, justified? According to the 2011 Commission report referred to above, there is progress in the overall picture. However, despite the procedures which the Commission has put in place to deal with irregularities and a general improvement in Member States' management and control systems, there are still significant differences in the approaches adopted by Member States to monitor and report fraudulent and non-fraudulent irregularities. Some Member States continue to report very low fraud rates and this raises questions about the adequacy of their national control and reporting systems. The Member States concerned have been invited to report back on how their control systems have been adapted to target those areas where there is a high risk of fraud and irregularities. That said, in the high-risk area of cohesion policy the analysis of the measures taken and irregularities reported shows improvements in the financial control and risk management systems. This includes improved legal provisions and guidelines, national or regional strategies, better risk indicators, enhanced administrative procedures and cooperation between national authorities. Further progress is needed in monitoring the results of the administrative and criminal anti-fraud investigations by the Member States, including the recovery of amounts from the final beneficiary.

The Commission: how good are its internal systems and how effective is its training of staff? One of the key objectives of the CAFS adopted in 2011 is to improve the capacity of the Commission departments to prevent and detect fraud. Fraud is a dynamic phenomenon and fraudsters are quick to adapt to new circumstances. This requires constant adjustment of the Commission’s anti-fraud policies on the one hand and its control systems on the other. The Commission's internal control systems are already well developed and are reflected in the current rules enshrined in the Financial Regulation19 and the Implementing rules.20 However, the 2011 CAFS sets an even higher standard by committing the Commission departments to developing specific individual and sectoral anti-fraud strategies, tailored to account for very specific fraud risks and implementing cost-effective remedial actions. The resulting action plan is being implemented and should be completed by the end of 2013. One key positive development is that the Commission departments are becoming more active in their use of specialised IT tools to support the availability and proper analysis of relevant data for risk assessment. DG CNECT and DG RTD use IT tools (‘Pluto’ and ‘Daisy’ respectively) for detecting risky operators and projects. DG EMPL and DG REGIO are currently developing ARACHNE, a risk-scoring tool that will enable DGs to focus on their internal control and audit activities (risk-based audit generates a pre-selection of operators and projects, with a higher success rate when performing the audit). OLAF is working on

19 Financial Regulation Article 28a identifies the prevention and detection of fraud and irregularities as one of the objectives of internal control. 20 The revision of the Financial Regulation would further improve management and control procedures and simplify them. See Council Doc. No 12250/12 ADD1 of 6 July 2012 (Proposal for a Regulation of the European Parliament and of the Council on the financial rules applicable to the annual budget of the Union — Approval of the final compromise text with a view to a first reading agreement with the EP). 112

OLAF—Written evidence guidelines to help IT project owners enhance their systems during the design phase in order to facilitate anti-fraud measures. In addition to the comprehensive anti-fraud training programme organised by the Commission (DG Human Resources), OLAF organises structured investigative training. This includes both general investigative techniques and a specific training course on the implementation of specific sectoral legislation. This training programme is evaluated and adapted where required on a continuous basis. Ultimately, its effectiveness can only be measured on a mid-term and long-term basis by more efficient investigative work output and a positive internal audit (if any are performed in the future). However, it has already had a positive effect by improving investigative methods and cooperation within the Commission.

OLAF: 1) How successful is it? 2) Does it have the necessary powers? 3) Is it too powerful — does it respect the rights of suspects? 4) Do the supervision arrangements work? 5) Should it remain part of the Commission? 1) In its mission statement, OLAF identifies three objectives: to protect the financial interests of the EU by investigating fraud, corruption and any other illegal activities; to detect and investigate serious matters relating to the discharge of professional duties by members and staff of the EU institutions and bodies that could result in disciplinary or criminal proceedings; and to support the European Commission in the development and implementation of fraud prevention and detection policies. OLAF performs administrative investigations of suspected fraud, corruption and any other illegal activities with the assistance of the national authorities. OLAF detects and investigates serious matters relating to the discharge of professional duties by members and staff of the EU institutions and bodies. At the end of 2011, OLAF had 463 open cases and 175 recommendations had been sent to authorities on cases closed during the year 2011. Cases before Member States’ courts resulted in 511 (cumulative) years of prison sentences in 2011, acting upon conclusions and recommendations from OLAF’s investigations. OLAF has been successful in supporting the European Commission in fraud prevention and detection policies. In 2010, OLAF contributed to the drafting of EU legal instruments relating to financial regulation, fraud and corruption prevention and European criminal law. In addition, OLAF has completed a number of arrangements (memoranda of understanding) with the authorities of third countries and with international organisations, in order to facilitate cooperation. OLAF also has a key role in the Commission-wide effort to combat cigarette smuggling along the EU’s Eastern Border and it coordinates the implementation of the Commission’s anti-fraud strategy referred to above. OLAF's annual reports provide ample information on the numbers and types of investigations, their geographical breakdown and their outcomes. These publications also include case studies which show that OLAF investigates high-profile cases in third countries, EU Member States and within the EU institutions and bodies. 2) Regulation No 1073/1999 invested OLAF with powers to conduct administrative on-the- spot checks and investigations on economic operators in the Member States and on staff members of the EU institutions. In carrying out its investigations, OLAF also relies on the cooperation of the competent national authorities. The latest legislative compromise text on amendments to Regulation 1073/9921 does not increase OLAF’s powers, but clarifies issues relating to cooperation between OLAF and its stakeholders, including the Member States’ authorities. This text makes it clear that OLAF may adopt administrative arrangements (non- legally binding) with national and international bodies in order to facilitate cooperation and

21 COREPER: legislative compromise text following informal trilogue discussions between EP, Council and Commission (Council Doc. No 12735/12 ADD1 of 20 July 2012). 113

OLAF—Written evidence information exchange. It explicitly requires the competent authorities of the Member States concerned to provide the Office’s staff with the assistance they need to carry out their tasks effectively, to designate a coordinating service to facilitate operational cooperation with OLAF, to take the appropriate precautionary measures under their national law (in particular to safeguard evidence) and to send OLAF information on action taken following transmission by OLAF of its investigation reports. 3) As OLAF can only address recommendations to competent authorities at the outcome of its administrative investigations, the General Tribunal has consistently ruled that OLAF’s investigative measures, including the final case reports, do not have legally binding effects. National investigating and prosecuting authorities are not bound by the content of OLAF’s conclusions and recommendations. OLAF has no power to impose sanctions or fines. OLAF has no coercive powers, including vis-à-vis witnesses, even if they are obliged to cooperate and provide information. As OLAF has no powers to enforce its investigative acts, it sometimes relies on national authorities and their willingness to cooperate during on-the-spot checks. OLAF participates as an observer but may not initiate a Joint Investigation Team. This does not mean that OLAF is not bound by procedural guarantees. As regards individual rights, as a matter of principle a person is informed of his or her possible implication as soon as he or she becomes a ‘person concerned’. Again as a matter of principle, OLAF ensures that persons concerned are heard before any conclusions are drawn referring to them by name. Persons concerned are given the opportunity to express their views on all the facts that concern them. They also have the right to refrain from self-incrimination. During an interview, they may use the EU language of their choice. They sign the written record of the interview. 4) The independence of the Director-General of OLAF means that he or she may neither seek nor take instructions from any government or any EU institution, body, office or agency in the performance of his or her investigative duties. This rule is strictly complied with and covers all phases, from the opening of an investigation through to its closure and the transmission of the results. This is without prejudice to OLAF's proper accountability for its investigative action, which includes complaints/procedures before the Ombudsman, the Data Protection Supervisor and the Court. In addition, the OLAF Supervisory Committee reinforces the independence of OLAF by regular monitoring of its investigative function. However, the Supervisory Committee does not have a mandate to interfere with ongoing investigations. It is informed of investigations lasting longer than nine months and of cases transmitted to the judicial authorities. According to the compromise text referred to above for amending Regulation 1073/1999, the Supervisory Committee will continue to play a role in monitoring investigative activities on the basis of information supplied by the Director- General. In addition, an exchange of views will be organised between institutions covering relevant aspects of anti-fraud policies and strategy. 5) The position of OLAF as a Directorate-General of the European Commission has advantages. OLAF has operational independence, but it takes part with other Directorates- General in the preparation of the Commission's policy work. Thus, experience acquired through investigations can be fed into the policy process, in particular for the prevention of fraud and corruption. Additionally, OLAF is consulted on the drafting of legislation and participates in the development of anti-fraud methods. OLAF's position within the Commission means that economies of scale are possible: access to the Commission’s translation service, training department, human resources administration, etc..

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The discussion surrounding the most appropriate legal structure for OLAF is not new. So far, the general consensus among the European Institutions is that OLAF should remain part of the Commission. Depending on how the European Public Prosecutor’s Office (EPPO) project develops and on the synergies envisaged between the future EPPO, OLAF and Eurojust, new elements will be feeding into this discussion. Various options should be examined when the impact assessment on setting up the EPPO is prepared.

What is the role of Eurojust? Should it focus more on fraud cases? How could the proposed European Public Prosecutor’s Office improve the fight against fraud? The Commission, in its Communication on the protection of the financial interests of the EU by criminal law and by administrative investigations — an integrated policy to safeguard tax payers’ money — adopted on 26 May 2011,22 introduced several initiatives, including a strengthened institutional framework. In this context, there are two aspects to this objective, both part of the Commission's work programme for 2013: - Eurojust is a coordinating structure composed of national members and a College to enhance cooperation between judicial authorities on serious cross-border crimes, including in the area of fraud. The planned reform of Eurojust may cover questions of its improved organisation and working procedures, - the setting up of an EPPO would bring together various functions at EU level (investigation, prosecution and coordination in PIF (protection of financial interests) cases. It would be premature at this stage to define the competencies of the EPPO. Studies are still to be developed to address the flaws already identified and to find ways of removing them.

Does the Commission's strategy set the right course? What should be the priorities? The Commission's strategy, as set out in the CAFS (see above), is to step up prevention and detection, improve the conditions for investigations and develop reporting and deterrence. The CAFS aims to strike a balance between cost-effective control and simplification and adapt the anti-fraud measures in place to counter new fraud schemes. The Commission makes use of the experience gained from OLAF’s investigations into alleged fraud. The CAFS defines fraud prevention as a priority, mentioning three points pertaining to fraud prevention that should be implemented by the end of 2013. Work has already started on the following points: 1. Adequate anti-fraud provisions in the Commission proposals on spending programmes under the new multi-annual financial framework. One year after adoption of the CAFS, anti-fraud provisions have been incorporated into the legislative proposals. Through close cooperation with the Danish Presidency and discussions in the Council working group, the Commission has ensured that uniform anti-fraud clauses in the direct expenditure and external aid programmes of the new multi-financial framework are maintained or introduced by the legislator. 2. The development of anti-fraud strategies at the level of the Commission departments with the assistance of OLAF. One year after the adoption of the CAFS, a methodology for the elaboration of an anti-fraud strategy has been drawn up and made available to the Commission departments. Some Commission departments already have their anti-fraud strategy in place.

22 COM(2011) 293, 26 May 2011. See also Commission Staff Working Document accompanying the Communication:

SEC(2011) 621. 115

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3. The revision of the public procurement directives. This priority is being implemented by the Commission on the basis of the legislative proposals adopted on 20 December 2011.

The other measures set out in the CAFS will be implemented by the end of 2014 at the latest. In their Annual Activity Reports the Commission Directorates-General report on the implementation of these measures.

How vulnerable are EU programmes to fraud and irregularities? Are some programmes or sectors more vulnerable than others? Can the design of legislation and frameworks be used to minimise the possibility of fraud or irregularity? EU programmes are as vulnerable as national programmes (e.g in the area of the cohesion policy co-financed programme the EU contribution is part of the public contribution). Under EU law, Member States have primary responsibility for preventing, detecting and following up on irregularities and fraud. In order to step up protection against irregularities and fraudulent activities, the Commission checks whether the national administrative practices are in line with EU rules, and whether the Member States’ control systems are working properly. The Commission also checks that all substantiating documents have been provided and that they comply with EU requirements. In addition, the Commission may carry out on- the-spot checks and inspections to verify that the Member States are complying with the rules. As mentioned above, cohesion policy funds are more prone to fraud than other sectors. However, efforts are still needed in every budgetary sector to continue making progress and address the potential adverse effects that the current financial crisis might have in terms of an increased risk of fraudulent acts. The Commission intends to reinforce the legal framework to protect the EU’s financial interests in a number of areas.23 Additionally, the Commission recommends that all Member States put in place adequate anti-fraud measures aimed at both prevention and detection, especially where results seem to be lacking or insufficient.

September 2012

23 See above (Commission Communication adopted on 26 May 2011). 116

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• 1. Whilst OLAF is formally part of the Commission, when it is investigating fraud it is independent; is OLAF sufficiently independent from the rest of the Commission? Would you recommend that further measures are needed to enhance OLAF’s independence?

As indicated in the Commission written contribution, the independence of the Director- General of OLAF means that he may neither seek nor take instructions from any government or any EU institution, body, office or agency in the performance of his investigative duties.

This rule is strictly complied with and covers all phases, from the opening of an investigation through to its closure and the transmission of the results.

The interinstitutional mandate of OLAF requires effective independence from all EU institutions, including a functional independence from the Commission. The Supervisory Committee of OLAF reinforces the independence of the Office by regular monitoring of its investigative function.

So far, the DG of OLAF has not encountered any problem with the Commission as regards the independence of the investigative function.

Moreover, the new OLAF Regulation (amending Regulation 1073/1999) foresees further measures to guarantee OLAF's independence, including, in particular, the following: - the DG of OLAF should be able to adopt guidelines on investigation procedures for the Staff of the Office,

- the staff of the Office should carry out their investigative tasks in full independence and should avoid conflicts of interest,

- the DG should be appointed for a non-renewable term of seven years.

Cooperation with UK national authorities: • 2. In his written submission to this inquiry the Attorney General for Northern Ireland said that “ ... OLAF has not been found by us to be particularly accessible”. How well does OLAF cooperate with the relevant national authorities?

First, it should be borne in mind that OLAF can only assist in cases involving EU money.

There are currently three issues which limit OLAF powers to assist the UK Police and vice versa. The first is that OLAF does not currently have a central contact point in the UK. The result is that OLAF is obliged to identify the relevant police force / prosecution authority having jurisdiction and then contact the Economic crime unit in the relevant police force, in order to notify it of the OLAF investigation and request assistance. Efforts are ongoing to establish a central contact point, such as the City of London Police, so as to facilitate contacts. Speedy reactions to requests for information are essential with all OLAF partners. To that end, the new OLAF Regulation (amending Regulation1073/1999) aims at an 117

OLAF— Supplementary Written evidence improved framework for exchange of updates and information on cases between OLAF and national authorities.

Secondly, evidence gathered by OLAF is not able to be used directly in an UK criminal investigation. This means that OLAF can only pass information to the UK authorities, who will then take formal witness statements for use in court. This results in possible duplication of investigation work. OLAF would also refer to Article 9 (2) of the Regulation 1073/1999 (according to which, in particular, OLAF shall take into account the procedural requirements laid down in the national law of the Member State concerned in drawing up its reports that shall constitute admissible evidence in administrative or judicial proceedings of the Member State in which their use proves necessary).

Thirdly, due to the fact that OLAF conducts administrative investigations, and the UK authorities conduct criminal investigations, in the absence of pre-existing evidence of criminality, which can be passed to the UK authorities, the police are only able to assist OLAF by providing open source information concerning entities which are to be visited, and act in the capacity of observers, when OLAF conducts an on the spot check at the premises of an economic operator. This necessarily limits the actions which the officers are able to take to assist OLAF. It also limits the extent to which OLAF can actively assist the UK police, OLAF can only act in the capacity of expert witnesses in assisting the UK police or in providing practical help such as assisting the UK Police to obtain information.

However, recent experience has demonstrated that such operations have resulted in successful cooperation. In the past five years, OLAF has provided information and assistance to the UK police concerning Members of the European Parliament (MEP cases) and to the Department for Business, Innovation and Skills (BIS) in fraudulent company insolvency cases arising from EU research projects.

Specifically, OLAF has provided assistance to the West Midlands Police and the Kent Police in two ongoing UK criminal investigations. In the first case, OLAF assisted the UK police as expert witnesses by identifying documents which may be subject to parliamentary privilege and assisting in translating any documents in foreign languages. In the second case, OLAF has assisted in verifying letters rogatory where the UK police were seeking information via the Belgian Authorities and assisting with negotiations.

In two cases investigated and later prosecuted by the BIS, OLAF has been able to identify and provide factual information from relevant EU Officials who are involved in projects, and pass the information to the BIS for consideration. The UK authorities are then able to take formal witness statements. The information provided to the BIS has been in the form of proofs of factual evidence which are able to be readily utilised.

In addition, OLAF has identified unused material, so as to enable the BIS investigator / lawyer to certify that there is no material which could provide a defence to the accused person. The unused material has been identified by a former UK fraud prosecutor, who has experience in identifying such material.

OLAF has also liaised with the UK Police forces in Cumbria, Belfast, Edinburgh, Sheffield and most recently, in London, when carrying out on the spot checks at premises of economic operators (companies / persons) who are the subject of OLAF investigation.

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Finally, as regards the statement by the Attorney General for Northern Ireland, if it relates to a specific case, this can be analysed to see how cooperation can be improved. OLAF is aware that: - on 12 April 2010, the Attorney General (AG) for England and Wales ceased to hold office as Attorney General of Northern Ireland as a separate office of AG for Northern Ireland was established.

- in Northern Ireland, criminal investigations are conducted independently by the police who submit their investigation findings to the Public Prosecution Service (PPS) who decide whether a prosecution is warranted.

If OLAF had a case with some criminal element relating to Northern Ireland, it would probably contact the PPS who would put OLAF in contact with the appropriate police force and in the event that the matter went for prosecution, OLAF would liaise with the PPS. From a criminal law enforcement perspective, OLAF would have no contacts with the office AG. However, as the AG is the chief legal adviser to the Northern Ireland Executive for both civil and criminal matters that fall within the devolved powers of the Northern Ireland Assembly, OLAF may have a need to have contacts with the office of the AG. A senior member of OLAF staff met the Attorney General of Northern Ireland in an informal context in early 2012.

• 3. How many cases has OLAF sent to the UK for action? To which national authorities have these cases been sent? What happened to these cases? Can you give the Committee any specific examples?

As regards cases sent to the judicial authorities, statistics are reproduced in the last OLAF reports. It appears that, between 2006 and 2011, 19 actions were transferred to UK. A judicial decision was taken in around 68% (13 actions). Out of these 13 actions, the results are the following:

- dismissed before trial (file closed without prosecution): around 69%

- acquittal: around 7%

- convictions: around 23%

6 actions were therefore ongoing when the last OLAF report was prepared.

In general, the success rate has been dependent upon the type and complexity of the file. Other factors, such as unused material, have also had a bearing upon the successful prosecution of cases referred to the UK.

As regards cases that have been referred to the Police, the BIS and the Serious Fraud Office (SFO):

- in 2008, two cases arising from EU research projects were referred to the BERR24 (now BIS). Both were prosecuted, resulting in the conviction of two company directors on 14 September 2010 at Wolverhampton Crown Court and 3 December 2010 at

24 Department for Business, Enterprise and Regulatory Reform. 119

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Newcastle Crown Court. Both received sentences of 18 months on the offences arising from the EU funding.

- in 2007, OLAF referred to Bedfordshire Police the case of a former MEP suspected of having overstated, for reimbursement by the European Parliament, the amount of the salary paid to his assistant. On 11 November 2009 the MEP was convicted at Southwark Crown Court to two years' imprisonment.

As an example of a case which has been less successful, it is worth mentioning that OLAF referred a case to the Grampian Police involving a consultant who, whilst working as an expert/subcontractor for several EU companies participating in several EU funded projects all over the world, submitted multiple claims for payment. The invoices issued by the expert / subcontractor contained an address in Scotland. The case was rejected essentially on grounds of lack of jurisdiction in Scotland.

OLAF does not wish to make specific comments on other on-going cases.

4. Does OLAF follow up on these cases once they have been sent to the UK? How is the follow up undertaken?

Yes, there is a follow-up process within OLAF.

In the three trials mentioned above, OLAF personnel were closely involved in following up the criminal proceedings.

Follow up is divided into prosecution and financial recovery/ administrative sanctions. So far, prosecution has been more successful than financial recovery in the cases referred to the UK, due to the nature of the cases referred to above which concern companies in liquidation or administration. Administrative sanctions have also been imposed by the EU to prevent the companies / persons being able to apply for further EU money.

12 September 2012

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OLAF—Oral evidence (QQ 48-61)

Evidence Session No. 3. Heard in Public. Questions 48 - 61

WEDNESDAY 7 NOVEMBER 2012

Members present

Lord Bowness (Chairman) Lord Dykes Lord Rowlands Lord Stoneham of Droxford

______

Examination of Witnesses

Giovanni Kessler, Nicholas Ilett and Margarete Hofmann, OLAF

Q48 The Chairman: I thank Mr Kessler and his colleagues for coming to appear before this Committee. We are the justice, institutions and, latterly, consumer protection Sub- Committee of the European Union Committee of the House of Lords, and we have started this inquiry into the combating of European Union fraud. Your evidence will be on the record; we will let you have a transcript and you will be able to make any minor corrections in the interests of accuracy. The Members of the Committee have already declared their interests in the House register of interests, but in so far as they may be relevant to this inquiry will do so again first of all. In passing, I do so as a practising solicitor. I invite you to make any opening statement that you would like—or maybe you wish to go straight to our questions. All I would say is that I would be grateful if you would introduce your colleagues or, when you are speaking, introduce yourself and your colleagues—again, for the record. Mr Giovanni Kessler: Thank you. I do not have any big general statements to make. I am here to discuss with you and to answer your questions. I am very pleased and honoured to have this opportunity to appear in front of you and to contribute to the work that you are doing, which I'm sure will be in the interests not only of the institutions of the country but of

121

OLAF—Oral evidence (QQ 48-61) the European institutions as well. We are fully ready to co-operate with your work. I know well the report that the House of Lords did on OLAF in 2004, which has been an important contribution that we took into consideration in our work. As you know, I was appointed to this office in February last year, less than two years ago, and in that time we have had an internal organisational reform of the office to strengthen its double investigative and policy- making capacity, in order to better distinguish these two different tasks. As you know, the European institutions are most probably about to finish—maybe even by the end of this year—their reform of Regulation 1073/1999, which established OLAF, so a legislative reform is about to be adopted. We are ready to implement it and adhere to it because we took it into consideration last year in our internal reforms. So this is an important and interesting moment for OLAF, a moment of changes. With an eye to the future, as you know and as we can probably discuss in this hearing, there is the issue of the European prosecutor’s office, as foreseen in the European treaty. As you know, the European Commission has already announced its intention to put forward a legislative proposal by the middle of next year. Of course there will be a lot of discussions between the Member States, the Council and the European Parliament, but the project of instituting a European public prosecutor will have an impact on OLAF—it is in the same field of investigation. In my view, it will be a positive step forward. So in a way this is about the future of OLAF. OLAF is directly participating in this policy-making effort, being the service in the Commission, together with the Directorate General for Justice, tasked with the preparation of these legislative proposals. So this is an important moment for OLAF, having had the internal changes, the legislative changes of Regulation 1073/1999 and the preparation for the future European public prosecutor’s office. Your visit to and study of OLAF could not be more appropriate in terms of timing. As I say, it is important not only for national purposes but for all of us. I introduce Mr Nicholas Ilett, who has been for a considerable time the senior director of OLAF and acting Director General before my arrival here, and is now also one of two directors of investigations, and Ms Margarete Hofmann, who a few months ago was appointed director of policy. They can help me and you in this discussion.

Q49 The Chairman: Thank you. I am sorry that we do not have more time because we have quite a lot of issues that we would like to raise with you. Could you briefly set the scene? How do you conduct your investigations? How and why do you decide to mount a particular investigation? Having decided that, what powers do you have? Are they sufficient? You have already touched on the review that is going on, and I sense that you welcome that. We would like to understand what you do, how you do it, what powers you have to do it and what leads you to make particular choices. It would be helpful if you could give us a brief overview. Mr Giovanni Kessler: I am referring to the situation after 1 February 2012, the date when the internal reform of OLAF was implemented. It was reformed by internal decision, not due to the new legislation. I might give you the organisational chart of the office if it would help you understand. We established a unit called “investigation, selection and review”, and we issued new instructions to staff on investigative procedures that foresee that any information of possible investigative interest, acquired by the office by any means, has to be forwarded in a short time to this newly created investigation and selection unit—or, as we call it in our internal jargon, Unit 01. This unit has the specific mandate to select all the incoming information of possible investigative interest and to recommend to open, or not to open, an investigation. The decision is taken by the Director-General himself, as foreseen in Regulation 1073/1999—as the Director-General, the decision is mine—after having a proper selection made, and an opinion issued, by the specialist Unit 01, which, I want to underline, is 122

OLAF—Oral evidence (QQ 48-61) then not involved in any possible following investigation. It is not an investigative unit but, you could say, an advisory one—at least, it advises the Director-General—that carries out the selection of the information. What is the selection and what are the parameters? I will also give you in writing what we call the investigation policy priorities (IPP), which for the first time in a transparent way we publish every year in our annual plan. The unit has to check the jurisdiction of OLAF—that is, whether the incoming information is in our jurisdiction. If not, we dismiss the case and forward it to the competent authorities—the police or other national authorities. If there are sufficiently serious suspicions, as Regulation 1073/1999 sets out, this is a second condition for us to open or not to open an investigation. Thirdly, they have to take these IPP criteria into account: proportionality and an efficient use of investigative resources and subsidiarity. Just to give you an idea, we have 1,046 items of incoming information of possible investigative interest, from all possible sources— anonymous, private, informants, whistleblowers, Member States’ authorities and institutions. This year, we are in November and, if we go on at the same pace, we will arrive at more than 1,300—an increase of 30% in incoming information. Last year we opened more or less 250 investigations, so just a small part of the incoming information is used because we do not have the capacity for all of it, and we work on the subsidiarity principle and the efficient use of our resources. We cannot open more investigations than we are able to follow, and we do not open an investigation when the case is purely national and when we deem that there are sufficient resources at the national level so there is no added value for OLAF to carry out the investigation. So this is the work that we do in applying the criteria and selecting the incoming information. I add that in this phase, by definition, we do not use any investigative power, because to do so we need to open an investigation. We started this procedure with the new unit in February this year, and we have managed to carry out the selection in an average of 1.1 month while more or less 85% of the selection is closed within two months, which is our objective. To give you an idea, before we did this, the selection was done by all the investigative units and the average was seven months. Now, at least, in 85% of the cases the decision to open or not to open an investigation is taken within two months, which is good, especially for the authority that has sent us the information, which wants to know in as short a time as possible whether an investigation will be taken up or not.

Q50 Lord Rowlands: I would like to explore with you the relationships between OLAF and national authorities. In your reports, there is quite a high percentage of cases that you forward to national authorities where either very little happens or nothing happens. Could you explain how this happens and how you could achieve a higher percentage of take-up or follow-on? Is the problem with the kind of evidence that you are submitting, or is it a lack of interest or enthusiasm on the part of the national authority? Mr Giovanni Kessler: That is an important issue for us, of course. The co-operation with national authorities is multifaceted. It is before the opening of an investigation. We make sure at the beginning, in the selection phase—

Lord Rowlands: So this new unit might contact the national authority before even deciding whether to proceed? Mr Giovanni Kessler: Normally it does not—only if necessary. It is more about evaluation of the incoming information. Of course, if the information comes from national authorities, yes, it does make contact with them. It makes contact with the informant, which can be a person, an institution, a national police force or, sometimes, national judicial authorities. This is in the very initial phase, when we receive the information from national authorities. It 123

OLAF—Oral evidence (QQ 48-61) already shows that we will co-operate with them, if they ask us to do something when sending us this information. In some cases it is us who, at the end of the selection, decide not to take the case, maybe because we know that the case has already been dealt with by the national authorities or, as I say, because we think that there is no added value for OLAF to investigate it when it can be done by the national authorities themselves. In those cases, we forward the case to them, and in that moment we make contact with them. Normally, this works very well. During an investigation, we normally work with national authorities, especially when we have to work in Member States. By definition, when we work in Member States—when we do spot checks, which is the major power that we have in Member States, or when we carry out activities in Member States’ territory—we always make contact; by definition, we ask them to assist us, always. Not all Member States are the same. It depends on whether you are talking about during the investigation, or whether you have to speak about after the investigation, which is another issue and is much more difficult. During the investigation, though, it depends on many issues but especially institutional ones. For instance, for us your country is a bit more difficult than others. Not that it is your fault, but you have three judicial systems— Mr Nicholas Ilett: Forty-two police forces. Mr Giovanni Kessler: Yes, and you have a common-law system, which is beautiful but is different from ours. In almost all other countries, for instance, we have not common law but a prosecutor. That is easy for us; we often deal with prosecution offices. Sometimes you have a prosecutor, sometimes you do not; sometimes we deal with the police directly. It is not that big a difficulty but of course we work with 27 Member States so we have to know the situation very well. For instance, one issue that could facilitate or hamper co-operation during an investigation is the existence in the Member States of the national anti-fraud office, normally called an AFCOS. By the way, there is an AFCOS in every so-called new Member State because it was one of the preconditions for their accession. For us, that is a good thing; it helps us because we have some referent at the national level. Some of them work well and some of them less well, but they are our counterparts. In some countries we do not have that so we have to choose police forces, and so on. Nevertheless, during the investigation we have generally good co-operation. Thirdly, and you hinted at this, it is more difficult after the investigation. At that point, the only power or role for OLAF is, when we think that there is something of criminal relevance, to send our report and records of the investigation to the national competent judicial authority. That is the prosecution office—not the court; we do not have any contact with the courts. With Great Britain, we have to find out who we need to deal with— perhaps the police—but, whoever it is, they will have to be able to carry out a national investigation. Then we move on to the monitoring phase.

Q51 Lord Rowlands: Do you recommend? Do you say, “We think this case is strong enough to pursue”? Mr Giovanni Kessler: Yes. In fact, in Regulation 1073/1999 it is written that we make a recommendation—which, to be clear in legal terms, is not legally binding; it is not even on the level of advice that I give to my friend over a coffee. It is merely a recommendation that we issue. We send a report, which is signed by the investigators and the head or the director of the investigation, while the recommendation is signed by the Director-General. It is proposed by the investigators and reviewed by Unit 01, which has the role of selecting the incoming information and of reviewing investigations in order to give me an opinion on them.

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Lord Dykes: The follow-up? Mr Giovanni Kessler: Yes. Then we send it to the prosecution offices. Lord Rowlands: This sounds quite thorough, but there is quite a high percentage of cases where very little happens afterwards. Mr Giovanni Kessler: We have all the data because we monitor this. I think the average is around 42%. If you look closely at that, though, you will see that among the 27 Member States we have figures from 80% to 10%. The average is a result of very divergent results, Member State by Member State, which for me is less worrying. If I had a low percentage in all Member States, there could be something wrong with the quality of the work of the office, but it is not like that; there are Member States where the figure is even less than 10% and some where it is more than 85%.

Q52 Lord Dykes: Are those figures fairly stable? Does it always tend to be the same Member States—without mentioning names, of course—that have high and low figures? Mr Giovanni Kessler: Yes, it is like that. This is a big weakness, a sensitive weakness, of the system, and it has many explanations. First, in most Member States, the evidence that we gather is not usable in criminal proceedings. So what happens? The prosecution office has to restart the investigation from the beginning, and maybe some evidence is lost; time passes— then we have the issue of time-barring—and maybe some evidence is no longer available. In some other cases, there is another reason. I have been a prosecutor for 15 years so I know how my colleagues work and, if you will allow me, their psychology. Our investigations are sometimes perceived like pre-cooked food—it is not real food. So there may be a lack of interest for that reason; investigators like fresh cases. More seriously, though, another reason is that the protection of the financial interests, which is where we investigate, is left to the ability and willingness of national authorities, and that varies very much. Some cases that we investigate—and this issue is one of the reasons for the European public prosecutor—are by definition not national, even in the simplest cases of corruption where there are two people, one paying and the other receiving the bribe. Say that a public official in one country, where there are European funds, is bribed by a company from another country, and the bribe—I am referring to a real case, and we have had many like this—was paid not by the company but by another company that is controlled by it but is based in a third country, and is paid to another company, belonging indirectly to the first company, which is in a fourth country. So there are four countries, and we have to decide which one to send the report to. We can send a report to one or two, but then we have a negative conflict of interest—or maybe they will say, “But nothing has happened here; the corruption has happened over in this country or that”. We had another case recently, which was in the newspapers, of an OLAF investigation into fraud where people were over-invoicing. The invoices were presented in one country so, inappropriately, incorrectly, illegally and immorally, they got more European funds, but those who falsely inflated invoices were in another country. We sent two reports, one to one country and one to the other. There were two prosecutions and two trials. One suspect was sentenced and the other was acquitted. Mr Nicholas Ilett: On the identical facts. Mr Giovanni Kessler: On the identical facts. There were two prosecutions and two trials, which lasted years, especially in one country, and then with different results. All this has an impact because these crimes are not specific to one nation or another—they are European crimes. There are many other such cases. What we can do is carry out the investigation, 125

OLAF—Oral evidence (QQ 48-61) collect all the evidence and send the results, the evidence and our recommendation to Member States’ authorities, but sometimes they lack interest. In some smaller Member States, say, they sometimes also lack capacity. It has also happened that where a big sum of money is involved, the result of our investigation is that there is a fraud and they have to give the money back to the EU, because we also make a recommendation to the financial authorities for recovering the money that has been illicitly or illegally received. The result may be that the company that received this money in the tens of millions, which for a company is a big sum, will have to go bankrupt. That may not be good news for the Government as many people may be made redundant, and the money is perceived, let us say psychologically or politically, as, “not our money—at the end of the day it’s European money”. So it is not so much in the national interest to prosecute these kinds of crimes because there are significant consequences for national politicians and authorities.

Q53 Lord Rowlands: Are there any ways to improve this? Do you have any suggestions for what might be done? Mr Giovanni Kessler: Yes. My suggestion is that the European public prosecutor’s office should fill this gap.

Q54 Lord Dykes: Would there be enough cases, when it is cross-border like that, where the sentences were similar or even the same, so that when you had a situation such as you have described, with one suspect acquitted and one not, you were surprised and shocked? Was that very unusual? Also, do the national prosecuting authorities—maybe without even telling you so you do not know—consult each other if there is a cross-border case to compare notes about what they are going to do in terms of sentencing and so on? Mr Giovanni Kessler: It varies. There is no straightforward answer. What I can say is that in some investigations, in order to address this problem or weakness—I do not want to say to “solve” it—we involve national prosecution services or national police forces, which then normally report to the prosecution, during the investigation, in order not to deliver pre- cooked food to them. Our role then is not only to investigate but to let them investigate during our investigation together with us and with each other. That is how we address the problem. However, that is not a no-cost solution since, when they start their own national criminal proceedings, we are bound by their rules. For instance, in some cases we cannot close our investigation until they have closed theirs because otherwise we will disclose evidence—for example, if an internal member of an institution is involved. Still, this is one way in which we try to address the issue. We let them co-operate together with us, in a way; we involve them during our investigation. Our role also sometimes involves simply opening a co-ordination case. This happens quite often and it means that we let them work together with us. Last year we opened 34 of these cases. In such cases we do not really investigate but we let them investigate and we support them. In some cases when we investigate, though, during our investigation we send information to them; we make contact with the national authorities of different countries and we work together. This is another way in which we try to address the problem. This kind of crime is European by nature, because you cannot say it is specific to this nation or that one. Sometimes it is very difficult to locate these crimes territorially; it is impossible, in fact, and I could give you plenty of examples. A well known example that relates to the institutions stemmed from a newspaper in your country. Mr Nicholas Ilett: The Sunday Times. 126

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Mr Giovanni Kessler: Members of the European Parliament were accused last year of accepting made-up bribes, if I may say so. Mr Nicholas Ilett: It was a sting operation. Mr Giovanni Kessler: It is well known because it was a complete disgrace. So there were identical facts relating to the four MEPs who were involved in different ways, though I do not want to go into details. Although they were of four different nationalities, they were acting not in their national capacity but as Members of the European Parliament. We started an investigation. Actually there were three nationalities involved; one case was wrong, so we closed it and the MEP was cleared immediately. In the other three cases, though, national prosecution services from three different European countries opened their own investigations, as well as the Belgian and French authorities because the European Parliament has two seats. So there were five investigations—we sat here in this room, all together, and it was a nightmare. Because these kinds of crimes are differently treated in national legislation, each one led to a different result. Ours was the only common investigation, because we found evidence that we distributed to all of them. It was a bit unfair on the people who had done the same thing but were investigated by five national prosecution offices, with five different results. For these kinds of crimes—or possible crimes; I do not want to say that they definitely committed them, but it was a criminal investigation because the allegation was a criminal one—we would need one common authority, not for the trial but for the prosecution of the investigation.

The Chairman: Forgive me if I interrupt you at this stage. We really have to leave here just before 11 am to go to the Commission. There are two areas that we would particularly like to cover. One is the relationship between you, Europol and Eurojust—Lord Stoneham may want to pursue that—and, briefly if we can, the accountability of OLAF and your relationship with the Supervisory Committee.

Q55 Lord Stoneham of Droxford: How good is the co-operation between OLAF, Europol and Eurojust? Mr Giovanni Kessler: It is good with both of them, which does not mean that it cannot be improved. I shall start with Europol. We are now quite advanced in having—finally, because we never had this until now—a working arrangement with them. I have personally met the head of Europol several times in order to have this working arrangement in place for better co-operation. You know that we both do different work—we do investigations while they have a huge capacity in intelligence-gathering and orientating and supporting all the national police forces in this. In the arrangement that we want to sign, it is foreseen that they will use intensively our collection of data, especially in the customs field—we have quite extensive data storage on this, which might be of interest to them. That is just an example from outside—maybe the major example. In return, they will provide us with some of their information. In order to do this, something in writing is needed, not least because there are privacy and legal issues that need to be addressed and we are addressing them. So we will shortly have this working arrangement in place, which will greatly improve co-operation which until now has been practical but from now on will be even more structured. Eurojust is a different issue. It has a task and a duty to facilitate co-operation among the judicial authorities of the Member States. That is what it is supposed to do, and it does it extensively. We do investigations so we can be considered one of Eurojust’s possible “clients”, if I may, or users, but at the same time we also co-ordinate investigations, as I just said, among Member States—more than Eurojust does, because it does not really co-

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OLAF—Oral evidence (QQ 48-61) ordinate investigations but facilitate co-operation. We have very different capacities. In some cases we let judicial authorities work together so, not being investigative authorities, they just facilitate; they let them meet together and stay in contact. For instance, in the case of the MEPs that I just mentioned, we had a meeting here at OLAF of five Member States’ judicial authorities and Eurojust. We contacted them and they intervened. So we try to find a way to increase co-operation, even if we cover very different fields and have different capacities.

Q56 Lord Stoneham of Droxford: Could I ask you about your relationship with your Supervisory Committee and how that helps you in your work? Mr Giovanni Kessler: We have a new Supervisory Committee, appointed a few months ago, whom you have just met. It is not clear in the regulation exactly what the role of the Supervisory Committee is, and in fact the way that it interprets its role has changed with the new Supervisory Committee. Mr Nicholas Ilett: Could I perhaps put a bit of historical perspective on this? The 1999 legislation is pretty ambiguous. There is a specific duty on the Supervisory Committee to ensure our independence, which has not actually proved to be the problem that was originally envisaged back in those days because we developed a protective cocoon of tradition, custom and experience that has ensured the protection of our independence; and also for the Supervisory Committee to do various technical things related to our budget. We have had several Supervisory Committees over this 12-year period, and with the ambiguity of the legislation it has been possible to have a number of different approaches to how the Committee’s work is carried out. With each Committee there has been a period in which we have reached an accommodation, with a mutual understanding about how far its advice is advice and how far it is something stronger or sometimes weaker. Hopefully, the new legislation, which we expect to come into effect shortly, will define the Committee’s duties rather more clearly.

Q57 Lord Stoneham of Droxford: Which direction is it taking? Mr Giovanni Kessler: I am telling you. In saying that, by the way, I am just answering your question—I do not have any influence at all, and I do not want any, on the way it interprets its role. That is its decision and it sticks to it. However, you have asked my opinion. I shall read the first paragraph of Article 11 of Regulation 1073/1999: “The Supervisory Committee shall reinforce the Office’s independence by regular monitoring of the implementation of the investigative function. At the request of the Director or on its own initiative, the Committee shall deliver opinions to the Director concerning the activities of the Office, without however interfering with the conduct of investigations in progress”. This particular Supervisory Committee has started asking us for full access to all investigations, to any investigative activities—to everything.

Q58 The Chairman: If I may interrupt you, did they want access to ongoing investigations or to completed ones? Mr Giovanni Kessler: Both—in different ways, but both. By the way, when we say “completed investigations”, they are completed for OLAF. When we send them to the national authorities individually, they tend to ask us not to give them to the Supervisory Committee. Nevertheless, the Committee has received them. Now, finally, since September, we have working arrangements with the Supervisory Committee in place because I cannot deal with different requests at any one moment. So we have a working arrangement in place

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OLAF—Oral evidence (QQ 48-61) that allows them routinely to have some information about our investigative activities without any request. Ms Margarete Hofmann: A three-step approach. Mr Giovanni Kessler: Yes, a three-step approach. Some information they will get automatically from us. They have full access to all the generic data of the ongoing investigations, not the data of the cases themselves. At the touch of a button they can get the number of open investigations, where they are, how long they have lasted, when they are closed and so on—the statistical data, which are very important. All the investigations that we send to the national judiciaries are first sent to the Committee—at least, summaries of the report are—and then, on request, as part of the three-step approach, the committee can get more information or full disclosure of the case.

Q59 Lord Dykes: Is that steps two and three together—more information and full information? Mr Giovanni Kessler: Yes, exactly. That is written down in the working arrangement, which takes into account an opinion of several years ago of the European data protection supervisor that these data are sensitive. However, what has happened is that all the requests from the new Supervisory Committee apparently concern the way that our investigations are done in order to see whether we have respected human rights and even, which sometimes worries me with regard to its role, if the person under investigation complains to the Supervisory Committee, the Committee asks us for full access to the case. Once, the Committee even asked the investigators to appear in front of them, which I managed to avoid. My investigators said, “What is this? Is it a court?” You have to know that of course it happens that people under investigation, either during it or afterwards, go to the European Court of Justice and claim that we have not respected their human rights. This leads to court cases—and since I am here, I will say that we have won them to a great extent. Nevertheless, that is a fundamental right and there is a court for that purpose. If the Committee transforms itself into a court, though, that does not stick very much to its role of protecting our independence and monitoring the implementation of our investigative function. To me, that role does not mean having each case scrutinised in order to see if we committed any irregularities or not. Nevertheless, that is what it does. I do not have the power or the intention to change that; it is its decision.

Q60 The Chairman: You may not wish to comment on the case itself, but if you can it would be interesting to know whether you agree with this. In the publicity that followed Mr Dalli’s resignation, he alleged that all OLAF reports should be vetted by the Supervisory Committee before they were made public, but that had not been done in a particular case. What is your view on that? Do you accept that statement of the position?

Mr Giovanni Kessler: Thank you for your question. By the way, we have reacted to this, and not only to him—we also put out a press statement. We are low-key in our communication, though; it is just on our website. It is true that he did not get the final report from us, for two simple reasons: first, because we never do that, and secondly because it is in the inter-institutional agreement, which is the second legal basis for us, and it is the legal basis when it comes to the internal investigations. Mr Dalli was a member of the institution, which means that before drawing conclusions in the report we have to explain the facts to the person under investigation, so he has the right to know what the investigation is about and the right to be put in a position to respond or make a statement— which, effectively, is what happened. He was interviewed twice. The second time he was 129

OLAF—Oral evidence (QQ 48-61) accompanied by a lawyer, although the first time he chose not to be. In both cases he was fully informed about not only the facts and the allegations but also of the evidence. Questions were put to him about all the evidence and he reacted, so he has given his view. Not only is that according to the rules but, if I may, it is also common sense. It is before you draw a conclusion that you conduct an interview. It would not have been very helpful for him if I had interviewed him after I had drawn my conclusions—“These are my conclusions; what is your comment? Thank you very much, but the final report is this”. I think he made the statement that you are referring to the very beginning of the first day—it was his immediate reaction. Since then, he has no longer claimed this. He might make that claim about the Commission, because of course our report was given to it, according to the rules, and to the judicial authority, and it is up to them to take measures if they want to.

Q61 The Chairman: On the narrow point, rather than the merits of this particular case, you do not accept that these things have to be vetted by the Supervisory Committee? Mr Giovanni Kessler: No, on the contrary; according to the working arrangement with them, I sent them the summary of the report three days before sending it to the judiciary. Again according to our working arrangement, I had a written request from the president of the Supervisory Committee to have full access to the case, so they jumped straight from step one, where I contacted them on my own initiative—I had to do so, and I did—to step three. They asked me for full access and they got it immediately, the same day. This is before we sent the case to the judiciary but they still got it. They asked for access until 15 November and they are still studying it. Mr Nicholas Ilett: On the specific procedural point, there is never any vetting of our reports by the Supervisory Committee under any circumstances. When we send a report to an institution, in this case the Commission, we do that directly. When we send a report to the national judicial authority, we have a statutory obligation to inform the Supervisory Committee. Following various precedents, it is our practice to do that some days in advance, but that does not constitute a vetting. On the point of fact, Mr Dalli is completely wrong in what he said. The Chairman: That is very helpful. I really am sorry that we have to go elsewhere. I apologise to colleagues, too, who I am sure have other questions. There are a number of questions that we had not had time to address. Perhaps we may write to you indicating those questions that we would appreciate answers to, and if you could write to us that would be very helpful. Mr Giovanni Kessler: Absolutely. I thought that we had until 12 pm. We were informed that we would have two hours, so maybe I took too much of your time in my answers. The Chairman: In that case, I apologise. That is unfortunate. However, we do have to go and see the Commission. Thank you very much. Mr Giovanni Kessler: Thank you. We are at your disposal. The Chairman: So far as the record is concerned, you will get a transcript. As I said at the beginning, minor amendments may be made.

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Evidence Session No. 2. Heard in Public. Questions 36 - 47

WEDNESDAY 7 NOVEMBER 2012

Members present

Lord Bowness (Chairman) Lord Dykes Lord Rowlands Lord Stoneham of Droxford

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Examination of Witnesses

Mr Johan Denolf, Mrs Rita Schembri, Mr Herbert Bösch and Mr Marek Kaduczak, OLAF’s Supervisory Committee

Q36 The Chairman: I thank the members of the supervisory committee for agreeing to see this Sub-Committee of the House of Lords European Union Select Committee. We deal with justice and consumer affairs, and we are conducting an inquiry into the whole question of protecting EU finances against fraud. Obviously the supervisory committee has an important role here. I remind you that we are taking a transcript. Our normal practice is to submit that transcript to the participants in evidence sessions for any corrections that they wish to make—of a minor sort, not retractions—so that will submitted to everyone. Members will declare any interest that they have either already declared in the House register of interests or which are particularly relevant to this inquiry. In so doing, I say that I have a practising certificate as a solicitor. I will start by asking you whether you want to make any particular opening statement or whether you are happy to go directly to the questions. If you are happy to do the latter, in view of the time perhaps one of you would be kind enough to indicate to us the supervisory committee’s precise role and your role as members. Perhaps you would be kind enough when speaking for the first time to introduce yourself and your particular role and position, again for the record. 131

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Mrs Rita Schembri: My name is Rita Schembri and I come from Malta. I am one of the five members of the supervisory committee. I am a certified public accountant and auditor by profession. We have prepared a few introductory notes which, in the absence of my chairman, I would like to read out to you to put everything into context so that we understand each other. We thank you for inviting us here, and we are ready to answer any questions that you are going to put to us. We think that this is a healthy exercise by the honourable House of Lords. We wish to state that the Supervisory Committee of the European Anti-fraud Office was established for the purpose of reinforcing OLAF’s independence by the regular monitoring of its investigative function, while refraining from interfering with the conduct of the investigations in progress. The committee supervises—just supervises—OLAF’s proper conduct of investigations. The supervisory committee also assists the director-general of OLAF, whom you are meeting after us, in the discharge of his responsibilities. In doing so, the committee’s aim is to support the work of OLAF and to see to it that its investigative work is carried out according to the highest standards and with full respect for human rights and fundamental freedoms. It discharges its role principally by the submission of reports to the EU institutions, by delivering opinions to the director-general and by challenging, questioning and making recommendations to OLAF for improvement, where we deem it appropriate. The supervisory committee actively and regularly monitors the way in which investigations are carried out. Only by sustained efforts in examining a representative sample of a diverse range of case files and discussing them with OLAF investigators, managers and directors is it possible to identify any undue pressure on OLAF that could lead to its independence being compromised. The supervisory committee selects, on criteria predefined by our own committee, a number of cases from each sector and examines complete files as well as evaluation reports, final case reports or any other individual document. Monitoring activity covers OLAF-dismissed cases, cases under assessment and cases under investigation, as well as completed cases. Moreover, the director-general of OLAF regularly submits to the supervisory committee information on the investigations, reports of cases opened for a period over nine months and cases necessitating transmission to the national judicial authorities for the committee to assess the effectiveness and efficiency of OLAF’s work. Given the significant powers that OLAF has to conduct administrative investigations, the exercise of these powers is subject to respect for human rights and fundamental freedoms under the control of the supervisory committee. Respect for fundamental rights and procedural guarantees is also important to ensure the effectiveness and efficiency of OLAF’s investigations. The supervisory committee regularly monitored the respect for fundamental rights and procedural warranties when examining each and every case file and document relating to OLAF investigations. Following the judgment of the Court of First Instance in Case T-45/05, the supervisory committee now additionally carries out this particular control prior to the transmission of those OLAF cases to be sent to the national judicial authorities. That is how it should work, although I shall explain how it has worked so far. Over the past six years the supervisory committee has made the fullest use of those legal mechanisms provided to it by the legislator with regard to the regular monitoring of OLAF’s investigatory function. Here I add that we were appointed in January this year. The other team was made up of five individuals and was there for six years, if I am not mistaken. We are basically the new team, and we inherited— Mr Johan Denolf: I am so sorry. My train was delayed for three-quarters of an hour. 132

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The Chairman: Not at all. Thank you very much for coming, Mr Chairman. Believe me, those of us who live in and around London entirely understand problems with travelling on trains. Mrs Rita Schembri: When I speak about the supervisory committee, there is an element of continuity because I am speaking as well about what has happened over the past six years, while we have been here for eight months. The committee has systematically scrutinised reports of cases where investigations have exceeded nine months’ duration, which amounts to more than 78% of OLAF’s cases, and has recommended radical changes to the information contained in the reports designed to give detailed reasons for exorbitant delays in investigations and to draw attention to potential time-barring periods. The supervisory committee delivered an extensive opinion on this matter, Opinion 2/2009, highlighting a number of shortcomings in the conduct of investigations and recommending modifications to the internal level of management control as well as to the planning of such investigations. The supervisory committee has examined a representative sample of prima facie non-cases and de minimis cases in order to assess the independence of the procedure for dealing with incoming information prior to the decision whether or not to open an investigation. The committee has also examined the assessments of initial information, with a view to determining the way in which OLAF evaluates and plans investigations and assessing whether the principles of independence, impartiality and legality have been respected. The committee has regularly monitored the respect of procedural guarantees and fundamental rights within OLAF's investigations. This role has been carried out each and every time a case file or investigation document has been examined by the committee, as well as on examination of those cases necessitating transmission to the national judicial authorities. The committee’s Opinion 5/2010 on Respect for Fundamental Rights and Procedural Guarantees in Investigations by OLAF is the key reflection of the supervisory committee in this essential area of its competence. In the exercise of the monitoring function of the supervisory committee, the members of the committee’s secretariat normally had access to OLAF's case files in the electronic case management system, as well as to paper copies. In 2006 a satisfactory agreement was reached with OLAF. However, from March 2012, the access of the supervisory committee—that means the members around this table and two colleagues who are not with us—to OLAF’s case files, both in the CMS and paper copies, has been abruptly limited. This has proved to be a serious obstacle to the supervisory committee's ability to fulfil its remit. OLAF has raised concerns with regard to giving the supervisory committee access to case files, invoking the necessary restrictions imposed by the personal data protection rules in Regulation (EC) No 45/2001. Moreover, it has called into question the competence, the legal powers, of the supervisory committee to assess the respect for fundamental rights in OLAF’s investigations. The reasons given by the supervisory committee for requesting individual access to case files have not always been accepted by the director-general as sufficient for granting immediate access. This risks degenerating into a situation in which the supervised entity decides discretionally about the scope of supervision. A considerable amount of time has been spent in the past month on this debate with the director-general of OLAF. As a consequence, the supervisory committee has not been in the position for the past month to carry out its monitoring responsibility as it would have wished. After lengthy discussions between the supervisory committee and the director- general, an interim working arrangement has now been agreed that should allow the re- establishment of regular co-operation and monitoring. 133

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These difficulties have shown that the definition by the present legislation of the role and nature of the supervisory committee might not be satisfactory. The committee has therefore proposed to adapt the definition when reforming Regulation (EC) No 1073/1999 concerning investigations conducted by the OLAF, as currently under consideration in a position paper where the committee has also proposed to strengthen the independence and resources of its secretariat.

Q37 Lord Rowlands: Reading the OLAF report, the problem appears to be that in quite a large percentage of OLAF cases that are sent to national authorities, little or no action follows. Does the supervisory committee have a role in finding out why that is happening, either by questioning OLAF over whether the fault lies with its submission or by looking into whether it is a problem with the national authorities? Mr Johan Denolf: To be clear, the role of the supervisory committee is actually limited to monitoring the investigative function of OLAF. We are the only supervisory body to monitor OLAF, which is why we insist on being able to do our job properly. Once the file has been sent to the national authorities, it is their responsibility to continue the investigation or the judicial procedure. The supervisory committee cannot supervise the national authorities as such.

Q38 Lord Rowlands: I was not quite suggesting that you should be supervising national authorities, but is it not one of your roles to try to discover why some of these cases seem to come to an abrupt end? For example, if a national authority said a submission was not strong enough or did not have enough evidence, would that not be a concern to you? Mr Johan Denolf: We looked at the issue of time barring. We have problems already with OLAF informing us. There is complete disagreement between us and the director-general. He is not in agreement with the extent of the legal powers of the supervisory committee. He does not accept those internal rules of procedure. He does not send us everything that we ask for and he does not even send us all the files that we want to see before transmission to the national authorities. There again, it is impossible to even look at it properly because we do not receive what we should receive to do the job properly. Mr Herbert Bösch: This is a very important question. About 80% of the European budget is spent via the national authorities so you can imagine that more or less the same percentage of misuse of money, financial irregularities, is done by national authorities. It is a very important question. Our predecessors intended to look at this but, as our chairman said, we still have problems in getting proper access to documents. Probably it will be a good hint for the work for the next years to have a look at one capital or another to get a feeling for what happens. Also, on the value of the results of OLAF’s investigations, a national authority could say, “We cannot use the findings of OLAF for further action at home”. Mr Johan Denolf: I think it should be one of the missions of OLAF to do the financial and judicial follow-up. Of course, if it does that, it should report that to us, one way or the other, so that we can follow that. But that is not happening for the time being. Even worse, OLAF introduced ISIP, which is the new working instruction manual and the new working arrangements within OLAF. Before the reorganisation of OLAF, there was a unit dealing with the financial and judicial follow-up, which does not exist any more in the new chart. Having said that, it is still foreseen that the financial and judicial follow-up will be done by the investigators, which I do not think is a good idea. I am a senior police officer and I have been an investigator for the police for many years. Police officers and investigators are not at all interested in the financial follow-up. What they are interested in is to see another case come

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OLAF’s Supervisory Committee—Oral evidence (QQ 36-47) in and to work on it. That is what they are police officers for. Even then, if you go to a member state as an investigator of OLAF, you have to discuss with the judicial authorities what your authority is—our investigators have discussions with magistrates and high-ranked people but they have no authority whatever. We think that one of the key problems in the organisation of OLAF is that it has not maintained that unit and now it has to be done by the investigators themselves. Mr Herbert Bösch: It might be interesting for the House of Lords to know that we have prepared an opinion on this. Following our rules, we have elected two rapporteurs. If someone asks for it, we send our opinion to assist the work of the director-general but the institutions are also free to ask for the opinion of the supervisory committee. Our three main players are the European Parliament, the European Commission but also the Council of Ministers. Your country is well represented there. It could be an idea for Parliament to ask for such an opinion in a very official way via the Council of Ministers. There will be an official document, written by this committee, which should be adopted in two months’ time. Mr Johan Denolf: Early next year.

Q39 The Chairman: You indicated that you had been requesting certain files from OLAF. Presumably you want to be able to go through those files. What sort of staffing resources has the supervisory committee got, separate from OLAF? Mr Johan Denolf: Thank you very much for that question. We award that question 10 points. We have another problem there, the main problem actually. The director-general is not in agreement with the extent of our legal powers but he also thinks that it is his staff— according to the regulations, the staff being provided to us is OLAF staff. If you had the correct working methods and arrangements, one would expect that before moving or adding people you would have a chat or a proper conversation and discussion about that. That has not happened since last March. So the director-general himself decides on the number of staff. He decided to reduce the staffing from eight to six. We have the right to eight full-time equivalents, but the six are not even full-time. He decided to remove people and replace them with others, which we did not ask for, and we personally feel that our colleagues could have been handled better. Normally you would expect a vacancy to be publicised in the three institutions so that those people who were interested in it could apply, but that was not done. The director-general decided that from his 500 people he will offer us various people and we can say yes or no. Well, we could not say yes or no before because he just put them in. For the time being the discussion is about removal—although I do not know about discussion. The day before yesterday he informed us that he will remove another member of the secretariat, someone who is the living memory of the supervisory committee and is the only one left, and that he will replace her with another member of OLAF. Again, he will select that person for us. It has to be borne in mind that we are not a full-time supervisory committee; we all have professional lives. For instance, I am in charge of the Belgian serious fraud office which is comprised of approximately 300 people in Brussels and 1,000 elsewhere. I am not moaning or complaining because I like doing this work. It is nice and it is a challenge, but you have to be properly staffed with a secretariat. These people have been chosen specifically because of their expertise, but you cannot have expertise if you do not conduct a proper job in that field. That is why it is a combination of experts, not full-time people. The idea of having people working in the country is a good one, but having said that, he should staff the

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OLAF’s Supervisory Committee—Oral evidence (QQ 36-47) secretariat properly so that they can prepare all the files on the cases. For the time being we have two people, one of whom is here today, out of six who are dealing with the case files and studying them—and they are not even working full time. The Chairman: Thank you. I believe that Mr Kaduczak wants to say something. Mr Marek Kaduczak: I want to make a comment concerning national judicial follow-up to OLAF investigations. It is a crucial point because while you may have the best-conducted investigation, if there is no follow-up, such an investigation is of no use. In fact, one of the main tasks of the supervisory committee is to monitor the proper conduct of the investigation and to look at the proper follow-up that is done at the national level. The committee looked into two elements. The first is the question of time-barring or prescription, and the second is the conduct of investigations in accordance with national rules so that the results of such investigations can be used properly as evidence in national proceedings. The committee looked at the question of time-barring when analysing the nine-month reports. These reports are sent by OLAF to the supervisory committee when an investigation lasts longer than nine months. One of the committee’s powers is the ability to look at the duration of cases. The committee requested that, in the reports on the duration of cases, the issue of time-barring should be clearly specified. So it should be made clear in those reports whether an investigation could be endangered by a short period of prescription—of time-barring—in those member states where the results should be sent for judicial follow-up. Unfortunately, we have not been receiving that information in a regular manner, which may be linked to the fact that, as the chairman of the committee has mentioned, there is no separate unit of magistrates with a national background who can properly monitor the duration of the time-barring periods in member states. An investigator who investigates a case cannot be aware of the time-barring restrictions in all the different member states. That is one element at which the committee has been looking and I think it is very important. The second element is that of the proper conduct of an investigation, particularly on-the- spot checks in member states which, according to the EU legislation, must be conducted in accordance with national rules. Here again there is a significant need for magistrates in OLAF who can inform the investigators and provide them with information about the exact nature of the various national rules so that they can be followed. The committee also looks into this when analysing the reports from OLAF, but unfortunately we are not provided with enough information about national regulations. Lord Rowlands: So you would not know how many cases have fallen on either of those two grounds. Mr Marek Kaduczak: No, because we are not properly informed about time-barring and national regulations with regard to on-the-spot checks, it is difficult to make such assessments. Mr Johan Denolf: Having said that, and perhaps by way of a conclusion, I think I should emphasise that we are still talking about supervising the work of OLAF here. I want to make that clear.

Q40 Lord Dykes: Of course, I understand that. Are you optimistic that these problems can be resolved with an appropriate response that is more helpful to you and your colleagues?

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Mr Johan Denolf: Thank you very much for that question because it is a very important one. I should say that we hope so. To be perfectly honest with you, I do not understand the attitude of the director-general. If I were he, I would be pleased to have a strong supervisory committee working alongside me as a critical friend who can inform his role and position. So I do not really understand the position. There is no real consistency in what is being done and what is being decided. For months now we have been discussing how to come to an agreement, but we could not reach one. In the end, we decided to go to the European Parliament and ask for a hearing, which we had yesterday. We informed them, but when I was on my way in I heard that that was considered to be a declaration of war, which it is not. We are stuck. We have an official mission which has been given to be by the three European institutions, and we are liable to accountable for that. At the end of the day we will be asked, “What have you done?” What can we say? We have not done anything because we have not been in a position to do what we have been selected for or what we have been appointed to do. Rather than carrying on as we have for almost a year now, we decided to go to the institutions and ask them for help and support, which they have promised to give us.

Q41 Lord Dykes: Forgive me for interrupting. When you said, “Declaration of war”, did you mean that there were certain individual MEPs who disagreed with you? Mr Johan Denolf: No, on the contrary. In the Parliament we were very restrained. When I came here to OLAF’s premises, I just crossed an official who said, “What happened yesterday in this house has been considered as a declaration of war”. Lord Dykes: So just the DG was saying that? Mr Herbert Bösch: It is important, as our chairman said, that we are elected in accordance with the three institutions. European law has foreseen that we should play a strong role so that we get the authority from the three institutions to play a role. We will also have to go to the Council, and we would probably be very happy if the British position would be strengthened on this point by the strong position of the Parliament of the United Kingdom. Of course, we always rely on the partners; we can only be as strong as those who elected us and gave us the authority. We have to say that, yes, the Parliament on the first reading of the 2013 budget has foreseen another two posts for our committee, and a long credit line to give us the independence that we are looking for and which is absolutely necessary, but not so that the supervised becomes the one who defines the scope of the supervision, which is, frankly, the case today. I see this report and I can tell you, okay, you can believe it or not. As a member of the supervisory committee I cannot say anything of value regarding this report. I am on our chairman’s side. It would be good if the first construction of the supervisory committee was to have a critical friend and to say, “Wait a second”. As we say in Austria, when people work they make mistakes, of course; if they do nothing, they cannot make mistakes. So if we have a such a critical follow-up, you can reduce the bad consequences, but if you are not informed you cannot do that. We have to send the ball back to our stakeholders, and that is what we are doing.

Q42 Lord Stoneham of Droxford: I would like to ask a follow-up on this. You said that you were all appointed in January. Is this an inevitable conflict that happens every time there is a change in the supervisory committee, while the two bodies sort out their various authorities? Or did the previous committee have the same problem? My third question is: is there no continuity in terms of membership from the previous committee? Were you a completely new committee that started in January?

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Mrs Rita Schembri: First, the present law, regulation 1073/1999, does not cater for that continuity. Unfortunately, it was a three-year period and again, another three-year period was given to the other members, and then new team came in. Now the regulation, under the changes foreseen to regulation 1073, caters for that. In fact, it says that of the five of us, two will resign after three years and another two will come in for the rest of the three years. So that would be solved. What was the other question? Mr Johan Denolf: Is it a problem? Mrs Rita Schembri: Yes, it is a problem with us. Lord Stoneham of Droxford: I was not trying to say that. Sometimes when a new body is established and you are supervising another body, there is inevitably a little bit of sorting out of the relationship at the start. Mrs Rita Schembri: They are teething problems. We even had a look at what the previous House of Lords and the previous committee had to say some six years ago. The timing was that the new team had come in at that point. We realised that the person who was speaking on behalf of the committee—this is from the minutes taken six years ago—again explained that they had had teething problems. What do you give teething problems? Should you give them three to six months? But now we are in our ninth month and although we have tried to find some form of agreement via a three-step approach in asking for the files, it seems that even with that we are having problems. Also, if we do not take care of this, it may be extended, and then that becomes an intrinsic problem, not a teething problem.

Q43 Lord Stoneham of Droxford: I am just trying to understand. Do I take it that at the moment you do not have your own budget, but you will have in the future? At the moment you are indicating that all your staffing is determined by the body that you are supervising, which strikes me as being slightly odd. Mrs Rita Schembri: OLAF as an organisation is in a privileged position because it has a separate budget line. Within OLAF’s separate budget line, under the EU budget, there is another separate budget line, but within OLAF’s budget, for the expense of the five supervisory committee members. During the run-up to the changes to be made to 1073 we have advised that it is as well to be seen, not only to be there, as being independent from the rest of OLAF. We should have a separate budget line, which includes not only the supervisory committee—the expenses of the five—but also of the secretariat. That would lead us to some form of control over our own secretariat. Unfortunately, while this may take place, because we seem to have seen in the budget documents of a few weeks ago that this will take place, the human resources are still the competency of the director-general. So while it may help because we have set aside a budget that includes the cost of the supervisory role, still we have not solved the problem of sourcing our own human resources, because we still depend on the organisation known as OLAF for the provision of our human resources.

Q44 The Chairman: Can I come back to this, because the Committee feels that this is an important issue that has been exposed to us, perhaps for the first time, at this meeting. The report, in the section on the supervisory committee, states that the committee monitors the implementation of OLAF’s investigative function without, “interfering with the conduct of investigations in progress”. Can I press you, Mr Chairman, on this? First, do you agree with that? Secondly, how do you see yourselves doing that? You say that you act as a critical friend, that you ask for files but you do not get them. Presumably you do not want to see all the files. Are they files that you want to choose yourselves on a selective basis, and 138

OLAF’s Supervisory Committee—Oral evidence (QQ 36-47) when you have them, what do you want to do with them? We understand particularly well that you are not full-time members—very well qualified but not full-time. How are you going to monitor that investigative function without having someone to check on the investigation? Will you not need a great number of people to do that? Mr Johan Denolf: Thank you.

The Chairman: Sorry. Mr Johan Denolf: No, that is all right. I am quite happy with the question, to be perfectly honest. How do we want to do that? First, the annual report of OLAF actually refers to last year. It is what it is. The regulation is in Article 11. In 2011 the supervisory committee edited its own rules of procedure and sent them to the three institutions, and they were published in the Official Journal of the European Union. In those rules of procedure it was explained how we were going to monitor OLAF. This is the basis of the disagreement between the director-general and the supervisory committee because he does not accept those rules of procedure. He says they are not binding to him. However, the three institutions did not disapprove. The rules were published. When he received them last year, he did not react at all, but now he says that they are not binding to him. We have to monitor the investigative work that is carried out—whether it is being carried out according to the highest standards and with full respect to human rights and fundamental freedoms. So we do not have to judge the content of the file as such. We are very limited in what we can do. We should do this before transmission to the competent national judicial authorities. Do we need staffing for that? Of course we do. We need competent people. As I explained to the Parliament yesterday, the EDPS—the European data protection supervisor—has made an opinion which is helping us. The director-general of OLAF has delayed and even denied access to files, and he is invoking the personal data protection rules. After lengthy discussions, we came to a working agreement in three steps, which I will ask the secretariat to explain. It might be useful—and I presented this to the European Parliament yesterday as well—to say explicitly what the EDPS stated on that and how the director-general is reacting to that. In 2007 the EDPS said, “Furthermore, a methodology shall be established describing the different steps to be followed in any access request, previous to the access to the whole CMS file”—the CMS is the case management system of OLAF. It goes on, “In the last step”—there are three steps; we now have rules according to the three steps proposed by the EDPS—“it has to be to the SC to decide whether the previous steps have been insufficient for the performance of its role and therefore there is a need to access the whole file”. It is for us to decide. It does not say here that OLAF has the right to refuse access, which is what it is doing. The supervisor is being supervised by the one who is to be supervised. This is completely upside-down. The director-general is not even responding to that. He is invoking personal data protections. We are reading what the EDPS actually stated on it, and this is completely different from what he is doing.

Q45 Lord Rowlands: Going back to the issue of whether this is a teething problem or something more fundamental, the present director-general was appointed on 14 February 2011; the data protection issues must have been there for his predecessor in his relationship with your supervisory committee. Were these data protection issues invoked by the previous director-general? Mr Johan Denolf: Not even by him. He took the opportunity of having a new committee with a certain approach.

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Lord Rowlands: To assert a new interpretation, a new approach, is that what you are saying? Mr Johan Denolf: Yes, he made decisions. In January and February he took decisions cutting the access to the CMS files and cutting the secretariat staff by 25%. We were just coming in. It happened a week before we came in. So this was really planned. I will give you another example. We are making opinions and therefore we have to meet. Sometimes we meet in Brussels; sometimes we meet elsewhere. If you meet in France or in Brussels, one or two people have to make travel arrangements. At the end of the day the budget is the same if two people travel from Brussels to Paris or the other way round. We asked for one member of the secretariat to come with one of us to France instead of two people coming from France to Belgium. He refused that and he did not do that before. It is difficult working in that way. You are stuck. There is a lot of frustration and that is why we decided to go to the European Parliament. This is not a declaration of war at all, honestly. We are still there, hoping to co-operate and to be able to do our job properly.

Q46 The Chairman: You are outlining what is clearly a problem in the administration here. In the opening statement that your colleague read on your behalf, and in your answer to Lord Rowlands just now, you particularly emphasised your responsibility for looking at these files to ensure that they are compliant in human rights terms. That is obviously important because maybe prosecutions can fail if human rights have not been complied with, but do you see yourselves as having a role in supervising the investigation in a wider sense, rather than just those particular concerns? Mrs Rita Schembri: Yes, it is our obligation. We have been there for nine months. It is not as if we have not done anything. We have three experts and have managed somehow to get a couple of files and assess them. We have a structured way, set by the previous supervising committee, of assessing them. We have tweaked it to ensure that we cover all the ground of how an investigation should be carried out. I call this a situation of mistrust between the supervisor and the supervisee. It can perhaps be solved. If you take the analogy of an auditor and auditee relationship, which is what this basically is, a situation which is a supervisory role, we have different types of investigations at certain important times, when we are required by law to look at them. There is a nine- month report to ensure that there is no time-barring. We cannot tamper with an ongoing investigation, but once an investigation is closed—there are many cases of closed investigations—we can look at them. Another sample would be the transmission to national judicial authorities. If we divide our work, as we are entitled to, into different samples, all one needs to do is take a methodological sample, such as a statistical sample. One removes the doubt from the supervisee that an employee or member of the committee is choosing a particular case to study for whatever reason. Different samples of different roles that we have in different investigations can easily be solved in this manner. Vis-à-vis the sampling, in our step two it has to be chosen between the two of us. That means the supervisory committee, represented by our staff, and the staff of OLAF. In my opinion as an auditor it is the auditor who chooses the sample, not the auditee. Mr Herbert Bösch: If there is no supervisory committee OLAF is an unguided missile. We do not have a European public prosecutor. We are talking about what will happen in future. As the chairman said before, the real supervision is done by this committee. If this does not work, you can forget the independence of OLAF. Then you have a service of the

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Commission, which is again what we had before the Santer Commission had to step down. The Commission makes the same mistake as before. For example, you had in the Eurostat case, a major case a few years ago, a sentence by the European Court of Justice, which said that there is protection of human rights and of procedure and so on, and this has to be carried out by the supervisory committee. It even reflects on our own rules of procedure. We do not have to talk about the legal base if our highest court decides this. You have to bear in mind that this is the construction and it is important that we have the authority from the three, otherwise there is no independence any more, neither of the director general, nor of anybody else. You have to be aware of this construction. It is an important and crucial one and we have to defend it, otherwise it will not work at all. In the Eurostat case, the European taxpayer lost a lot of money. OLAF was sentenced for wrongdoing.

Q47 The Chairman: We are pressed for time. I would just ask if my colleague Lord Dykes could ask a question. Mr Johan Denolf: Very briefly, I think we should go back to the original supervisory committee in 1999. Why was it established? In UCLAF there was no supervision. When OLAF was created the employees were supervised by the Commission and there was no problem. The investigations were not at all supervised. That is why we were created, to supervise that part of what OLAF is doing. The Chairman: I am afraid that time is catching up with us. Lord Dykes: Perhaps we should go off the record. The Chairman: Mr Chairman, I thank you and your colleagues for appearing before the Committee and giving us your evidence. I am sorry that we do not have more time to pursue it. I suspect that when we have taken all our evidence from various sources, arising from what, in a frank way, you have said to us this morning, we may have other questions. If we may write to you with them, hopefully you will feel able to answer them. I am not saying that we will, but it is a real possibility arising from this session. As I say, time rather catches up with us, as always in these sessions. Thank you all for coming. Mr Johan Denolf: We welcome your questions.

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Public Prosecution Service, Belfast—Written evidence

I refer to your letter of 11 July 2012 regarding the launch of an inquiry into fraud against the European Union's finances. I welcome the opportunity to make a written submission to the inquiry, although I would have to point out that as my office has generally no direct involvement with European Union bodies any observations made will be quite general in nature. I am however in a position to comment on the following issues, which I believe are being considered and within the terms of your inquiry.

• Who is responsible for detecting frauds and irregularities, enforcing the law, and recovering misappropriated money

• How much of a link is there between fraud and organised crime

By way of background it may be useful if to provide some information on the role of the PPS and my position as Director.

The Public Prosecution Service for Northern Ireland (PPS) was established in June 2005 by the commencement of the Justice (Northern Ireland) Act 2002. The Act defines the PPS, its statutory duties and responsibilities and the legislative framework within which it must provide its services. The PPS is the principal prosecuting authority in Northern Ireland. In addition to taking decisions as to prosecution in cases investigated by the police in Northern Ireland, it also considers cases investigated by other statutory authorities, such as HM Revenue and Customs.

Since the devolution of policing and justice to the Northern Ireland Assembly in April 2010, the Service has been designated as a non-ministerial government department. Funding for the PPS is provided by the Northern Ireland Assembly and, as accounting officer for the Service, I am responsible for ensuring that the public monies provided are used efficiently. All members of staff are Northern Ireland Civil Servants.

I am not aware of any particular cases which have been referred to this office in recent times which involve a direct fraud against an EU institution or affecting the EU budget. However there have been occasions when cases submitted to the PPS have involved frauds against Northern Ireland Departments or other non-departmental public bodies that have allocated monies to groups or individuals, where the funding may have been originally provided by the European Union. An example of this type of case would be where an individual has fraudulently obtained a farming grant, premium or subsidy. In these cases evidence is not generally required from the EU body that provided the original funding which was then distributed by the Northern Ireland Department.

The majority of fraud cases submitted to the PPS will have been investigated by PSNI. PSNI no longer have a dedicated fraud or economic crime department. PSNI fraud cases submitted to the PPS are generally either investigated by C1 Organised Crime or by District Criminal Investigation Teams. Generally speaking very few of these cases involve potential fraud against the European Union in terms of funding. The injured parties in the majority 142

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of fraud cases submitted are financial institutions (e.g. mortgage fraud against banks) or individuals who have lost monies due to false representations made about an investment scheme.

In terms of cases which may involve EU funding, PSNI or the Department of Agriculture and Rural Development (DARD) may conduct the investigation depending on the seriousness or complexity of the alleged offence. DARD have a Central Investigation Service which internally investigates frauds which may have come from two funding areas within DARD - (i) agriculture e.g. single farm payment grants and (ii) rural development e.g. small business development grants. These investigation files are submitted directly by DARD to the PPS for a prosecution decision to be taken. DARD may also receive referrals and requests to conduct investigations from other Departments, which in the past have included the Office of the First Minister and Deputy First Minister and the Department of Culture Arts and Leisure. DARD usually conducts investigations on behalf of these Departments as they do not have their own investigative staff. An "investigation pack" is then handed over to PSNI and DARD may accompany PSNI in after caution interviews with the suspect. PSNI may ultimately submit the file to the PPS for a prosecution decision to be taken.

As outlined above, as it does not normally form a necessary proof for a prosecution, the PPS will not always be aware if a fraud committed against a Northern Ireland Department or other body originally involved European Funding. However there has been at least one PSNI investigation file submitted to the PPS which involved a referral from the Special European Union Programme Body as regards a potential fraud.

The PPS also receives files investigated by HM Revenue & Customs (HMRC) which involve tax fraud or excise duty evasion, primarily through fuel laundering and cigarette smuggling. I gave evidence to the Northern Ireland Affairs Committee in January of this year as regards its inquiry into "Fuel Laundering and Smuggling in Northern Ireland". As the NIAC report has now been published I do not consider it necessary to elaborate further here as regards this particular matter. However it would be fair to say that the evidence given to NIAC would suggest a link between organised crime and this particular type of fraud.

Regardless of which investigating agency has conducted the investigation of a particular fraud, once a file has been submitted to the PPS the evidence is carefully analysed by a Prosecutor to determine whether the evidential and public interest tests for prosecution are met, and if so whether the matter should be prosecuted summarily or on indictment.

Particularly large or complex fraud cases are referred to the PPS Fraud and Departmental Section and are allocated to a Senior Public Prosecutor for a prosecution decision to be taken. The Fraud and Departmental Section also takes prosecution decisions on all cases investigated by HMRC, DARD, and a number of other Departments. These include the Department for Social Development (DSD), who report cases of benefit fraud. Once a decision to prosecute is taken the PPS has carriage of the case through to the conclusion of criminal proceedings. Advocacy is either carried out by trained Prosecutors from within the PPS, or through independent Counsel instructed by the PPS.

The PPS liaises with the investigating agency concerned to ensure that any appropriate

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ancillary orders are sought from the Court upon conviction such as Serious Crime Prevention Orders under the Serious Crime Act 2007 or confiscation orders under the Proceeds of Crime Act 2002.

The PPS High Court and International Section plays a significant role in seeking to recover the proceeds of crime and thus take the profitability out of offending, primarily through bringing restraint and confiscation proceedings. Where it is necessary to prevent the dissipation of assets which may go to the satisfaction of a confiscation order, the PPS will apply at an early stage for a restraint order preventing the disposal of such assets.

When a confiscation order is made by the court it is also possible for this to be varied. It is therefore difficult to be precise about the exact amount obtained in confiscation orders relating to individual prosecutions for a particular year. However In both 2008 /2009 and 2009/2010 the total amount of confiscation orders made in each year was over £5 million. In 2010/2011 the figure was well in excess of £2 million. When a confiscation order is made by the court the convicted person is given time to pay and a default period of imprisonment is imposed for non-payment. At present the amount of confiscation actually paid over in satisfaction of court orders for the 3 years referred to above is in excess of £7 million.

Although the confiscation figures referred to above will include cases involving fraud investigated by PSNI, HMRC and DSD it is not possible to provide an exact figure as regards how much of the confiscated monies relate to fraud offences or indeed those which may have involved EU funding which was allocated through a Department or body based in Northern Ireland.

Although it is an independent prosecuting authority which must remain detached from the investigation of offences, the PPS does work closely with its partner agencies in terms of providing prosecutorial advice and participating in working groups and initiatives tackling particular areas of criminality.

The PPS is an active participant in the Organised Crime Task Force (OCTF) which was established in 2000 and is presently Chaired by the Minister for Justice. The OCTF provides a multi agency partnership approach to tackling organised crime in Northern Ireland including fraud perpetrated by organised crime gangs (OCGs). The PPS is represented on the OCTF Strategy Group and also participates in the Criminal Finance, Legal, and Immigration and Human Trafficking Sub-Groups.

In 2011 the PPS led an initiative to set up an OCTF Proceeds of Crime Working Group with an emphasis on ensuring that investigating agencies and prosecutors were working together to fully realise the potential of confiscation and other ancillary orders available upon conviction. This has not only further established relationships between the PPS and investigating authorities, but has also focussed the potential for interaction between investigators in terms of joint investigation and submission of files for prosecution.

The PPS is also a member of the Northern Ireland Fraud Forum and provides advice to the Forum on potential prosecution for fraud offences. An agenda item of the Forum is the "National Fraud Initiative" which through data matching between Departments has uncovered potential frauds some of which have ultimately resulted in prosecution. The Forum has produced a guide for Northern Ireland Departments "Managing the Risk of 144

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Fraud". The Fraud Forum is chaired by the Department of Finance and Personnel (DFP). All Northern Ireland Departments are required to submit an annual return to DFP giving details of all cases of suspected and proven fraud, including attempted fraud, where public funds are involved. These include fraud affecting Departments, Agencies, NDPBs voluntary bodies and other agents such as Intermediary Funding Bodies. Cases involving European Union funding are also to be included.

In terms of fraud cases which require evidence from outside this jurisdiction, the PPS has not yet needed to call directly on EUROJUST or OLAF for assistance. In 2009 the PPS participated in an OLAF conference held in Dublin which had the aim of improving best practice in the prevention, detection, investigation and prosecution of cross border fraud and corruption affecting EU interests. Informal contacts thus remain should the need for advice or assistance arise.

The PPS also attends the annual European conference of the International Association of Prosecutors which normally involves a plenary session at the offices of EUROJUST. Again, whilst there has been no requirement to date to formally engage with EUROJUST as regards the prosecution of any fraud offences, these channels remain open to the PPS should the need arise.

The main reason why the PPS had not had to seek the services of OLAF or EUROJUST is that there have been no fraud cases submitted for prosecution which involve an international dimension across several European boundaries. There are of course an increasing number of prosecutions in which PSNI or HMRC seek Mutual Legal Assistance from another Member State as regards the investigation of an offence. Such requests are facilitated by the PPS High Court and International Section issuing an International Letter of Request (ILOR) to the appropriate authority of the Member State holding the information sought by the investigator, and liaising with contacts within each jurisdiction to ensure that the requested material is obtained. Due to the ease with which monies can be transferred across the border, it will be of no surprise that a large proportion of ILORS issued are to the Republic of Ireland. The PPS and indeed PSNI and HMRC have very positive working relationships with respective counterparts in the South and there is generally no difficulty in the exchange of information between the two jurisdictions.

Occasionally fraud investigations require information such as bank accounts held or business dealings by a suspect in mainland Europe. As the fraudulent activity being investigated usually only centres on financial dealings in one Member State, as opposed to funds being moved across several European boundaries, there is no question as to who has primacy in terms of prosecuting offences or other such dimension which EUROJUST could assist with and the ILOR mechanism of requesting information is usually effective.

13 September 2012

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Dr Theodoros Skylakakis MEP, European Parliament Special Committee on Organised Crime—Oral evidence (QQ 91-99)

Evidence Session No. 6. Heard in Public. Questions 91 - 99

WEDNESDAY 7 NOVEMBER 2012

Members present

Lord Bowness (Chairman) Lord Dykes Lord Rowlands Lord Stoneham of Droxford

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Examination of Witness

Dr Theodoros Skylakakis MEP, European Parliament Special Committee on Organised Crime

Q91 The Chairman: Mr Skylakakis, thank you very much indeed for coming to see this Committee. We are the Justice, Institutions and Consumer Protection Sub-Committee of the European Union Select Committee of the House of Lords, and we are carrying out an inquiry into combating fraud against EU funds. We have seen representatives of a number of the institutions. We are grateful that you have indicated a willingness to give evidence in your capacity as a member of the various committees involved in such matters. For the record, this meeting is being recorded and will be transcribed. We will send you a copy of the transcript for you to put right any obvious inaccuracies. It will be published as part of the evidence to our inquiry. Members of this Committee who have an interest will declare it when they speak; otherwise those interests are as recorded in the House of Lords register of interests. I do not know whether you wish to make an introductory statement or go straight to questions. Perhaps you could when you first speak—again for the record, because it will be published—formally introduce yourself and advise us of your positions held in the European Parliament and the names of your colleagues. Having said that, in so far as it may 146

Dr Theodoros Skylakakis MEP, European Parliament Special Committee on Organised Crime—Oral evidence (QQ 91-99) be relevant, I declare an interest as a solicitor who may or may not have been concerned with matters of this kind. Dr Theodoros Skylakakis: Thank you very much for this opportunity. My name is Theodoros Skylakakis and, for the record, I am a Member of the European Parliament from Greece. I belong to the Alliance of Liberals and Democrats and am a member of four committees—the Budgetary Control Committee, where I have been our co-ordinator for a few months; the Environment, Public Health and Food Safety Committee, ENVI; a substitute member at the Committee on Economic and Monetary Affairs, ECON; and a member of the special committee on organised crime, corruption and money-laundering. I have seen your questions and they are very close to the issues, so I would rather go to the questions.

Q92 The Chairman: Thank you. I appreciate that your time is limited, as indeed is ours, I am afraid. We noted that the Budgetary Control Committee has responsibility for oversight of the EU budget and its relationship with the Court of Auditors. Can you tell us a bit about the committee’s experience of fraud and irregularity in connection with EU finances? How much does it affect the budget? What is your experience of the role of the Court of Auditors in all this? Does the Court of Auditors have the powers that it needs, or is that in fact a matter for someone else? Dr Theodoros Skylakakis: I will be totally frank, so I will be relatively interesting. My experience on the oversight of the EU’s budget is limited because I believe that our oversight of it is limited. I have said, and it is on the record, that we have created a wall in terms of rules and procedures in the EU, but it is not a manned wall but an unmanned wall. Our effectiveness is as effective as an unmanned wall can be. That is an answer to your first question, and I will get into details later. In terms of our effectiveness, I will give you only a number. If I recall correctly, Commissioner Šemeta said a couple of months ago—I will read from the statement—that from 2000 we had 647 cases transferred by OLAF, our anti-fraud agency, to the national judicial authorities. Out of them, 281 were dismissed. Of the rest, we had a conviction rate of 41%. If you do the numbers, you are talking about some 150 cases of conviction for fraud in the past 10 years. Evidence of petty corruption in the EU shows that we are talking in general—I am talking not about EU funds but about the public administrations in the whole of the Union—about millions or tens of millions of euros in bribes being paid. Obviously, this includes the funds managed by the EU, although no one has measured it. The Commission is starting to make an effort on that and you should ask it about that, because it has a relatively good strategy. However, in reality, it is extremely unlikely that EU institutions will get you if you manipulate EU funds. It is more likely that something will happen to your health.

Q93 Lord Rowlands: While it is recognised that fraud and irregularities take place in the cohesion funds, 80% of which are delivered by national Governments, the other area that struck me from reading our reports is the huge level of VAT fraud. Is that being addressed at all, not just by trying to catch it but by trying to deal with the structures of the tax to make fraud less possible? Dr Theodoros Skylakakis: Let us start with the realisation that the VAT revenues that the EU takes for its budget are related not to the actual VAT collected but to GDP. Of course, we do not know what the GDP is, because we have a black economy in all European countries, and in many of them that is extensive. We are therefore not very sure exactly what we are taking. There is no immediate impact of inability to connect VAT with EU financial interests, although the Court has decided in the most recent directive that the Commission is now bringing forward against fraud that VAT is within the financial interests 147

Dr Theodoros Skylakakis MEP, European Parliament Special Committee on Organised Crime—Oral evidence (QQ 91-99) of the Community, although always with proportionality and subsidiarity within the policies that the EU has to deal with. The extent of VAT irregularities is the extent of the black economy, essentially. Most of the black economy relates to VAT irregularities. So depending on the country, people think the figure might be 20%, 25% or 10%, but we do not have, in terms of corruption, fraud and the black economy, a very detailed picture of what is going on.

Q94 Lord Stoneham of Droxford: You are obviously pretty critical, so perhaps we can deal with the effectiveness of the existing institutions fighting fraud in the EU. Do OLAF, Eurojust and Europol co-operate effectively? Are they coherent in fighting fraud? Do they co-operate with the relevant national authorities? Do they have the necessary powers? Dr Theodoros Skylakakis: The short answer to all that is: no, no, no and no.

Lord Stoneham of Droxford: Okay. What do we need to do? Dr Theodoros Skylakakis: Let me put more meat on that. I will read you an extract of the OLAF director’s last answer to my questioning in CONT, which I have on record. I asked him if OLAF was doing any own-initiative investigations. He said: “We have already 1,300 incoming pieces of information per year. I am not in a position, with cuts of staff etc, to additionally go around and look for other information. OLAF does not have the legal basis, the staff or the power to make own-initiative investigations. If you ask me to do that, I will be happy. How can I do that? I cannot even go and look at the bank account of any investigated person.” I hope that that answers your question.

Q95 Lord Stoneham of Droxford: Where does that lead us? Dr Theodoros Skylakakis: In Europe we look only ceremonially at the anti-fraud and anti- corruption fight. We have defensive lines but we have no one to actively pursue people who commit fraud—not even the big-time cases. A number of member states put their national interest up front, not the anti-corruption or anti-fraud activities. I will give you an example from my home country, Greece, on the Siemens case—a famous case. There is a report for the countries that have signed up to the anti-bribery convention of the OECD. Part of that report refers to Germany and how it dealt with the Siemens case and the case of the other foreign officials who were bribed, many of whom were inside the rest of Europe, some of them in Greece. I will read to you a small piece that will make you realise what is really going on, in the national interest. The OECD anti-bribery report on Germany says: “From 2005 to end 2010, 69 individuals were sanctioned, of which 30 were criminally convicted, 35 were sanctioned under an arrangement”—where they only had to pay a fine. The report continues: “Out of the 30 convicted individuals, 23 received suspended prison sentences and 4 served time in prison”. Among the suspended prison sentences, four individuals convicted for “especially serious cases” of bribery of foreign officials did not go to jail. So even a country that is very good at dealing with corruption within its own territory has a totally different policy towards corruption outside its borders, even if it is within the EU. If we do not have really powerful EU institutions—which I think Great Britain is totally against, but that is another issue—we will never be able to tackle fraud and corruption in the EU effectively. Apart from the countries that do not consider it in their national interest to tackle fraud and corruption effectively outside their borders, there are also countries, a lot of them in the south and the east of Europe, where they are caught in traps of systemic corruption involving the political system—less so the judiciary, but they are partly involved—and the other prosecuting authorities: police, tax authorities, et cetera. When you

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Dr Theodoros Skylakakis MEP, European Parliament Special Committee on Organised Crime—Oral evidence (QQ 91-99) are caught in a trap of systemic corruption, it is almost impossible for the local political system to get out of that trap because all the motives are against integrity.

Q96 Lord Stoneham of Droxford: Do you think the way to break out of this is to go down the route of a European public prosecutor? Dr Theodoros Skylakakis: Yes, even stronger: a European FBI, I would say. The Americans, who are actually effective in countering local corruption and recovering their taxes all over the US—no American is playing with the IRS—had the progressive movement in the early 20th century promoting federal institutions like the FBI and the IRS, and managed to get out of local corruption and fraud traps that also involved their federal money. I think we should do something like that.

Q97 Lord Dykes: I have just been in the United States and people there say that— surprisingly, to some observers—the Italian authorities, despite all the problems of Sicily and so on, have managed to prosecute and put away many more members of the mafia than the United States has ever done. There have been a few high-profile cases in the United States, but not more. Dr Theodoros Skylakakis: They also have more.

Lord Dykes: Are you convinced that it is possible to construct realistic European-level legislation for the European Parliament and the Council of Ministers to deal with these serious problems of particularly cross-border crime and crime and fraud on a massive scale? Dr Theodoros Skylakakis: We have the legal instruments in the treaty, and they are very strong. What we do not have is investigative and prosecuting muscle. When we get out of the borders, it is impossible to get people convicted because the whole process of sending the letter, getting it back, opening the account, et cetera, is almost impossible, even if you have strong evidence. To go back to the Siemens case, we knew who had paid the money and where the money came from initially—we could follow the trail of the bank accounts. Somehow, between everyone involved, no one managed to get any bank accounts open—or maybe no one wanted to.

Q98 Lord Rowlands: I have to say that the UK Government might be a bit reluctant to have a European FBI at this moment. Can I ask you about some rather more modest changes that could possibly be made? The regulation defining OLAF is under review. Can you do something with that regulation that would make OLAF more effective? There is also a proposed directive on the protection of financial interests of the EU under criminal law. So we have the directive and the regulation. Is there anything that could be released from those two and used to push the issue a little further? Dr Theodoros Skylakakis: The only effective thing that we can do is to use the European public prosecutor. The Commission has said that it is bringing forward a proposal next June, but I do not know if it will arrive. The other measures you refer to are very weak. You have to realise that the problem of corruption is not just a problem of morality. I would say that the least of the problem is morality. The problem is that you cannot compete in those countries that are caught in traps of systemic corruption. They are in the eurozone and therefore they are also caught in the trap of non-competitiveness. They cannot change by themselves; their political systems find it very difficult to adapt. Corruption and fraud are devastating their countries. What happens is that as the political systems cannot collect taxes, they raise tax rates and thus create huge black economies.

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Dr Theodoros Skylakakis MEP, European Parliament Special Committee on Organised Crime—Oral evidence (QQ 91-99) Lord Rowlands: Should we not have addressed these problems when applications for entry took place? Dr Theodoros Skylakakis: Should we have avoided various mistakes in our lives? What difference does that make? We now belong to a monetary zone. It is like a ship in a bottle. You can get it in but you cannot get it out. You have to destroy the whole thing in order to get it out. The problem for many countries which have entered the eurozone is that we got in but we cannot get out without destroying ourselves and others. So we need to tackle issues and then we have to be extremely effective. What you are talking about is not effective. That is my problem. It is incremental and it does not work in the situation that we are caught in.

Lord Rowlands: Is it because the criminals are not being incremental? Dr Theodoros Skylakakis: Not at all, and it is not just criminals. When you have extensive corruption, big parts of society are involved. Some 10%, 20%, 30% or 50% of the population may be involved in these activities. They stop being criminal when you reach such percentages, so the need for action is extremely urgent.

Q99 The Chairman: From much of what you say, it seems that you feel that a lot of responsibility lies within the member states. Can you confirm that it is a lack of political will in the member states rather than any lack of will on the part of the Commission to try to do something about fraud, or do you feel that the Commission does not try because it feels that this will not get through the member states? Dr Theodoros Skylakakis: In reality the Commission has taken some very important steps over the past year. The directive on fraud is important, while the OLAF regulation is not as important. The report on corruption that is to be published every two years is an important initiative. But these are all name-and-shame projects and you do not have a real deterrent. No one fears that someone in Europe is going to come and look effectively into his dealings either with European funds or in customs and excise. All over the EU there are huge levels of bribery in customs. If you are interested in corruption and fraud, I would advise you to look at the corruption barometer of Transparency International. It asks actual people all over Europe, including people in the United Kingdom, whether they have had any experience of bribery in their dealings with public organisations and institutions during the past year. You have millions of people answering “Yes”. It is easy and the evidence is all there. No one wants to bring this up because then we will have to do something about it. Indeed, we will have to do very drastic things. The Chairman: That is very interesting. It had not occurred to me that I ought to declare an interest as a member of the advisory council of Transparency International UK. That is purely for our record. I am sorry that we will have to cut this session short because this has been a fascinating conversation. I am sure that I speak for all my colleagues when I say that, if we had the time, we would talk to you for much longer. Thank you very much indeed for asking to see us and for giving evidence. You have given us a number of things to think about and follow up on. We really are extremely grateful.

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Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35)

Professor John Spencer, Professor of Law, University of Cambridge— Oral evidence (QQ 1-35)

Evidence Session No. 1 Heard in Public Questions 1 - 35

WEDNESDAY 31 OCTOBER 2012

Members present

Lord Bowness (Chairman) Lord Anderson of Swansea Baroness Corston Lord Dykes Viscount Eccles Lord Elystan-Morgan Lord Hodgson of Astley Abbotts Lord Rowlands The Earl of Sandwich

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Examination of Witnesses

Professor John Spencer, Professor of Law, University of Cambridge

The Chairman: Thank you very much for coming to meet the Committee and helping us with our enquiry into the European Union's fight against fraud in its finances. For the record, as this is a public session, I point out that Members’ interests are recorded in the Register of Lords’ Interests, and Members with the relevant interests will declare them as we go along. In so far as it may be relevant, I do so as a solicitor with a practising certificate. This session is on the record, is being webcast live and will be accessible via the parliamentary website. As usual, we will send you a transcript of the evidence; although it goes on the website immediately you will have an opportunity to submit any corrections that you wish to make.

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Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35) Having said all that, may I ask you to introduce yourself and make any opening statement if you wish to do so; otherwise we will proceed with the questions. Professor John Spencer: Thank you. I am John Rason Spencer, a professor of law at the University of Cambridge I am deputy director of CELS, the Centre for European Legal Studies, in Cambridge. I am also honorary president of an organisation called the European Criminal Law Association UK, which is the UK branch of a Europe-wide network of lawyers that was brought into being around 20 years ago by the European Commission to try to stimulate interest in the problems of EU fraud. Our organisation interests itself in the EU and criminal law generally, but among our number we have a nucleus of people who have practical experience in prosecuting, defending or generally dealing with EU fraud—which I myself do not. When I saw the list of questions that I thought I would be asked, I circulated them to some of my colleagues in ECLA UK and said, “Help!”. What I say today will depend in part on information from sources whom I hope are reliable. My other involvement in all this, years ago, was to be part of the team that wrote the Corpus Juris project that first recommended a European Public Prosecutor. I was involved in that and can tell you all far more than you ever want to know about the background to it, should you so wish.

Q1 The Chairman: Thank you. Perhaps we can go straight into the questions. In your opinion, how much does fraud and irregularity affect the EU’s budget? Do the statistics that we have give a realistic picture of the levels of the fraud and irregularity? Professor John Spencer: As doctors say, there is a lot of it about, but we do not know how much. The available statistics are almost certainly an underestimate—like recorded crime figures from the police, only more so. The official statistics result from member states carrying out their duty under the treaty—Article 325, I think—to report fraud and irregularities, and different member states have different levels of enthusiasm and different practices about reporting. Before they can report it, they have to know about it themselves, and some of them are less efficient than others in knowing about it. If they report a fraud, they are expected to do something about it, and in some circumstances it may be to repay some money, which may be a further disincentive to report it. So everyone agrees that the reported figures are an underestimate, but no one really knows by how much. There is much discussion about the matter. In preparation for this session, I looked at a study that was done by some investigative journalists for the Financial Times at the end of November and the beginning of December in 2011, which sources tell me is a serious piece of investigative journalism. I was reading it today and I commend it to your Lordships as a useful source of information.

Q2 Lord Anderson of Swansea: Realistically, in any large organisation that spends a great deal of money, public or otherwise, and particularly when two bodies—the Union and member states—are involved, one would anticipate a certain level of fraud. From what you know of the level, both declared and assumed, are you appalled or do you think this is as one might realistically expect from a body of this size? Professor John Spencer: I am not appalled by the level of reported fraud. Newspapers tend to report it in terms of millions with an exclamation mark, but you have to look at it in terms of billions, which it is in relation to. I am more worried about the undetected fraud, although my worry has uncertain edges because, like everyone else, I do not really know how much of it there is.

Q3 Baroness Corston: We have had evidence from the director of Europol to say that VAT criminal groups based in the UK but controlled by the masterminds in Dubai are 152

Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35) known to be actively creating networks of companies throughout the EU to establish fraudulent trading chains. Is any other work being done? What evidence is there of this? Professor John Spencer: I am afraid I cannot help you there; it may be that OLAF could give you some information about it. As far as our authorities are concerned, we hear about them when someone gets caught for something and then there is a prosecution. Rather than bluster, though, I think that I had better say that I just cannot help you further with that. Lord Rowlands: What struck me in the initial briefing, which concentrated my mind on the programmes and how they might be subject to fraud, was that it looks as if the VAT side of things and smuggling is by far the bigger problem. Professor John Spencer: I do not know in terms of sums of money. To divert the question, if I may, it seems to me that one of the reasons why we get so much VAT fraud is that it is a consequence of the way that the VAT system operates. As I understand it, the basis of carousel fraud is the repayment of VAT when goods cross the border, and the non-payment of VAT further up the chain is then reclaimed on the basis that it has been paid. If we altered that, and indeed some other ways in which the taxes that fund the European Union were collected, we would reduce the amount of fraud. I am not expert enough to help you further on that matter, but when I look at some of these issues it reminds me of the fuss at the beginning of the 19th century about the ease with which banknotes could be forged and how the initial reaction of the Government was to make almost even looking at a forged banknote capital, until in the end someone said we could solve the problem more easily by making banknotes that were not so readily forged. I suspect that to some extent problems of EU fraud are problems with the way that the tax system is structured. However, that is speculation; I cannot really take you further.

Q4 Lord Rowlands: Would you suggest that we concentrate on that side as much as on the issue of the programmes? Professor John Spencer: Yes, it is important to look at all aspects of it. Of course it is important to be concerned about seeing that people who commit fraud are punished, but it is also important to structure systems in such a way that the opportunity to defraud them is reduced. Obviously we have to prosecute burglars when we catch them but it is also a good thing to encourage people to put locks on their doors, and similarly with tax systems.

Q5 Lord Hodgson of Astley Abbotts: Professor, you tempted us with the thought that this is an iceberg and that two-thirds of the problem is beneath the surface. The extent to which there is stuff beneath the surface in my experience of organisations depends on the tone and attitude set at the top. As to the admissibility—the blind eye, the nod-nod, wink- wink—what is the attitude of the Commission at the highest level? Is there a rigorous attempt to make sure that fraud and irregularity are unacceptable? Professor John Spencer: I cannot give you a clear answer but my impression is that the Commission is fundamentally honest and deeply concerned about fraud. It publishes a report on fraud to the European Parliament every year, which gives the impression of a body that is seriously concerned about it. My off-the-cuff answer is that it is seriously concerned and it is not a question of slack leadership from the Commission.

Q6 Lord Dykes: Could we dwell quickly on the concept of the vulnerability of certain programmes in the European Union budget system to fraud or irregularities? Is there a particular technical or physical profile for any sectors that might be more vulnerable than others in a special way? Is that noted by your studies? 153

Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35) Professor John Spencer: It is widely said that the structural funds are vulnerable to fraud and the cohesion programme generally. That is partly in consequence of the fact that responsibility for managing them is divided between different levels. That is what I have been told by various people but I am giving you what lawyers would recognise as hearsay evidence to that effect.

Q7 Lord Dykes: Further to that, is there some rough and ready correlation whereby the ratio of the coefficients of control and supervision of these funds is higher in terms of a national Government dealing with the funds than with the Commission itself? Where that is higher there may be prospects of greater fraud? Professor John Spencer: I wish I could answer that question but unfortunately I cannot. I know that, as an attempt to deal with the problem, the Commission in its various manifestations has magnified the complication of the paperwork that has to be filled in to obtain these grants. I know that from once having myself obtained the most minute one. That does not necessarily solve the problem.

Q8 Baroness Corston: Turning to the distinction between fraud and irregularity, the Treasury in its evidence to us said that the Commission considered that irregularities are often the result of genuine errors—for example, not filling out a form—and it defined fraud as, “a deliberately committed irregularity constituting a criminal offence”. Do you agree with those distinctions and do you consider them meaningful? Professor John Spencer: Yes, I agree with them and yes, in principle, they are meaningful. If it is fraudulent in any legal system in a member state, in principle the people responsible are liable to prosecution in the criminal courts—and quite right. It is important to keep a distinction between dishonesty with money and carelessness with money. As to whether the distinction is meaningful, it is blurred to the extent that different member states seem to interpret what they are dealing with differently. There is a surprisingly wide difference between the extent to which different member states report fraud. It would be nice to think that we report so little of it to Brussels because the inhabitants of these islands are so honest. There may be some truth in that but it is more likely the perception of the people who do the reporting. Yes, in principle it is an important distinction but in practice we suspect that it gets blurred. Lord Anderson of Swansea: Is there in fact a continuum because of the attitude of different countries, or is there a sufficient divide because of the necessity to have a guilty mind? Professor John Spencer: That is to say, is there a fundamental difference of principle between fraud and irregularity according to whether there is a guilty mind? Yes there is. The point I was trying to make is that how it gets reported will depend on how what happened was interpreted by the people who had the job of writing the report. I do not want to suggest that people in one country are more inclined to turn a blind eye to fraud than others. I suspect that it is more likely the result of there being no internal protocols on how to deal with particular things.

Q9 Baroness O'Loan: Do you think that the effect of what happens when a member state reports fraud—the recovery of some part of the money—leads to an incentive, if you like, to underreport? Government departments may not wish to be shown not to have handled the funds that were put into their hands as well as they might have done.

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Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35) Q10 Professor John Spencer: I do not know but I strongly suspect it, and other people probably suspect that as well.

Q11 Lord Hodgson of Astley Abbotts: I wanted to ask about the EU’s institutional oversight of the EU’s funds, the different players, the roles of the Commission, OLAF, Eurojust and member states, and the level of co-operation between them. One piece of evidence that we hear from time to time in these committees is how member states often have bilateral relationships, which they operate between each other rather than routing it through the central European organisation, particularly in Europol but also elsewhere. Could you say something about that as well? Professor John Spencer: Not very much, I am sorry. It is said that co-operation is not as good as it could be between member states and OLAF. I have also heard the criticism that OLAF is not proactive about disseminating its work and telling the world what it does. I do not know whether that is really true. It would be interesting to talk to OLAF and ask how far it publicises its work throughout the Union and how far it thinks its work is known. Eurojust is not an investigative body; it is a body set up to try to co-ordinate prosecutions when it turns out that there is a trans-border element in them. Eurojust is reactive and is not a body that exists to exercise oversight over budgetary fraud, although it would sometimes end up trying to help to co-ordinate a prosecution if required.

Q12 Lord Hodgson of Astley Abbotts: I am not very clear from what you are saying whether or not there is a readiness here to use the institutions, including Europol, to make sure the oversight of these funds is appropriate. I get the impression from your answer that it is all a bit, “it might be, it might not be”. It goes back to my question of philosophy. The nature of your answer leads me to believe that there is a good deal of, “Well, we accept that this kind of thing goes wrong here. We allow it and we look the other way. It happens”. Professor John Spencer: I confess to being out of my depth. Any answer that I give you here will be based on hearsay or on hearsay upon hearsay. People say that the main problem is that too many people and too many agencies are involved in trying to supervise the same problem. So there is muddle and confusion rather than dishonesty. Of course, you get dishonest people in every organisation. Of course there have been criticisms of the public prosecution system in certain member states being overtolerant towards certain kinds of fraud. The impression I have is that it is more a question of overcomplication and left hands not knowing what right hands are doing, rather than left and right hands not caring what goes on.

Q13 Lord Hodgson of Astley Abbotts: You said before that your view of the philosophy was underpinned by the annual report, which showed that the Commission was keen on tackling irregularity and fraud. I ask—I could probably look it up myself—whether in the past couple of years employees of the Commission have been dispensed with because of fraud and irregularity? Professor John Spencer: I do not know the answer to that. I am sorry. I would answer it if I could, but I cannot. I can only tell you about the people in the Commission with whom I have worked and the people within OLAF with whom I have worked. I suppose it is as a result of their being interested in dealing with fraud that they give me an impression of great keenness and enthusiasm as well as concern about it. But I can only speak as I find.

Q14 Lord Elystan-Morgan: I wonder, Lord Chairman, whether I could ask Professor Spencer questions about OLAF. They are these. Is OLAF effective? Do the supervision 155

Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35) arrangements work? Does it respect suspects’ rights? Should it remain part of the Commission? In other words, is there not a strong case for it being totally independent of the Commission? I point here to the words of Dr Inge Gräßle, the rapporteur for OLAF, who said, “In February 2009 I counted 93% of all our cases fizzling out in the member states’ justice systems”. That raises two questions: first as to the structural position that OLAF should occupy vis-à-vis the Commission; and, secondly, a far more serious question, whether there is an institution conspiracy amongst member states to render OLAF ineffective. It is a very severe indictment but it comes very much from the statement of the rapporteur. Professor John Spencer: I will try to answer your question, Lord Elystan-Morgan, in two stages. First, is OLAF effective? I am sure that it does the best it can with the staff and the money that it has, which almost certainly is not enough to deal with the amount of fraud. We know, because it tells us, that it has to be selective about which cases it takes up. It has a large number referred to it and it picks up and investigates a smaller number. It is derided as toothless—Private Eye cannot mention OLAF without saying, “The Commission’s toothless fraud-busting agency”. It is toothless in the sense that it can investigate, but then it has to hand the matter over to the legal authorities of the member states to do something about it. It is toothless because the member states have chosen not to give it any teeth. That is the trouble. Hence the pressure coming from OLAF and UCLAF, which was the predecessor body, to create a European Public Prosecutor. The staff in OLAF are very frustrated when they hand a dossier over to a member state where they think they have established a fraud and nothing happens. Sometimes they do not even get a reply, they tell me, and sometimes they get a reply saying, “Well, we are not doing anything about it”. So it is not effective to the extent that it does not have the powers to be effective. As to whether it would be in a better position if it was separated from the Commission institutionally, there are two views. There are those who say, “Yes, it would. Obviously, if it were independent then it would do better”. But others with experience of OLAF say, “Actually it would not. It can be functionally independent of the Commission and able to do its job whilst still being structurally part of the Commission”. The counterargument is that if it was institutionally separated from the Commission it would then have greater difficulty than it does at the moment in working with the Commission in sorting out internal frauds. I have heard two views and it is mainly the academics who say on principle that it should be separated and it is the practitioners who say that in practice it works all right and you would make it worse if you separated it.

Q15 Baroness O'Loan: The OLAF report for 2011 appears to indicate that of the OLAF budget some 4.5% is spent on investigations and the other 95% is spent on things like buildings, IT missions, supervisory committees and other management staff. I just wondered whether you had any comment to make about the effectiveness in terms of resource allocations in the Commission. It may be a question that it is not fair to ask. Professor John Spencer: If I were a college bursar rather than a college professor I would have a go, but I have got to pass on that one. I am sorry.

Q16 Lord Anderson of Swansea: Professor Spencer, it is said that divided responsibility is no responsibility. There is clearly a danger of a blame game between the member states and the Commission in respect of fraud. We have heard, for example, that the responsibility for detecting fraud and irregularities, “falls in the cracks between the member states and the European Union”. Therefore, do you agree that as the individual states are responsible for the vast bulk—80%—of the spend of EU funds, they do enough to 156

Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35) combat fraud and irregularity? On the evidence, do you see any divide between the practices of, let us say, Sweden and certain countries further south? Professor John Spencer: I have asked my sources about this and they all say that it is variable between member states. Looked at in the round, no, the member states do not do enough. Looked at individually, some do a lot and some do a lot less. There seems to be a difference between them. It is widely suspected that the different rates of reported fraud from the member states indicate a difference in the level of inactivity in looking for fraud in those member states.

Q17 Lord Anderson of Swansea: Not on definitions? Professor John Spencer: Yes, maybe definitions as well. But also whether their system flags them up, as well as whether anybody actually looks for them within the member state.

Q18 Lord Anderson of Swansea: Do you agree that there is this no-man’s land of a crack between member states and the EU? If so, can it be filled? Professor John Spencer: I agree that there is a problem with too many non-cooks spoiling the broth. Do I think that the problem could be solved? It ought to be possible to find a means of solving it. I am, of course, one of the people who favour the idea of creating a European Public Prosecutor who would actually have the power to prosecute. The European Public Prosecutor idea was initially presented as a solution to the problem of trans-border frauds but it is equally, in the view of many people, a necessary measure to deal with member states which are slack about prosecuting frauds committed within their own boundaries. Lord Anderson of Swansea: Perhaps you could make submissions to the Daily Mail on that. Professor John Spencer: If I thought they would be interested, yes.

Q19 Lord Rowlands: Why does this issue create such passion? Professor John Spencer: The European Public Prosecutor has got deeply confused in this country. Somehow or another, the idea got abroad when the Corpus Juris project was published that there was a Brussels plot to overthrow the common law. It was presented to the world, basically in those terms, by the Daily Mail and the Daily Telegraph and has sunk into the political consciousness of quite a lot of people that this is so, most unfortunately. Lord Rowlands: So you failed to get your message across, then. Professor John Spencer: We absolutely did not get it across. I keep saying it but people do not listen. I have just written an article all about this, which is going to appear in the next volume of the Cambridge Yearbook of European Legal Studies. I will make it available to members of the committee, if they would like to see it. The Chairman: That would be very helpful, thank you. Is it fair to say while we are on this topic that while there is a lot of talk about the European prosecutor's office, there have never been detailed proposals brought forward? People do not know what they are criticising yet—is that right? Professor John Spencer: That is correct. I helped to produce a model of one in the Corpus Juris project, which was relatively lightweight. It would have had a director in Brussels and then national European Public Prosecutors, who were seconded members of the national prosecution services, armed with uniform procedural powers for investigating and bringing 157

Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35) prosecutions in all member states. Since then, there have been discussions about what kind of model of European Public Prosecutor might be put forward. It is said that the European Commission will produce a firm proposal for one sometime next year but we do not know whether it will be a macro or a mini version of it. It could be an absolutely minimalist version, which is simply Eurojust being given the power to start prosecutions, or the sort of slightly heavier version, as in the Corpus Juris proposal. It could theoretically be some new, big and heavy expensive institution with new people everywhere. I suspect that for financial reasons, if no others, it will not be the third version. It is quite true to say that we have not had a clear model of one. What has been presented in the press in this country is that the EPP will be a prosecutor in the Napoleonic system, with all the misconceptions about the Napoleonic system as being one where you are presumed guilty, in which judges and prosecutors have no differentiation between them, where you do not have habeas corpus or Magna Carta, and where you can be locked up forever without trial, and so on—unlike in this country. I am glad that you laugh but it is not a joke, because that is how it is taken. The Chairman: I think it is very serious but it is an uphill struggle. The Telegraph today refers to EU law in respect of a matter which has absolutely nothing to do with the EU; it has to do with human rights and the European Convention on Human Rights. But they do not listen—or do not want to listen.

Q20 Lord Rowlands: Would any of the proposed models you are talking about actually undermine the common law system? Professor John Spencer: I do not think so, least of all in England and Wales. Some resistance to the idea comes from countries that have a single, monolithic public prosecutor. This country is unusual in that we divide the prosecuting function: it is between the CPS, which does the cases that the police solve; the Serious Fraud Office, which is separate but with the Attorney-General at the top and does serious frauds; then we have the Health and Safety Executive, which does industrial accidents, and a whole range of different government departments that bring their own prosecutions. In addition to that, you or I or anybody else can prosecute anybody else because the right of private prosecution is preserved. Against that background, I would have thought just allowing a European Public Prosecutor to have a go does not disrupt anything.

Q21 Lord Rowlands: You emphasised the issue of the Daily Mail and the Telegraph, but are there equally opponents in Europe itself—in other countries—to the idea, or is it purely the UK? Professor John Spencer: It seems to be particularly the UK and, to some extent, the Republic of Ireland. Behind it is: “The common law is moral and just and we have the accusatorial system, whereas in continental Europe they have the inquisitorial system, which was invented by the Pope and perfected by Napoleon, and is immoral and unjust”. Lord Rowlands: So it is a peculiarly UK problem— Professor John Spencer: As far as I know, this perception that it is a terrible threat is a UK and Republic of Ireland issue. That said, some member states do not like the idea of a public prosecutor from Brussels interfering with their affairs, but that is a different objection.

Q22 Lord Dykes: There is at my disposal ample research from the Library here, and elsewhere, about the famous stories in newspapers—you mentioned particularly examples in the Daily Telegraph, the Daily Mail and the Daily Express but there are others as well 158

Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35) sometimes—with banner headlines about how the wicked European Commission is going to do something to the UK. Those stories, almost without exception, turn out to be totally untrue. Then the Commission gives a coherent explanation of the problem and the newspapers themselves never refer to it again. They just go onto the next one.

The poison has affected the public because a lot of people feel, as you were saying, that there is something different in Britain and that we are being persecuted. Would you welcome OLAF, when it complains about not getting a response from member states, being able to brief the press of the relevant country itself, so that people know the other side of the coin—the genuine European story? Professor John Spencer: Yes, I certainly would. It is most interesting to read the Commission’s UK present official Euromyths website. Maybe the members of the Committee have read it. I looked at it when I was writing the article which I mentioned a minute ago. It contains 500 Euromyths of the most extravagant sort such as: the EU is planning to ban corgi dogs as kept by Her Majesty the Queen; and the EU has a plan to make grieving relatives liquidise their deceased loved ones and flush them down the drain, to name but two. It would be very helpful to the debate if only Brussels could say publicly and loudly in some shape or form, “We have no plan for a unified European criminal justice system”. It has become widely believed that it has. It has never publicly said, “No we have not”. In fact, a lot of the third pillar measures around which there is the discussion about exercising the Protocol 36 opt-out at the moment are measures designed to enable the different member states to continue with their different criminal justice systems without having to harmonise or unify anything. An opposite plan proposes mutual recognition as the cornerstone for criminal justice in Europe, which means toleration of differences, not a top-down vertical approach.

Q23 Viscount Eccles: Would not the Commission take the general line that we are not here to predict the future because it is a matter ultimately for the Council of Ministers and the member states and we are the servants and should not be telling them what is going to happen next because that is not our job? Professor John Spencer: Yes, I am sure that is correct, but at the same time when they advocate the idea of a European Public Prosecutor, it would be a good thing if they would write in big red letters all over it, “Note, this is not a plan for a unified criminal justice system”.

Q24 Lord Hodgson of Astley Abbotts: I just want to talk about asset recovery. The asset recovery record for SOCA in this country is pretty dismal. I suspect this is no better. It is rather hard to understand the OLAF report since it was not clear whether the financial penalty meant asset recovery or additional fines. In four years the figure varies from €1.8 million to €1.5 billion. The scale seems to go up and down pretty substantially. Could you say a bit about the asset recovery plans and effectiveness? A propos of OLAF and its impact, the report is written in a style that is least likely to offend anybody in the sense that the list of judicial actions is done in alphabetical order not by a league table of offences committed— the sort of things that would move the dial in showing people that you meant business as opposed to being toothless. Surely, they have the power to write the report in the form they wish. Professor John Spencer: I am not sure how helpful I can be on this. OLAF obviously cannot shout louder than the powers that it has and cannot say, “We’re going to sort this out”. The basic flaw with OLAF is that it does not have any powers to do any more than investigate 159

Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35) and then send a file to a member state. The OLAF report in 2011 is a bit different in style from that of 2010. This reflects the fact that there has been a new director and a reorganisation to try to make itself more effective. No, I cannot say anything further intelligible or helpful about that. As for asset recovery, apart from sharing the general feeling that asset recovery is poor in these matters, I cannot add anything further of use. I just noted that in the study done by the Financial Times and the British Institute for Investigative Journalism there was a bizarre case about £3 million being swallowed up by some presumptively fraudulent Italian company and zero money being recovered from anybody after a very long investigation. I suspect there are other cases of that sort and every one of them is obviously one too many. One of the problems with asset recovery is what you do when the assets have been dissipated in terms of tracing the money.

Q25 Lord Hodgson of Astley Abbotts: They have rarely been as dissipated as the asset recoverer likes to tell you they are. They are somewhere. They have very rarely all been spent. They are hidden. Determined follow-through and follow-up can have a miraculous effect if there is the will and the drive to do it. Everything you are telling me leads me to believe that there is no real will to do anything about this. Professor John Spencer: I am not so sure that it is an absence of real will. I suspect that where there is a case of the transnational moving of money around there is also the problem of legal machinery being effective to bring the money back across borders. There is an EU framework decision designed to provide for mutual recognition of confiscation orders. I think the UK is in the clean as regards helping other countries to enforce their confiscation orders here. But I think I am right in saying that the possibilities of enforcement in other member states are not always as good as they ought to be. If you are talking about other parts of the world beyond Europe to which the money can be removed, then, of course, there are even greater difficulties getting it back.

Q26 Earl Sandwich: We move on to the UK at this point, in particular to agricultural funding. I declare an interest as my wife and I receive countryside stewardship funding from time to time. I think there is a perception, which you do not have to confirm, that we in northern Europe are squeaky clean as regards agriculture and the problem is all happening down somewhere in the Mediterranean. This chimes with the Commission’s annual report which says that the big spending states continue to report a very low number of irregularities as fraudulent. But the Treasury has told us that fraud and irregularities in the UK are taken very seriously. To your knowledge how widespread is the fraud and how effective are the authorities here in detecting and combating it? Professor John Spencer: I do not really know the answer to that, but what people say is that we have a problem here with two things. First, prosecutions for fraud in particular sectors will be done by different government departments, and it may only incidentally be revealed that the fraud impacted on European finances. Secondly, we do not have a system under which the victim of an offence can be joined in the proceedings as what the French call a partie civile. I suspect, although I do not know, that part of the problem here is that different prosecutions are brought against people without any official label ever being attached and recorded statistically as being fraud on EU finances. I think the fragmentation of responsibility for prosecutions for certain types of economic offence is probably something to do with the fact that we seem to have a low level of reported fraud. It may be that, actually, our authorities have been energetic in prosecuting people who have committed frauds which have impinged on the European budget, but it may not have reached the level of being reported as a fraud in the country’s annual report. 160

Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35) I was reading the Commission’s annual report, The Fight Against Fraud, and I saw that a questionnaire had been issued to all member states. It would be interesting to chase up the UK’s official response to the Commission's questionnaire last year see if we can get the breakdown of the figures that we returned and any further information that might be in them. I think that the Commission’s report comes together with several working papers, which are probably also available online, and it would be interesting to look further at them. I fear that I have not done so, but that sounds useful avenue of inquiry.

Q27 Lord Anderson of Swansea: Are we alone, with the Republic of Ireland, in having a diverse prosecuting authority? Professor John Spencer: I believe so. Some member states have systems under which you can have a private prosecution of some sort, but I think that I am right in saying that in all the other member states you essentially have a single public prosecutor who will bring the proceedings for either all or nearly all types of prosecution—as in Scotland, of course.

Q28 Lord Rowlands: In quite a bit of the evidence that we have received so far, there is a suggestion that the culture of the Commission’s programmes is that all the parties have a vested interest in saying that they are working, succeeding and the outcome is good, so there will never be a tradition of whistleblowing or exposing. Do you think that that culture exists? Professor John Spencer: I have yet to hear of an organisation that does not seek to justify itself to the rest of the world. Cambridge University is the most wonderful and perfect creation in the academic universe, I can assure you. Lord Rowlands: But people do blow whistles occasionally. Professor John Spencer: Yes, people do, sometimes things happen and sometimes OLAF conducts an investigation.

Q29 Lord Elystan-Morgan: In relation to the recovery of assets unlawfully obtained, is there any mileage in the concepts that we have developed in the past 20 years in our criminal law? For example, in the question of a criminal bankruptcy order, the presumption as to origins and how certain assets were begotten? It is a complicated and rather comprehensive structure, as you know, in the past 20 years, in our case. Is there any hope of that system working in Europe unless they have some pattern not dissimilar to that? Professor John Spencer: The problem here is that all the legal systems of all the member states are independent; they do it their own way. Just as they have their own prosecution systems, with their own rules and their own virtues and the merits, so their civil laws have their own way of doing it. It probably would help the recovery of assets that disappear with EU fraud if there were a uniform procedure as tough as ours that was applicable throughout the whole of the European Union, but I imagine similar resistance, and that similar years of work would be needed to try to set one up as needed for the European Public Prosecutor.

Q30 Viscount Eccles: I think you have driven a great hole into my question so I will paraphrase it. Is it the case, therefore, that even in this country we are not much interested in constructing a system which enables us to say what proportion of the fraud that is investigated has a European connection?

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Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35) Professor John Spencer: It is certainly my impression that that is so. That is an impression I gather from talking to various people who are closer to dealing with those matters than I am myself.

Q31 Viscount Eccles: So it follows that the unwillingness to create a pan-European system, whether a prosecutor or whatever the processes that would be followed, is not confined to less conforming member states, it applies to us as well? Professor John Spencer: I think it applies to us as well in as much as a number of different parts of the criminal and civil justice system are involved and nobody really recognises that fraud on the EU budget is particularly their business or particularly serious.

Q32 The Chairman: I should probably know the answer, but we keep asking you questions about investigating this at the European level and at the level of member states. Is it correct that some of the funds in many member states are actually dealt with at a subnational level? Professor John Spencer: I am afraid I cannot answer that question. I am sorry; I should know. Lord Rowlands: Yes there is a separate organisation in Wales.

Q33 The Chairman: I was hoping that Professor Spencer could confirm that or not. My impression is that some of these funds will be dealt with by regional, provincial or local governments. I am not sure who is legally responsible for them to the European Union, but the administration of them will be dealt with at a lower level, so it is not even quite as simple as EU/member state Professor John Spencer: I believe that is the case, yes. I cannot give you chapter and verse and examples, but it is certainly my impression. Again, I commend the study done by Cynthia O’Murchu for the Financial Times, which has a lot of practical examples of all that. Lord Hodgson of Astley Abbotts: It is not a defence under the UK Bribery Act to say that the bribery is done by a subsidiary. The Chairman: I was not suggesting that it was a defence. I was suggesting that we must not oversimplify this, because more than two levels are involved in all this. Lord Hodgson of Astley Abbotts: But it goes through a national Government at some point, and therefore they have some responsibility for it.

Q34 Lord Anderson of Swansea: You have said that we cannot obtain a total picture of the fraud because much of it may not be considered as fraud against the EU by the various prosecuting authorities. In your judgment, would there be some merit in insisting that all fraud cases where there is an EU element should be so reported? Professor John Spencer: Yes I think there would; that would be a good idea. It would be useful to have that information. There is another general matter to do with the extent of fraud, which is moving back to the question of fraud which never gets reported to any authorities at all or dealt with even under another name. We are dealing with what is usually called a victimless offence, so we do not even have the counter-check that you have with the British Crime Survey, which can ask a range of the population if they have been a victim of an offence. With fraud against the

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Professor John Spencer, Professor of Law, University of Cambridge—Oral evidence (QQ 1- 35) European Community, there is no immediate person who has lost out usually, so it makes it hard to know what the dark figure is. I am sorry, that was not actually answering your question.

Q35 The Chairman: Is there anything that you would like to add, Professor Spencer, or anything that you feel we should have asked you that we have not; and if we have not asked you, would you please answer it? Professor John Spencer: I think not. I have already gone as far as the limits, and beyond the limits, of my actual knowledge. I am very honoured that you asked me to come, and I apologise for the inadequacy of my answers to some of your questions.

The Chairman: Not at all; it has been most helpful. Thank you very much indeed; we are very grateful.

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HM Treasury—Written evidence

In response to the Committee’s call for evidence for the inquiry into policies and actions to combat fraud against the EU’s finances, please find the Government’s response in the annex to this letter.

I am copying this letter to: Lord Boswell, Chairman of the House of Lords European Union Committee; William Cash MP, Chairman of the House of Commons European Scrutiny Committee; Theresa May MP, Home Secretary; Chris Grayling MP, Secretary of State for Justice; David Liddington MP, Minister of State at the Foreign and Commonwealth Office; and Oliver Letwin MP, Minister of State at the Cabinet Office.

Yours sincerely,

GREG CLARK MP FINANCIAL SECRETARY TO THE TREASURY

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ANNEX: UK Government response to the House of Lords European Union Committee’s call for evidence for its inquiry on EU policies and actions to combat fraud against the financial interests of the EU. This groups together some of the issues in the call for evidence issued by the Sub-Committee.

Overview:

1. The UK Government takes the issue of fraud extremely seriously and is committed to tackling it, at both the EU and national level. We welcome the work of the Committee on this and look forward to seeing the Committee’s report with recommendations.

2. The UK Government’s top priorities for action on this are:

• The Government believes the Commission’s priority, and that of the Member States, should be focused on fraud prevention in the first place. To make real progress, the positive steps already taken to simplify rules in the new EU Financial Regulation need to be followed through in negotiations on the new Multi-Annual Financial Framework (MFF) regulations. Complex rules and regulations need to be simplified, but not weakened, to make the process for Member States to comply with the requirements of good financial management more effective, and to identify when they are falling short. Audit activities should also be more proportionate and targeted at those areas where EU funds are most vulnerable to misuse. Finally, performance management should be improved, to make sure funds are directed only to those areas where they can be effective and correctly disbursed.

• Fraud and irregularities in the UK are taken seriously and pursued vigorously. Capacity to implement the programmes and ensure detection of fraud or irregularity can vary across Member States. However, minimum standards have been set by the European Court of Auditors to which the Government would like to see all Member States adhere.

• The European Anti-Fraud Office (OLAF) should remain an independent entity. The Government has pushed for this to be protected in Council discussions on the reform of the Regulation that governs OLAF. • The onus is on the Commission to articulate the specific obstacles to combating fraud against the EU budget and how they see any new European Public Prosecutor (EPP) as helping to resolve those.

In detail:

Irregularity and fraud:

3. The Commission define an irregularity as when a beneficiary does not comply with the EU rules and requirements linked to the spending of EU funds, with a potentially negative impact on EU financial interests. The Commission considers that irregularities are often the result of genuine errors e.g. not filling out a form correctly, or not respecting the proper procedures for the tender procedure. The Commission define fraud as a deliberately committed irregularity constituting a 165

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criminal offence. When reporting an irregularity to the Commission, Member States must indicate whether any fraud is suspected or established in each case. The Commission also define suspected or established fraud as "irregularities reported as fraudulent".

4. EU programmes will always be vulnerable to fraud, and in some cases the management and control culture in a Member State also increases the vulnerability of a programme to fraud. EU programmes can be made safer through improved terms and conditions, controls and enforcement; and one way of reducing vulnerability would be for the Commission to support and nurture management and control systems already existing within Member States.

5. The Commission in July 2012 issued its Fight Against Fraud Annual Report 2011. This assesses the extent to which EU funds or revenue of the EU budget are at risk of misuse because of fraudulent or non-fraudulent irregularities and to explain what is being done to address the issue.

6. The report shows that there was a general decrease in 2011 compared to 2010 in both irregularities reported as fraudulent and irregularities not reported as fraudulent, in terms of both the amount of euros and number of cases. 7. In terms of the estimated financial impact of irregularities reported as fraudulent, the report shows that for total expenditure, this decreased from EUR 478m (1,000 cases) in 2010 to EUR 295m (507 cases) in 2011.

8. Breaking this down by sector: for agriculture, this increased, from EUR 69m (414 cases) in 2010 to EUR 77m (139 cases) in 2011; for cohesion policy, this decreased from EUR 364m (464 cases) in 2010 to EUR 204m (276 cases) in 2011; for pre- accession funds, this decreased from EUR 41m (101 cases) in 2010 to EUR 12m (56 cases) in 2011; and for direct expenditure, this decreased from EUR 3.6m (21 cases) in 2010 to EUR 1.5m (34 cases) in 2011.

9. In terms of the estimated financial impact of irregularities reported as fraudulent on total revenue (traditional own resources), this decreased from EUR 165m (883 cases) in 2010 to EUR 109m (723 cases) in 2011.

10. In terms of the estimated financial impact of irregularities not reported as fraudulent, the report shows that for total expenditure, this decreased from EUR 1,326m (9,349 cases) in 2010 to EUR 1,216m (7,001 cases) in 2011; and for total revenue (traditional own resources), this increased from EUR 253m (3,861 cases) in 2010 to EUR 278m (3,973 cases) in 2011.

11. In the UK, the National Fraud Authority (an executive agency of the Home Office) publishes the Annual Fraud Indicator report. The latest report, published in March 2012, estimates that the current level of fraud suffered by the UK public sector amounts to approximately £20.3 billion per annum.

Fraud and organised crime:

12. Fraud is a significant element of the organised crime threat, either as the primary activity of an organised crime group or as an enabler or funding stream for other 166

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serious crimes. The types of fraud that these groups might be involved in include: tax and benefits fraud; retail banking, insurance, mortgage and telecommunications fraud; and mass marketing fraud. The National Fraud Authority’s Annual Fraud Indicator report estimated that the level of fraud perpetrated by organised criminals now stands at £9.9 billion.

Role of the Commission:

13. The Commission in June 2011 issued its Anti-Fraud Strategy. The strategy aims to update and modernise the way fraud against the EU budget is tackled within the Commission with the view to ensure that the EU budget is managed in line with the principles of sound financial management, including the prevention of and fight against fraud.

14. The strategy aims to: improve and update fraud prevention, detection, and investigation techniques; recover a higher proportion of funds lost due to fraud; and deter future fraud through appropriate penalties.

15. The main methods towards this include to: introduce anti-fraud strategies per sector in the Commission; clarify and enforce the different responsibilities of the various stakeholders; and ensure that these strategies cover the whole expenditure cycle, and that anti-fraud measures are proportionate and cost-effective.

16. The Government believes the Commission’s priority, and that of the Member States, should be focused on fraud prevention in the first place. To make real progress, the positive steps already taken to simplify rules in the new EU Financial Regulation need to be followed through in negotiations on the new Multi-Annual Financial Framework (MFF) regulations. Complex rules and regulations need to be simplified, but not weakened, to make the process for Member States to comply with the requirements of good financial management more effective, and to identify when they are falling short. Audit activities should also be more proportionate and targeted at those areas where EU funds are most vulnerable to misuse. Finally, performance management should be improved, to make sure funds are directed only to those areas where they can be effective, and correctly disbursed.

Role of Member States:

17. Under EU law, Member States have primary responsibility for preventing, detecting and following up on irregularities and fraud. They are responsible for collecting EU budget revenue (e.g. Traditional Own Resources) and for managing, with the Commission, almost 80% of EU expenditure.

18. To further protect against irregularities and fraudulent activities, the Commission checks whether the national administrative practices are in line with EU rules, and whether the Member States’ control systems are working properly. The Commission also controls whether all substantiating documents are provided and if they comply with EU requirements. In addition, the Commission may carry out on-the-spot checks and inspections to verify Member States' adherence to the rules.

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19. With regards to Structural and Cohesion Funds, Member States are initially responsible for the day to day management of expenditure programmes. At Member State level, the Managing Authority, Certifying Authority, and Audit Authority each have specific responsibilities for management and control of programmes and are responsible for detecting irregularity and fraud, and are supervised by the Commission under shared management arrangements. From a UK perspective, the Government believes that co-operation between the EU authorities and the Member States can be an effective way of maintaining sound management and financial control of the operational programmes.

20. Fraud and irregularities in the UK are taken seriously and pursued vigorously. Capacity to implement the programmes and ensure detection of fraud or irregularity can vary across Member States. However, minimum standards have been set by the European Court of Auditors to which the Government would like to see all Member States adhere.

21. HMRC is one of several UK organisations that identify and tackle EU Own Resources fraud. It does this as part of its overall compliance and law enforcement efforts. HMRC takes a risk-based approach to compliance, and dedicates resources to the most serious frauds, allowing for coverage across different regimes and fraud types.

Role of the European Anti-fraud Office (OLAF):

22. OLAF investigates fraud against the EU budget, corruption, and serious misconduct within the European institutions, and develops anti-fraud policy for the European Commission. Its mission is to protect the EU budget, and thereby taxpayers' money, against fraud, and it has three main tasks. First, OLAF protects the financial interests of the EU by investigating and combating fraud, corruption and any other illegal activities, working closely with its counterparts in Member States. OLAF opened 178 cases in 2011, compared to 225 cases the year before. Second, OLAF investigates serious matters relating to the discharge of professional duties by staff members of the EU institutions that could result in disciplinary or criminal proceedings. Third, OLAF supports the Commission in the development and implementation of fraud prevention and detection policies.

23. Member States, OLAF and other parts of the Commission work together to carry out the range of activities necessary to identify and investigate customs Own Resources fraud and recover duty. OLAF’s role focuses on large-scale misappropriations, usually affecting several Member States. On customs, they request inquiries into specific suspected frauds (in addition to actions initiated in the UK). HMRC identify related traffic or businesses in the UK and arrange for appropriate actions, such as an inland assurance visit to a company by HMRC or a frontier intervention by UK Border Force, with results reported to OLAF. Sometimes OLAF lead ‘missions’ to third countries associated with particular issues in teams with officers from affected Member States, collecting information to use as evidence in recovery of duty by the Member States.

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24. In March 2011, OLAF launched an internal review process, focusing notably on improving the organisational structure of OLAF and its investigation process. The outcome is a new structure that reduced overheads and increased the number of staff assigned to investigations, and it also resulted in a new set of investigation policy priorities being set.

25. Also in March 2011, the Commission issued an amended proposal to make changes to the Regulation that governs the way OLAF carries out its work, focused on achieving better operational efficiency and improved governance. The proposal foresees significant changes in investigative procedures and procedural guarantees. The Government’s position is that OLAF should remain an independent entity and the Government has pushed for this to be protected in Council discussions on the reform of the Regulation that governs OLAF.

Role of Eurojust:

26. The role of Eurojust is set out in Council Decision 2009/426/JHA. Its core purpose is to support cooperation between Member States in cross-border criminal investigations and prosecutions, particularly in cases involving multiple jurisdictions. This can involve advising on the requirements of legal systems, supporting the operation of mutual legal assistance (judicial cooperation) arrangements, bringing together national authorities in coordination meetings, and providing funding and technical support to joint investigation teams.

27. Whilst Eurojust’s remit covers all serious crime, particularly when organised, data suggests that Eurojust’s involvement in fraud cases is on the rise. Their 2011 annual report shows an increase of involvement in fraud cases from 204 cases in 2010 to 218 cases in 2011. Also, the number of coordination meetings held by Eurojust in fraud cases increased from 17 in 2010 to 58 in 2011. It is up to the National Members at Eurojust, together with their operational partners, to decide where their resources are best deployed.

Role of a European Public Prosecutor (EPP):

28. We understand that the Commission is undertaking an impact assessment on the creation of a European Public Prosecutor (EPP), with the intention of bringing forward a proposal in 2013. The onus is on the Commission to articulate the specific obstacles to combating fraud against the EU budget and how they see the EPP as helping to resolve those.

September 2012

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HM Treasury —Oral evidence (QQ 208-226)

Evidence Session No. 12 Heard in Public Questions 208 - 226

WEDNESDAY 16 JANUARY 2013

Members present

Lord Bowness (Chairman) Lord Anderson of Swansea Baroness Corston Lord Dykes Viscount Eccles Lord Elystan-Morgan Lord Hodgson of Astley Abbotts Baroness O’Loan Lord Rowlands Earl of Sandwich Lord Stoneham of Droxford

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Examination of Witnesses

David Gauke MP, Exchequer Secretary to the Treasury, Jonathan Athow, Director of Knowledge, Analysis and Intelligence, HMRC, and Ian Stewart, Director of VAT, HMRC.

Q208 The Chairman: Mr Gauke, good afternoon and thank you very much for coming to this meeting of the Justice, Institutions and Consumer Protection Sub-Committee of the House of Lords European Union Committee. As you know, we have been conducting our Fight Against Fraud on the EU Finances inquiry. As a matter purely of form, I will point out to you publicly and on the record that our various interests are recorded in the Register and that any relevant interests will be declared at the time. The session is on the record and is being webcast live. It will be accessible via the parliamentary website. As you know, we will

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HM Treasury —Oral evidence (QQ 208-226) send you a transcript so that you can check for and correct any inaccuracies—but it will go straight on the parliamentary website immediately after this session. Again for the record, perhaps you would formally introduce yourself and your colleagues before we move on to questions. David Gauke MP: Certainly. First of all, apologies for running a few minutes late; we had a four o’clock vote. I am David Gauke, Exchequer Secretary to the Treasury. With me are two officials from HMRC. Jonathan Athow is director of KAI: Knowledge, Analysis and Intelligence. Ian Stewart is a specialist on VAT matters. Both will be able to help me this afternoon on technical issues relating to VAT and, more widely, to fraud.

The Chairman: Thank you. We do not want to labour the point, but an answer on this would be helpful. The Committee was somewhat puzzled about why we were not able to have the benefit of a briefing from officials earlier in the process of our inquiry. I think that that was agreed in principle, but officials withdrew. I am not putting the blame on you, Minister, because you are here, but you will know that it is somewhat unusual, in inquiries of this kind, that the Chairman of a Select Committee had to write to the Chancellor, Mr Osborne, before we were able to arrange your visit to see us, with your officials. I wonder what it was about this inquiry that made all this so difficult. David Gauke MP: I certainly do not want there to have been any discourtesy to this Committee. I am sorry if that impression was given. The explanation as I understand it is that this Committee is looking at fraud affecting EU finances. The advice that officials gave was that VAT fraud was not so much a fraud on EU finances as on UK finances. That was the point that HMRC officials were trying to convey. Of course we take VAT fraud very seriously, but we did not see it principally as a matter relating to the EU. Of course there is an impact on EU finances, but 97% of the money goes to the UK Exchequer. That was the intention of the communication. I am sorry if any discourtesy was perceived as a consequence. The Chairman: We will come to the question of VAT fraud in a minute.

Q209 Lord Anderson of Swansea: Minister, was the refusal to appear taken to, and approved by, Ministers? David Gauke MP: As far as I can recall I was not aware of it, but I would have to check.

Lord Anderson of Swansea: Is it not a little unusual, and contrary to normal practice? David Gauke MP: As I say—

Lord Anderson of Swansea: Let me finish, please. Is it not contrary to normal practice for civil servants to take a decision on whether to appear before a parliamentary Committee? David Gauke MP: As I say, I would have to check—

Lord Anderson of Swansea: Should you not have checked beforehand? David Gauke MP: —the precise circumstances. The point that was made by officials was that VAT fraud is not a fraud on EU finances. That was why the advice was that a focus on that issue—

Lord Anderson of Swansea: The advice to you?

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David Gauke MP: The advice to this Committee, as I understand it, was that that was outside the scope of the investigation. However, as you can see, I am here, the officials are here and we are keen to assist the Committee in whatever way we can.

Lord Anderson of Swansea: But with respect, you are in charge of the department. Are you content with the fact that your civil servants took a decision in relation to an appearance before a Select Committee without reference to you? David Gauke MP: The position was that they provided advice in good faith as to the relevance—

Lord Anderson of Swansea: But not advice to you? David Gauke MP: The advice was to the Committee. To some extent perhaps there has been, if not a misunderstanding, then crossed wires. As I understand it, officials were saying that this was not a matter of EU finances. Clearly the Committee was not satisfied with that view and interpretation. But there was no hard and fast refusal to have anything to do with the Committee—as is demonstrated by the fact that I am here and the officials are here.

Lord Anderson of Swansea: There was a refusal. Will you ensure that in future you or another Minister is consulted before there is what could be construed as an insult to a Committee? David Gauke MP: Well, I certainly would not want it to be construed that there was any insult to the Committee. I will take that away. No insult was intended. As I said, my understanding was that officials were seeking to persuade the Committee that this was outside the scope of the investigation. If that has come across as a refusal to engage with the Committee, I am sorry. The Chairman: We will move on to VAT fraud after Lady Corston’s question.

Baroness Corston: Thank you, Lord Chairman. In 21 years in Parliament I have never come across such a refusal. Was not Mrs Thatcher right when she said that officials advise but Ministers decide? What is happening in the Treasury that allowed such a decision to be taken? Surely any elected or appointed Member of Parliament knows how important it is to refuse to appear before a Select Committee—because certainly I for one took this as an outright refusal. David Gauke MP: As I said, I am sorry that that has been the perception. Lord Anderson of Swansea: It was not perception but actuality. David Gauke MP: It is the case that VAT fraud is essentially a domestic matter. This is an investigation into EU finances. Officials made that view clear, but there are officials and a Minister here today to discuss this matter.

The Chairman: We will move on, Minister. I am afraid that some of the questions, despite what you said, relate to VAT. Perhaps when they have been asked you will begin to understand why we wanted to pursue them. All I will say in conclusion to our opening exchanges is that perhaps 40 minutes of briefing with your officials could have saved you however long it will take this afternoon to prove the point that you are seeking to make, about which we are not yet satisfied, that there is no connection between the two. David Gauke MP: I think that we will all agree on that point by the end of the afternoon.

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Q210 Viscount Eccles: I cannot resist wanting to know, at least before the end of the session, whether the department’s opinion is still that VAT is outside the scope of our inquiry. It is quite an important point. If it is going to be argued that it is, it should be properly argued so that we can see the argument. However, at the moment my question is that VAT fraud seems to be pretty prevalent. Of course, it involves more than a single transaction. Often it involves more than one member state. Could you explain this type of fraud and the Treasury’s attitude to it? David Gauke MP: You are right to say that VAT fraud is significant. HMRC estimates that in totality it makes up about £5 billion a year. To put that in context, that falls within an overall tax gap of something like £32 billion a year, so it is a significant amount. There are various aspects to VAT fraud. Some of it is simply failure to declare particular transactions, but some of it—I suspect that this is the focus of the Committee—is on Missing Trader Intra-Community fraud, of which there are broadly two types. One is carousel fraud. I think that the Committee has had a briefing outlining that. I will ask Ian to say a word or two to describe it more fully. Essentially it is a circle of transactions whereby one participant claims for recovery of the VAT that they have apparently incurred, but no VAT is ultimately paid to the Exchequer. The second type of MTIC fraud is acquisition fraud, which is not circuitous as such but does mean that no VAT is ultimately paid on a transaction when it should be. That issue has been a problem for some years. At its peak, HMRC estimates that it was costing something like £3 billion to £4 billion a year—this was around 2006. The most up-to-date estimate is that it is continuing to cost us between £0.5 billion and £1 billion a year. Clearly, significant progress has been made in tackling MTIC fraud through measures such as the reverse charge. Again, we can talk about the details of what that involves. Clearly it is an important sum of money, and in the context of very difficult public finances the Government are absolutely determined to address tax evasion and avoidance. That is why we have put additional resources into HMRC to tackle these areas. Clearly VAT fraud is an important part of that. Perhaps Ian wants to add something. I do not know how much more detail you want on the working of carousel fraud. Ian Stewart: You have given a very good summary. I would be happy to take more detailed questions on carousel fraud.

Q211 Baroness O'Loan: Mr Gauke, I think I heard the answer to this question in what you said, but just for the record I will ask it. Do the Government consider VAT fraud to be fraud against the EU’s budget? David Gauke MP: No, we do not. Perhaps I should explain why. A complicated formula is in place to calculate a percentage of the harmonised, adjusted amount of collected VAT. It is 0.3% of this figure. In more practical terms, that is between 2% and 3% of the total VAT take. That is what it has been in recent years. The argument that I would make to the Committee is that it would be wrong to see VAT as being an EU tax that is paid directly to— Baroness O'Loan: We know it is not that. David Gauke MP: —the EU, or that it is predominantly there to fund the very small proportion of the VAT take that goes to the European Union. It is not by any means the largest element of the total UK contribution to the EU.

Baroness O'Loan: Perhaps I could ask you a specific question. In monetary terms, what does that 2% to 3% of the VAT take amount to?

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Jonathan Athow: For example, in 2011 the own-resources payment was £2.2 billion. It has stayed roughly at that level. In some years it has been lower and in some a little bit higher.

Baroness O'Loan: So that very low percentage that you described which does not go to the EU as a consequence of the fraud that occurs is not fraud against the EU? David Gauke MP: Well, I think that there is a danger that we view VAT fraud as being predominantly or significantly an EU matter when the responsibility to address this, and the consequences of VAT fraud, are felt overwhelmingly by member states—obviously the UK in our case.

Baroness O'Loan: In that context, does not the EU as the body that is not receiving money which it might otherwise receive in any way require you to account for the fact that you are not dealing with the fraud to such an extent that it is being deprived of income that it might otherwise have, which would then feed back into other revenue streams? David Gauke MP: Obviously the EU, and more specifically the Commission, has an interest in VAT in terms of VAT law. What we can do with VAT on a legal basis is constrained by the directives. Also, clearly there are circumstances where co-operation between member states in dealing with VAT, and specifically with VAT fraud, is important. We engage in that. Clearly when something like 97% of the cost of VAT fraud is borne by member states, this is principally a matter for them.

Baroness O'Loan: To my simple mind, £2.2 billion—3%—is still a significant amount of money. It may not be a significant sum of money in terms of overall government spending but—again for the record—whose responsibility is it to combat this fraud? David Gauke MP: HMRC’s.

Baroness O'Loan: Is there any responsibility in any other part of the European Union, apart from member-state responsibility? David Gauke MP: It is essentially the responsibility of member states. In the UK that is the responsibility of HM Revenue and Customs.

Baroness O'Loan: So why is the fight against fraud being lost? David Gauke MP: I am not sure that I would accept that. I have highlighted the numbers relating to MTIC fraud. Clearly, moving from losing £3 billion to £4 million a year to losing £0.5 billion to £1 billion a year is significant progress. That is not to say that we should be complacent or rest on our laurels and not think about what we can do to go further, but it is significant progress in the right direction which has occurred under Governments of different colours. This Government are certainly determined to address further the issue of tax evasion and tax fraud. That is why we have put in additional resources to HMRC to address that. So you are right to press us to be vigilant because it is a concern. Clearly the incentives on a member state to address VAT fraud are very considerable. There is a large sum of money; even with the progress made in recent years it remains £5 billion. That is something that we want to address.

Baroness O'Loan: It is a very significant sum of money. David Gauke MP: Absolutely.

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Baroness O'Loan: Therefore it is a significant sum of money that does not go to the EU. That is the reason the Committee is interested; it is part of a much bigger whole in terms of EU fraud. David Gauke MP: I would underline the point that 97% of it is lost from the UK Exchequer. That is a significant issue for us.

Q212 The Chairman: Minister, a number of my colleagues want to pursue this matter. Perhaps I may ask what may be a simpleton’s question. Nobody is suggesting that dealing with VAT fraud is not an HMRC matter or should be dealt with by the European Commission or anybody else. What we are trying to get to grips with is whether fraud leads to a situation whereby the European Union gets less money than it otherwise would. It seems to me that you are saying that that is the case but because it is only 3% of the whole you are not that fussed about it. David Gauke MP: I am not saying that I am not fussed, but would one categorise VAT fraud as predominantly fraud on a member state or fraud on the EU?

The Chairman: With great respect, it depends on which organisation you happen to be talking about. If you are talking about the EU and its income, and it is not getting 3% of whatever, effectively it is a fraud on its resources. Perhaps I am thinking too simply. David Gauke MP: I will answer your question very clearly. Is there a financial consequence of VAT fraud for the EU? The answer is yes. But it would be wrong to describe VAT fraud as principally, overwhelmingly or in major respects an EU fraud, and therefore—I am not saying that this is what the Committee is saying—essentially a matter for the EU. Clearly that is not the case. But there is a financial consequence for the EU. The Chairman: I will let my colleagues speak for themselves, but I do not think that any of them are running on beyond the position that you state.

Lord Anderson of Swansea: I should know this. What proportion of the total contribution to EU funds is accounted for by VAT receipts? Jonathan Athow: It is £2.2 billion out of just over £15 billion.

Lord Anderson of Swansea: So it is substantial proportion. Therefore there is a legitimate EU interest in the collection of that amount. David Gauke MP: Well, it has a consequence for the EU. Obviously there is a much bigger interest for member states.

Q213 Lord Dykes: Minister, you can relax on this because it is definitely about EU aspects of VAT. If we consider again the proposed directive to protect the Union’s financial interests by means of the criminal law, you will remember that the definition covers “all revenues and expenditures covered by, acquired through or due to … the Union budget”. Do you now expect that VAT will fall within the definition of the EU’s financial interests in the directive on protecting the EU’s financial interests, or will only part of it—the EU part— come into that? David Gauke MP: We should be a bit cautious about competence creep in this area.

Lord Dykes: You do not mean generally in advance of the speech on Friday?

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David Gauke MP: I am not going to anticipate what the Prime Minister will say on Friday. Obviously we welcome attempts to reduce VAT fraud. We welcome attempts to protect EU funds. We all want to reduce fraud against its budget. With regard to the proposals in the directive, the operation of the VAT system is very much a matter for national competence. We are concerned that the proposal has the capacity to expand the EU’s competence in the sphere of tax. It has been the long-standing position of this country that we want to defend our sovereignty in this area.

Lord Dykes: Would it not be true to say that if you have the overarching application of the criminal law aspect through the EU, it helps you as a national entity in your fight against fraud at the margin? David Gauke MP: There is a point of principle here. Member states are responsible for the control and operation of the VAT system. This particular proposal has the potential to expand the EU’s role and competence into this type of fraud work. We think that there are some fundamental concerns about that. Of course there is scope for significant co-operation between tax authorities within the EU to address fraud. Indeed, a lot of work is ongoing in this area. But we have a nervousness about these proposals.

Lord Dykes: Are HMG planning to oppose this directive? David Gauke MP: We do have significant concerns about giving competence to EU institutions to investigate VAT fraud cases, for example. That is a concern that I do not think will be easily overcome, so we will see how that particular proposal develops. I do not think that we are alone in having concerns about that.

Lord Dykes: Which other member states are concerned? David Gauke MP: I do not want to say too much more on that at this point. There is a point of principle about the fact that VAT fraud should be investigated by HMRC rather than any other body. There is a role for European Union institutions in scrutinising and questioning particular systems, providing advice to HMRC in comparing best practice and so on. But the investigation of particular cases has to be a matter for HMRC and our judicial system, rather than being done at a European level.

Lord Dykes: It appears to me that no other member state is supporting this position but that you as HMG plan to oppose the directive. David Gauke MP: It is right to say that we do not think that the current proposal is acceptable, but I am not going to provide a commentary on the position of every other member state.

The Chairman: We are still holding it under scrutiny, so—who knows?—we might send you another invitation. David Gauke MP: I look forward to that. The Chairman: I know that supplementary questions have arisen from the questions put by Lady O’Loan and Lord Dykes.

Q214 Lord Stoneham of Droxford: You mentioned a figure of £5 billion. Do you have any assessment of how much of that fraud is transferred across borders? That would give us some idea of the capability of HMRC to follow up cases at home as opposed to having to deal with other Governments and Administrations. 176

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David Gauke MP: Jonathan may be able to help with that. The MTIC element is the £0.5 billion to £1 billion a year. There are other elements to do with the hidden economy or tax evasion. I do not wish to pick on a particular type of person, but it could be a tradesman who takes cash in hand and does not declare a transaction. Jonathan Athow: Broadly speaking, we think that of that £5 billion, around £3 billion relates to either the hidden economy or evasion, primarily here, although we cannot rule out the possibility that there might be an international element of people not declaring work they do across borders. The rest is related to what we call criminal attacks, of which MTIC fraud is part. That gives you what is probably an upper limit.

Lord Stoneham of Droxford: Do you classify that as international or domestic? Jonathan Athow: Certainly the MTIC element would be international, but elements of that fraud will be within in the UK. For example, it would also include the VAT consequences of certain excise frauds. Some of those frauds happen across borders and some happen within the UK. It gives you an upper boundary.

Lord Stoneham of Droxford: Are you talking about, say, a 40% cross-border element? Jonathan Athow: It is very difficult to work out exactly. Sometimes fraud will relate to goods that were intended for export but never left the country. Do you classify that as international or not? It is a difficult issue. The £2 billion would give you an upper limit on the element of criminal attacks. Many of them will have an international element, but I cannot say that all of them will.

Q215 Lord Elystan-Morgan: My question is not unassociated with one lower down in the order. Perhaps I may put it in this way. In relation to what you say in the context of VAT fraud and how it should be hedged in as far as the United Kingdom is concerned, is that not in many respects a betrayal of the trust that every member of the European Union has in the totality of the Union? In other words, fraud is a massive abuse of the Union. As to its exact range, we do not know. My colleagues here cannot begin to guess the exact nature and extent of that fraud. It should be regarded as a matter of trusteeship for each and every member of the European Union to allow that to be tackled at two levels: at European Union level and at national level. To build a hedge nationally would be a breach of that trust. I put it as highly as I can in order to dramatise a point that I think is one of immense force. What I would like to hear, putting VAT fraud aside for a moment, is an intelligent guess as to the totality of fraud that the EU suffers, and how much of that may emanate from the United Kingdom? David Gauke MP: There has been some analysis done. Again, I will ask Jonathan to provide detailed numbers about the percentage of VAT that is lost through fraud or other activity. In some cases it runs significantly higher in some member states than in the UK. If I remember rightly, the tax gap for VAT is around 10% in the UK. Not all of that is fraud; if a business goes under, it might owe HMRC unpaid VAT.

Lord Elystan-Morgan: I am referring to fraud—perhaps I may use a phrase from the Book of Common Prayer—“in all its works”. David Gauke MP: Yes. Some of the tax gap is clearly not fraud. A business may go under owing VAT to HMRC. I would not describe that as fraud. The figure is around 10% in the UK. In some member states the estimate is as high as 20%. That is clearly significant. The point that I would make about VAT fraud—and indeed all fraud—is that it has to be a

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HM Treasury —Oral evidence (QQ 208-226) significant concern for every country. Some countries have a bigger problem than others. By international standards, UK is probably in a better place than others. We have a relatively strong culture of people paying their taxes. None the less, it is a substantial sum of money and, when they have to make difficult decisions in public finances, any responsible Government would want to do everything they can to reduce that sum. That applies to VAT as much as to anything else. VAT as a tax is inherently more likely to have a tax gap than, for example, PAYE, which is deducted at source. It is quite difficult to evade PAYE. VAT has a lot to be said for it as a tax. It is economically pretty efficient. But whichever way you design it, there are risks of fraud. Ian Stewart: Perhaps it would be possible to add to the Minister’s reply. On the point about HMRC having a hedge—I think that that was the word you used—in the way we address fraud, an important point to make that although HMRC is responsible for countering MTIC fraud in the UK, we use exchange of information provisions with other member states. We work very closely with other member states. With the carousel fraud that the Minister talked about, with goods going to the UK and other member states, we need to understand what is happening. I do not want the Committee to get the impression that HMRC is doing this in a silo. We work very closely with other member states. A network called Eurofisc was set up about two years ago. It is all about helping member states exchange information. Europol and Eurojust also give us assistance on the criminal side. We work very closely with other member states on countering VAT fraud.

Q216 Lord Rowlands: Looking at this colourful chart, it is clear that those who perpetrate carousel fraud are enjoying the benefits of what is basically an open system of trading, with virtually no borders. In that case, while appreciating the jealous guardianship of national competence, you need a European dimension to tackle this fraud. Based on what we have heard so far, the criminals seem to be smarter and better co-ordinated than those who are combating the fraud. Besides the things that you mentioned such as sharing and exchanging information, which has been going on for some time, are there any other new initiatives in the pipeline to take on the very serious loss of money through carousel fraud and make the system more effective than it appears to be so far? Ian Stewart: I can tell you about one initiative that will come into effect in April this year. It was announced in the previous Budget. It is a new online system for vehicles that are being brought into the UK. There was quite a lot of acquisition fraud on the vehicles that were being brought in. We are designing a new system which will mean that an individual or a business bringing a vehicle into the UK will not be able to register it with the DVLA unless we are satisfied that the VAT has either been paid, if it is an individual, or, in the case of a VAT business, that it is going to be paid. DVLA will have access to the new online system.

Lord Rowlands: Are all 27 member states signed up to this process? Ian Stewart: No, this is for the UK only. This is for vehicles coming into the UK. At the moment, if you buy a new vehicle in another member state and bring it to the UK, UK VAT should be paid here. But there has been acquisition fraud where VAT has not been paid. We find that fraudsters bring in the vehicles, register them with the DVLA to get all the relevant documentation and then sell them on to legitimate buyers. In future they will not be able to register the car with the DVLA until we have told the DVLA either that the VAT has been paid or that we expect it to be paid. That will seriously disrupt that kind of fraud. That is an example of something that is coming along in April. In the past, we introduced legislative change, for example the reverse charge on emissions allowances—carbon credits. That

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HM Treasury —Oral evidence (QQ 208-226) legislative change was aimed at stopping the MTIC fraud in carbon credits, and it has been very successful.

Lord Rowlands: While I support strongly your jealous safeguarding of national competence in respect of VAT, I feel that we need some kind of European dimension to tackle a fraud that the European Union is making easier to perpetrate. It is because we have open borders and can move goods around with ease that carousel fraud has become so prevalent. Ian Stewart: I think that the European Commission and member states recognise that fraud is a problem in all member states. The Commission produced a White Paper some time ago that set out a number of ideas for how fraud might be countered going forward. One of the suggestions they raised was a different collection system for VAT. If you can collect VAT up- front, that would prevent a lot of fraud. That is the kind of big topic that the Commission and member states will certainly look at in the coming years.

Lord Rowlands: Minister, do you think that that would be a way forward? David Gauke MP: Yes. Clearly there is scope for co-operation between tax authorities and for the sharing of information on developing new means by which we can address this problem, which is significant not just in the UK but across the European Union. We are keen to encourage that; it is a practical response to a significant issue for all member states.

Lord Rowlands: Take the money up-front? David Gauke MP: Absolutely; there are circumstances where that is the right thing to do. The Chairman: We ought to move on now. Lord Hodgson may want to deal with the agricultural element of this question.

Q217 Lord Hodgson of Astley Abbotts: It is interesting that sometimes the Revenue is slightly precious. The review on the Charities Act that I did for your colleagues indicated how difficult it was for the Charity Commission to get HMRC to make sure that a charity that applied for Gift Aid had a charity number before Gift Aid status was granted. That was just an internal UK “keep-off-our-turf” approach. When I see that here, in this country, and I hear my colleagues asking questions like this, it leads me to believe that there is more likely to be a big problem with transnational sovereignty than with just interdepartmental sovereignty within Whitehall. David Gauke MP: Perhaps I should respond to the Charity Commission point on another occasion. Lord Hodgson of Astley Abbotts: I mention it as evidence of an attitude of mind that I think others here have been trying to tease out in their questions. We have heard that in the UK fraud against the EU’s budget is most commonly perpetrated against agricultural funds and VAT. In its annual report looking at fraud, the European Commission stated that the UK, in relation to agricultural funds, continued “to report a very low number of irregularities as fraudulent”. Professor Spencer, who gave evidence to us, told us that it was “widely suspected that the different rates of reported fraud from the Member States indicated a difference in the level of inactivity”—his word—“in looking for fraud”. Can we explore the Government’s commitment to discover fraud against the EU budget? David Gauke MP: There was an issue with regard to fraud reporting because of the Rural Payments Agency system and its incompatibility with the irregularity management system in 2009. That created a backlog of cases. That was the reason why very low numbers of

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HM Treasury —Oral evidence (QQ 208-226) fraudulent irregularities were reported. I understand that that situation has now been resolved and that the backlog of cases has been addressed. We are now on track in our reporting obligations. In terms of those low numbers, I do not know whether anything has yet been published that would support what I have just said, but my understanding is that the backlog is being or has been addressed.

Q218 Lord Stoneham of Droxford: In the UK, who is responsible for leading the fight against EU fraud and irregularity? David Gauke MP: It is important to break down the various elements. If we are looking at agricultural funds, Defra leads. If we are looking at structural funds, in those circumstances BIS looks at that. If you are asking who has overarching responsibility, the interaction with OLAF is through the Treasury. The Treasury has that strategic role as the organisation that interacts with OLAF, but at a practical level there are different heads of expenditure and various government departments are engaged with that.

Lord Stoneham of Droxford: Does the Treasury co-ordinate this information between departments? David Gauke MP: As far as information is concerned, I do not know to what extent the Treasury has a significant role in dealing with that. Individual departments fulfil their particular obligations. It is more a matter at EU level to collate that at member state level in terms of what is coming in from a particular department, or on a particular aspect of EU expenditure, looking at that across headings and across member states.

Lord Hodgson of Astley Abbotts: So Defra makes reports direct to the EU? David Gauke MP: Yes, that is my understanding.

Lord Hodgson of Astley Abbotts: And other departments will make reports straight to the EU? David Gauke MP: Yes.

Lord Hodgson of Astley Abbotts: And never the twain will know what the other is doing? David Gauke MP: In areas of EU finance, the purpose of looking at it across the piece is more one for EU institutions than for the Commission. We have that information in reports provided by other departments, but I am not sure that we produce a document with all those numbers together.

Q219 Lord Rowlands: While there is an obligation for member states to co-operate with OLAF, there is no requirement on them to take action following a referral from OLAF. Do you think that there should be? David Gauke MP: The difficulty, if there was a requirement to take action following what OLAF said, would be that we could find ourselves cutting across our existing legal systems. We have a national judiciary and a national criminal framework in each member state. Obviously they can differ between member states. There are also differences in the criteria used by member states when deciding whether an offence should be investigated or prosecuted. Within the UK, we take EU fraud extremely seriously. If there is evidence that fraud has been committed, we will take action. But I am not particularly attracted to

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HM Treasury —Oral evidence (QQ 208-226) permitting OLAF to direct UK institutions to perform in a particular way. That is not how the system should operate.

Lord Rowlands: That is where problems arise. Again, I understand your position. When we were in Brussels, a Commission official said, “Given that national prosecution authorities are often overwhelmed by the work they have, the fact that the fraud is not affecting the national budget means that there will be a tendency to make fraud of that kind a lesser priority”. Do you think that because of these arrangements a situation is likely to arise where priority is not given to European fraud because the national budget is not affected? David Gauke MP: I do not think so. We take fraud in all its forms very seriously and clearly this is applicable outside the VAT area. We are looking more broadly here. In the context of other frauds, for a start, where you have a fraudster, the likelihood of them being interested only in one form of fraud is very low.

Lord Rowlands: They are not specialist European fraudsters. David Gauke MP: Exactly. You put it well. They do not specialise in European fraud and leave everything else alone. The authorities in the UK—and, I am sure, elsewhere—take all these matters seriously in any event. Secondly, even if I were to accept your point about a lack of incentive, a fraudster is a fraudster and we want to deal with them because they put all sorts of things at risk.

Q220 Lord Anderson of Swansea: Minister, there is no question of a direction by OLAF. It does its work and refers it to you. Whether you take action in respect of that referral, should it not be a matter of course that you give—not just as a matter of courtesy but of good practice—a report to OLAF on what has happened in respect of its referral? David Gauke MP: One could look at what we do to provide feedback to OLAF in terms of action taken following its referrals. I do not have any particular objection to that. The important thing, on which we are in agreement, is that ultimately the decision on what action is taken, for example on criminal prosecutions, is a domestic matter.

Lord Anderson of Swansea: There may be no action for good reason. The question is whether in your judgment it should be a matter of practice to tell OLAF what you have or have not done. David Gauke MP: I am happy to take that one away. It partly depends on various practical points relating to the nature of the burden that it would impose, and what level of detail could be provided to OLAF in a way that does not divert resources from other activities. I do not have any principled objection to providing that. We need to deal with that in as practical a way as possible. I am aware that HMRC, for example, provides feedback to OLAF with regard to Customs referrals. In those circumstances, feedback is provided to OLAF.

Lord Anderson of Swansea: But not on VAT? David Gauke MP: Ian, do you have anything to add on VAT? Ian Stewart: On Customs duties, we get referrals from OLAF and, as the Minister said, we give feedback on them. On VAT we do not get referrals from OLAF. We share information with OLAF and sometimes receive information, but it is a different process for VAT.

Q221 Lord Dykes: I am surprised at your anxieties about OLAF wishing to give directions to national Governments. I do not think that there is any indication of that. It is 181

HM Treasury —Oral evidence (QQ 208-226) anxious to help national prosecuting authorities in each country follow up these cases; that is why it sends out information. Also, it is not a question of being inundated with material from OLAF. Surely it is basic courtesy to respond and let OLAF know what the follow-up will be in terms of a national prosecuting authority fraud case, even if it is transnational. Presumably you would confirm that you would take OLAF evidence and material if it was followed through by the national prosecuting authority as a case in court? David Gauke MP: The point I made about direction was in response to the point rightly made by Lord Anderson that we would not expect the UK authorities to take direction from OLAF. I was simply agreeing with that. Where it is appropriate and practical to provide feedback to OLAF, we should do so. As I said, HMRC does that in the context of referrals relating to Customs. On your point about when OLAF provides evidence of fraud, clearly that evidence would be of use in any criminal proceedings—or proceedings of any type— within the UK. So I see no reason why that evidence would not be made use of.

Q222 The Chairman: When we were in Brussels and talking to OLAF officials, Minister, there was no question of directions. They made the observation that it would be very helpful if there was one place in the UK to which they could make their referrals. The system you described seems to be very ad hoc. Would you not support OLAF’s suggestion? I am sure that you have seen the evidence that was given to our inquiry by other people who also think that there may be some benefit in that. David Gauke MP: We would consider that. At a practical level, for the reasons I mentioned earlier, there are different types of EU expenditure, for example, that are scrutinised by different government departments. We could have a debate about whether the information is allocated by OLAF to the relevant government departments or allocated by an agency within the UK. I do not have a dogmatic view about the best way of addressing that.

The Chairman: I appreciate that, but the question is whether it would be helpful. One can perhaps have some sympathy with OLAF, which is dealing with 27 systems in 27 countries— and we have three legal jurisdictions in one country. I do not know how many additions you can make to the figure of 27 as a consequence of that. David Gauke MP: I can see the argument that a UK entity may be best placed to determine where information provided by OLAF is allocated, but we would want to consider the full consequences of that before making any commitment.

Lord Stoneham of Droxford: The Government’s written submission to this inquiry emphasised the necessity of OLAF’s independence, which is underwritten by its supervisory committee. Are the Government concerned by the apparent breakdown that we discovered in the relationship between OLAF and its supervisory committee? If so, what should be done? David Gauke MP: The supervisory committee has an important role, which has been clearly set out. Certainly we would want the two institutions to work closely together to achieve their common goal of tackling EU fraud. Although I was very interested in the evidence that this Committee obtained, my understanding is that the Government as a whole was not aware of the breakdown of that relationship. However, I note the comments that you make.

Lord Stoneham of Droxford: Some might say that they were at each other’s throats when we were there.

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David Gauke MP: Right. It is an important relationship. We want to ensure that OLAF’s independence is not compromised in any way by the supervisory committee and EU institutions. Our position has been very strong on that. I note your comments. They do have an important role to play and we would expect them to work constructively together. But as I said, we want to ensure that OLAF remains independent.

Q223 Lord Anderson of Swansea: Minister, we heard evidence of competence diffusion within the EU in respect of fraud. One of our witnesses, Professor Spencer, argued that “too many people and too many agencies” supervise the same problem, leading to “muddle and confusion”. Do you agree? David Gauke MP: The Commission has acknowledged that the roles of the EU agencies need to be reviewed. Last month it published a road map on this, which looks at how those agencies should be set up and managed. The Foreign Office is in the process of consulting departments on the specific proposals in the road map, including for agencies with fraud prevention competencies. Once the consultation is completed, the UK Government will play an active role in advising other government departments on its implementation. I have not really answered your question, to be fair. The point is that there is clearly a concern about the somewhat tangled web here. The Commission is looking at this and has published a road map, and we are looking at its proposals very carefully to see what the right response is.

Lord Anderson of Swansea: And the purpose of the published road map is to streamline procedures and competencies? David Gauke MP: Yes. I think it is fair to say that we are very supportive of efforts to simplify and streamline EU institutions to deliver a more efficient and effective EU. I do not want to get drawn too much into the particular details, as I say, because we are looking carefully at the Commission’s road map. We think it is right to look at this issue because, as you say, there are an awful lot of organisations and agencies here, and if there is scope for improved efficiency and effectiveness we would certainly support that.

Lord Rowlands: Is there a case for an anti-fraud tsar to drive this programme through rather than this diffuse and, to be honest, disorganised attack on fraud in the European Union? David Gauke MP: As I say, we want to look very carefully at the particular proposals. On the question whether an anti-fraud tsar is the right answer here, there is an argument for that, but I think we want to look carefully at the particular proposals and see whether there is too much complexity here and if we can simplify it. Your suggestion, of course, is very much a simplification, but we can look at whether that is the right simplification. Across government we are looking at the implications of the proposals to see if there is a way in which we can make this more efficient and effective, because of course we all want to do more to deal with EU fraud.

Q224 The Chairman: Lord Elystan-Morgan, we skipped over your question because we moved on to OLAF. I do not know whether there is any element of it that you wanted to put which the Minister has not covered.

Lord Elystan-Morgan: Can I ask this all-embracing question, Chairman? I think the impression that we the Members of this Sub-Committee had when we heard Professor Spencer’s evidence last year was this: as far as the European Union itself was concerned, 183

HM Treasury —Oral evidence (QQ 208-226) there seemed very little determination or enthusiasm for combating fraud as such. In so far as there were institutions, they were locked in internecine strife against each other. As far as the United Kingdom is concerned, again, there was a lack of cohesion, co-ordination and total determination. Between OLAF and the individual 27 members, there is of course an obligation on these states to co-operate with OLAF but no obligation to act and no obligation, formally and officially, to inform OLAF of what they are doing or not doing. In other words—and I do not expect you to agree with this—is there not massive evidence of a lack of determination all round? David Gauke MP: From my point of view, and I am only really in a position to discuss the approach of the UK, we take fraud in all its forms very seriously. I look at the work that is done at HMRC, which is obviously the part of government that I have day to day dealings with, and I can say that there is a very strong determination to deal with fraud and, indeed, significant evidence of progress being made on that particular front. I am sure I speak for other parts of government as well, whether it be Defra or BIS, that we all take fraud seriously. I think there is frustration among all member states at the level of fraud on the EU, and we all have a part to play in trying to address that. I do not accept the view that in the UK there is not the energy, desire and determination to deal with fraud on EU institutions. I think it is unfair and a waste of taxpayers’ money, and in the circumstances that we are in at the moment, where there is rightly a particular sensitivity to waste in government spending, whether it be at the EU, national or local level, we all want to play a role in trying to reduce that.

Q225 Baroness O'Loan: OLAF refers cases to the United Kingdom. Is that correct? David Gauke MP: Yes.

Baroness O'Loan: Do you know how many cases have been referred in the last five years? Can I just ask you a couple more questions? Do you know how many have led to an investigation? Do you know how many of those have led to prosecution? Do you know how many of those led to convictions? David Gauke MP: I am not sure that I have those numbers here.

Baroness O'Loan: Can you even tell us how many were referred by OLAF? David Gauke MP: I do not think that we have those numbers here, but we can certainly write to the Committee.

The Chairman: I would be most grateful if Lady O’Loan could just make sure that you have a note of the three questions—the three figures.

Baroness O'Loan: My questions were: how many cases have been referred by OLAF in the past five years? How many investigations have resulted? What percentage led to prosecutions? What percentage of those prosecutions led to convictions? Numbers, please.

Lord Dykes: A lot of these figures are in the addendum.

Q226 The Chairman: Yes, I know, but it would be interesting to know if our figures agree, would it not? Good. Thank you for that. Can I just ask in closing, and I appreciate that you may feel that this is a difficult question to answer other than in one particular way, a question that relates to the question of the European Public Prosecutor’s Office? Many of our witnesses have suggested that in terms of 184

HM Treasury —Oral evidence (QQ 208-226) dealing with fraud against EU finances, and bearing in mind the different jurisdictions and procedures, whether the Prosecutor’s Office took the form of an individual or was an office with a number of people with responsibility for dealing with it, this is needed and would be helpful. I think the Government, in their submissions to us, put the onus on the Commission to make out the argument as to whether it was a good idea. Bearing in mind we have not seen a proposal—when we went to Brussels, the Commission was very clear that it did not have a proposal that it could put before anybody—we as a Government have actually ruled it out in the coalition agreement and made it a very difficult thing to achieve, even if you thought that the proposal was a great one, because you have to pass an Act of Parliament and have a referendum. Why are we in the position of having made up our minds in advance on something that we do not even know the form of? David Gauke MP: I think that if we had a European Public Prosecutor’s Office, that would fundamentally cut across our common-law system for the roles of the police, prosecutors and the judiciary. The majority of other EU member states have a very different criminal justice system from ours, and we do not believe that there is a convincing case that this is the right solution and is necessary to help to tackle fraud against the Community budget. We have the tools and powers in place to fight fraud, and our view is that this would be a disruptive institutional change and not the right way forward. So both on the grounds of practicality and principle, we believe that this would be the wrong step.

The Chairman: I have to say, if you will allow me the observation, that it sounds more a question of principle than of observation as to whether it is practical or how it would work, especially since nobody has even articulated their proposal yet. David Gauke MP: I am not denying that there is a very big point of principle here.

The Chairman: Minister, is there anything else that you want to say to us or think we should have asked you? David Gauke MP: No. Thank you for your questions. I hope it has been helpful. As I said at the beginning, I know that no discourtesy was intended and I hope that Jonathan, Ian and I have been able to provide you with as much information as possible. For those other aspects, we will of course contact you and provide as much information as we can.

Lord Anderson of Swansea: Can we have your assurance, Minister, that a decision of that nature will not in future be taken by civil servants? David Gauke MP: I think that point has been made strongly, and I suspect there will be a keen desire to ensure that Ministers are consulted on anything that could be perceived in the way in which this clearly has been.

The Chairman: Thank you very much indeed. David Gauke MP: Thank you.

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HM Treasury – Supplementary evidence

During the course of the oral inquiry into fraud against the EU’s finances, which I had the pleasure of attending on the 16 January under your chairmanship, I undertook to write to Committee Members in response to a number of questions I was asked regarding suspected cases of fraud referred to the UK by OLAF in the last five years.

Statistics regarding cases of suspected fraud sent to Member States’ judicial authorities by OLAF are published in OLAF’s Annual Reports. The last publication in 2012 showed that between 2006 and 2011, 19 cases had been sent to UK judicial authorities. Of these, 13 (around 70%) investigations have been concluded. The remaining 6 cases were still ongoing. Of the 13 cases concluded, 3 cases led to convictions. Further detail on these judicial cases can be found in table 6 of the 2011 OLAF report.

I am copying this letter to Sarah Davies, Clerk to the Commons Committee; Jake Vaughn, Clerk to the Lords Committee; Elisa Rubio, Clerk to Lords Sub-Committee; Les Saunders, Cabinet Office; Robert Douglas and Thomas Kenny, HM Treasury.

January 2013

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Lord Williamson of Horton—Written evidence

1. In response to Lord Bowness’ letter of 11 July I would like to make a number of points which I consider important. My knowledge is not sufficiently up to date to deal with all the issues set out on page 2 of the call for evidence. I would draw your attention to the memorandum which I submitted on 26 June 2006 to an earlier inquiry by the EU Committee on “Financial Management and Fraud in the EU: Perceptions, Facts and Proposals”. My short memorandum sent to that inquiry is published in volume 2 of the 50th report of Session 2005–06 (HL Paper 270–111). In my view it is still relevant, although regrettably its impact on popular misconceptions in the United Kingdom has been zero. I would also draw your attention to the recently updated (June 2012) report of the Senior Experts Group (of which I am a member) on fraud and accounting in the European Union.

2. In this submission I shall return to some of the points covered in the two documents I have referred to above but I do wish to restate them

1) the relationship between the Commission and the Court of Auditors (ECA) is sometimes presented as a state of conflict. This is quite wrong. When I worked in the Commission I always sought respect for and careful attention to the Court of Auditors and its reports. The Court’s reports and opinions are an essential element of EU accountability and a means of improving performance. What is important, however, in the UK in the current state of opinion on the EU is that the reports should be commented upon fairly here. In particular, their conclusions on the regularity of transactions are not conclusions on fraud.

2) nonetheless these key elements of the 2010 Annual Report of the ECA should be stressed

(a) reliability of 2010 accounts In the ECA’s opinion, the annual reports of the European Union present fairly, in all material respects, the financial position of the Union as of 31 December 2010, and the results of its operations and its cash flows for the year then ended, in accordance with the provisions of the Financial regulation and the accounting rules adopted by the Commission’s accounting officer

(b) revenue (127.8 billion euro) In the ECA’s opinion, EU revenue underlying the 2010 accounts is legal and regular in all material respects

(c) commitments In the ECA’s opinion, commitments underlying the 2010 accounts are legal and regular in all material respects

(d) administrative and other expenditure of the institutions and bodies (9.3 billion euro) The ECA found that supervisory and control systems for this expenditure were effective in ensuring the regularity of payments and that the expenditure was on the whole free from material error. In every year since 1994 when the current system was established the ECA has given a positive opinion on the administrative expenditure of the EU institutions

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Lord Williamson of Horton—Written evidence

(e) in relation to payments of which about 80 per cent are handled by the Member States and not by the Commission directly, there was an element of material error, principally in the agricultural (56.8 billion euro) and cohesion (40.6 billion euro) expenditure. The estimated agricultural error rate was 2.3% and the 2 examples quoted in the ECA report, including some incorrect land measurement by national inspectors, indicate errors, not fraud. It is worth noting that direct payments covered by the IACS control system (on which I commented favourably in my memorandum of 2006) representing 39.7 billion euro were free from material error

The biggest problem relates to cohesion expenditure and this should obviously be a priority area for improved control in the Member States, although once again the examples quoted by the ECA relate to mistakes, not fraud with an important element being failure to comply with public procurement rules (a notably difficult area, as we know, for SME’s in the UK)

(f) it is evident from my comments above that I consider that the distinction between fraud and irregularity (your 2nd question under issues in the call for evidence) is essential. The ECA reports the position very fairly in its 2009 report as follows

“Errors can arise from misapplication or misunderstanding of the often complex rules of EU expenditure schemes. Only if EU funds have intentionally been improperly claimed can the resulting error be considered as fraud. If the Court has reason to suspect that fraudulent activity has taken place, it reports this to OLAF, the Union’s anti-fraud office, which is responsible for carrying out any resulting investigations. The Court reports around 3 cases per year to OLAF, based on its audit work.”

3) in relation to fraud, it seems to me that the priority issues for the Committee are

(a) the extent to which the recent Commission proposals and the anti- fraud strategy correspond to the need for action in the Member States and the progress which the Member States are making. The problems of cooperation with the Member States and the difficulty of obtaining prosecutions in the Member States were the reasons why the original anti- fraud unit was set up when I was Secretary General of the Commission and reported to me. Currently it seems to me that it remains serious if Member States do not always have the necessary means to prosecute cases involving EU Funds, I consider myself that OLAF should remain within the European Commission but with a special status, because it is a recognition of the responsibility of the Commission for the implementation of the budget, even if the payments are largely made within the Member States

(b) although evidently some attention is given to proofing proposals for legislation, as far as possible, against fraud, I do not myself see much stress on this point in the progress of proposals to decisions by the Council of Ministers and the European Parliament 188

Lord Williamson of Horton—Written evidence

It would be helpful to know whether this is thoroughly done, particularly in the priority anti-fraud area of the cohesion payments.

6 August 2012

189

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207)

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee— Oral evidence (QQ165-207)

Evidence Session No. 11 Heard in Public Questions 165—207

WEDNESDAY 28 NOVEMBER 2012

Members present:

Lord Bowness (The Chairman) Lord Anderson of Swansea Baroness Corston Lord Dykes The Earl of Sandwich Viscount Eccles Lord Elystan-Morgan Baroness O’Loan Lord Rowlands Lord Stoneham of Droxford Lord Temple-Morris ______

Examination of Witness

Rosalind Wright CB QC, former Director, Serious Fraud Office and former member and Chairman, OLAF Supervisory Committee, gave evidence.

Q165 The Chairman: Thank you very much indeed for coming and agreeing to give evidence to this Justice, Institutions and Consumer Protection Sub-Committee in connection with our inquiry into the fight against fraud on the EU’s finances. First of all, I fear that we may be interrupted yet again; I apologise for the late start, and I apologise if we all rush off and come back and leave you for a few minutes. Hopefully we can make some progress 190

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) before that happens again. For the record, Members’ interests are as recorded in the Register of Members’ Interests. Any of us with a relevant interest will declare it when they speak. The session is on the record. It is webcast live. It will be available on the parliamentary website. A transcript is being taken; you will be sent a copy of that to make any minor corrections in the interests of accuracy, although it does go on the parliamentary website before in an uncorrected form. Lastly, I would be grateful if you would let me know whether you would like to make an opening statement or go directly to questions. In any event, again for the record, although we do, of course, know who you are and the distinguished positions that you have held, perhaps you could introduce yourself when speaking. Rosalind Wright: My Lord Chairman, I do not want to make an opening statement. Just very briefly I will say who I am. I am Rosalind Wright. At the moment I chair the Fraud Advisory Panel, which is an independent panel established in 1998 by the Institute of Chartered Accountants. The idea of it is to draw awareness to the dangers of fraud, to help businesses and individuals protect themselves against it. We look into any kind of fraud in any jurisdiction anywhere, and we put on seminars; we put out publications. We have a rather interesting website, which I would invite Members of the Select Committee to have a look at. That is my principal role at the moment.

Q166 The Chairman: Thank you very much indeed. Perhaps I could start by asking you if you would let us know whether you have a view about the extent of fraud and irregularly against the EU finances, both in the UK and within the EU as a whole. Rosalind Wright: Fraud, both in the EU and the UK, is rather like the tip of an iceberg. You only see the very tip, and we really do not have any idea how much there is. We only know the amount of reported fraud, and that is a pretty small amount; we suspect that there is an awful lot more. Certainly, in Europe as a whole, anecdotally figures in excess of €2 billion have been canvassed over the last few years, but we think that is a substantial underestimate. Of course, fraud has been estimated in the UK alone to be in the region of £73 billion. That is not fraud on the European budget, I hasten to say; that is fraud generally in the UK. A figure of €2 billion on the European budget looks a little low to me.

Q167 Lord Anderson of Swansea: Turning to fraud on the European budget, and recognising you are saying that what we know is only the tip of an iceberg, given your lifetime experience of fraud, is what we know more or less than what one would expect from such a large organisation with such large funds? Rosalind Wright: I think it is probably very much in excess of the €2 billion.

Q168 Lord Anderson of Swansea: Sorry—to get this in perspective, we are looking at the position in relation to EU fraud. You have many comparators of fraud against other public and private institutions. Are we talking about something which is more or less than someone of your experience might expect? Rosalind Wright: You are talking about fraud committed in the UK on the European budget.

Lord Anderson of Swansea: Yes. Rosalind Wright: Again, it is very difficult to say, because nobody keeps records on who is defrauded, the nature of the victims or the destination of the funds. We do not know, for example, whether fraud is committed against the budget of the EU or whether it is committed on public funds generally in the UK. We do not know, but we do have an idea of

191

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) how much fraud is reported to the authorities, and how much fraud has been reported, for example, to the European anti-fraud office, OLAF, from the UK and how much they have investigated. That, in comparison with other Member States, is pretty low. So we, as a country, do pretty well in comparison with the other 26 Member States.

Q169 Lord Anderson of Swansea: On the totality of the picture, again to get this in perspective, is the fraud generally against EU finances more or less than one might expect? Rosalind Wright: I do not know what one might expect. It is very difficult to answer that, because I do not know what one might expect. As I say, all of the figures are probably under-estimates. If we look at the fraud committed on the European budget in the UK, it is largely committed in two particular areas; one is in the area of common agricultural policy subsidies, and the other one is in relation to customs, particularly what they call missing trader intercommunity fraud, which is MTIC or carousel fraud. Those are the two major areas of fraud committed within the UK. But we know, for example, that a number of MEPs in the past have committed comparatively minor amounts of fraud in relation to expenses. Those are other subsidiary kinds of fraud. As I say, the main areas are agricultural subsidy fraud and customs fraud. On the agricultural subsidies fraud, looking at the Defra website, they reckon that there are in the region of about 50 frauds reported to them each year. As we know, reported fraud is always less than the total amount of fraud committed, so we know that that is an underestimate, but it may not be a very large underestimate. MTIC fraud is pretty substantial, although, according to HMRC, the numbers are going down, and they say that is thanks to their efforts in restraining it and investigating it.

Q170 The Chairman: Is that a comment made by HMRC, forgive me, in connection with fraud against EU finances? Rosalind Wright: Yes.

The Chairman: That is very interesting, thank you.

Q171 Lord Temple-Morris: We are very grateful for your earlier answers; there is an awful lot we do not know. Rosalind Wright: There is a lot I do not know.

Lord Temple-Morris: If you do not know, we do not know. It is quantifying the problem. With the National Fraud Authority, and up to now, certainly in evidence taken here, it seems that we are not too bothered about EU fraud. We have very efficient organisations dealing with international fraud on a much bigger level. On the other hand, fraud against the EU budget—you have dealt with this partly—it seems to me is not that serious here by comparison to other places. I am wondering if we could focus as to where we should be concentrating. In so far as we are dealing, because it is an integral part of our report, with EU fraud on our particular budget—leaving aside carousel and VAT, which is I would say almost national as well as international—it is the agricultural one I am interested in. If that is national and it is a problem, admittedly small by comparison to other countries, where does it come from? Rosalind Wright: Well, it is all subsidy fraud; false claims. It is normally picked up in the National Audit Office report. In the past Sir John Bourne—this is a long time ago—focused very heavily on that; there was probably much, much more of it then than there is now. I 192

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) think, again, it is diminishing. He focused on agricultural fraud in a very amusing report he gave in about 2002, where he picked up on particular case where a gentleman called Mr Bowden, who had gone to prison for 30 months, had applied for a CAP subsidy for flax farming. Looking at the map references that he had submitted, which nobody bothered to check, some of his fields of flax were apparently in the North Sea and some in Greenland. That was one instance, but, again, it was not a huge problem even then, and it is a lesser problem now.

Q172 Lord Temple-Morris: It is a UK administrative problem by the sounds of it. Rosalind Wright: It is. When you get grants you get frauds of all sorts.

Q173 Baroness O'Loan: Mrs Wright, you have addressed this to a certain extent. Do the relevant UK authorities do enough to combat fraud? You talked particularly about carousel fraud; you have just addressed the common agricultural policy. Is there a better way to fight fraud against the EU finances in the UK? Rosalind Wright: Probably.

Baroness O'Loan: What might it be? Rosalind Wright: The difficulty with fighting fraud in the UK is that resources are very limited, and they are spread, still, between a very large number of different agencies. The pot is not large to start with, and it is diminishing. As we all know, cuts are taking place in every Government department, and I am sure the Treasury and HMRC is taking its cut as well. That is a problem to start with. As far as joined-up approaches to anti-fraud action are concerned, they are not as good as they could be; I have to say that. They could certainly be improved and there is room for improvement there. There is, I think, a confusion in some areas as to who should be responsible for investigating frauds. As I have said, it is not part of the way we count fraud or look at fraud in this country to break it down as far as the victims are concerned, so it is difficult to tell what is fraud on the European budget and what is national fraud. Unfortunately, we do not look at it like that; it would be much easier to tackle it if we knew what the size of the problem was and where it was coming from more clearly. That is a problem; we could be more effective there. Then, the resources about tackling fraud generally in this country, as I have said, are insufficient. The City of London Police—and you have spoken to Mr Leppard, so you know the situation there—is the lead force on the investigation of fraud, and they are doing an exceptionally good job. They are the only police force who have, first of all, fighting fraud as a policing priority and, second of all, probably just about adequate funds to do the job they are doing. A little more would not come amiss, and they could do an even better job. Regional fraud offices are now being established, as I am sure Mr Leppard told you, which will help in the regions, especially as we see diminishing numbers of specialised fraud squads throughout the country. It also brings one on to the confusion; I think that is possibly coming on later in your list of questions that you were suggesting you might ask me, about where the European Anti-Fraud Office could refer cases to. There is a huge confusion abroad as to who does what, and who they should turn to when they want something investigated over here. I know that when I was part of the Supervisory Committee of OLAF, in those days they had a specialist magistrates unit that came under their legal and judicial department, which I think has now been abolished. They had somebody there responsible for the legal expertise of each 193

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) Member State; in fact, for the time I was there we did not have anybody with any particular expertise of English and Welsh law. The Irish representative had to cover the English situation; although he was an expert on Irish law, and an expert on the Irish legal system, he was not all that au fait with the English legal system. He was not clear, for example, where customs cases should go to, or that things involving companies that looked as if they were going to become insolvent, or were in the process of being wound up, should go to the companies investigation department of the Insolvency Service. I hate to say I had to put him straight, but I did advise that contacting other agencies might be an idea. There is a confusion there; everything was going to local police forces. It does happen, and it is a human trait, that you go to the people you know. An awful lot of cases seemed to being channelled through Hampshire Police, and I did not know why. It turned out this Irish gentleman had a friend in the Hampshire Police, and everything was going through Hampshire. It was not very logical, but there we are. I know people were asking for a single point of contact, and I think the City of London Police would generally be the best point of contact, who could then feather it out to the relevant departments. There is a confusion as to who does what, and that is a national problem.

Q174 Lord Elystan-Morgan: Could I ask a question that follows immediately upon that? Where must the direct and most committed thrust against European fraud come from? It seems to me that at the moment there is a great dichotomy. On the one hand, 80% of all expenditure in relation to these matters goes, of course, through the 27 states through their individual treasuries. In a way, they are in the best position to investigate fraud, for many reasons. The City of London Police, I am sure, are up to their very eyelids in work involving the UK. When one comes to a European thrust, I do not know if you have seen the transcript of the Committee’s first meeting, which was at 9 o’clock on 7 November. May I read out the reply given to Lord Rowlands at question 38, page 6? Mr Johan Denolf, who was speaking on behalf of the Supervisory Committee, said, “We looked at the issue of time barring. We have problems already with OLAF informing us. There is complete disagreement between us and the Director-General. He is not in agreement with the extent of the legal powers of the Supervisory Committee. He does not accept those internal rules of procedure. He does not send us everything that we ask for and he does not even send us all the files that we want to see before transmission to the national authorities. There again, it is impossible to even look at it properly because we do not receive what we should receive to do the job properly.” There are other questions that are dealing with the jurisdiction of all that. It does seem to me that there is no real prospect at the moment of that thrust being efficiently made, in respect of and from Europe itself. Is it the case that we will have to wait for the formation of a European prosecutor status for that to happen? At the moment it seems a real shambles; in the very area in which there should be this commitment and concentration, it just is not there.

The Chairman: Before Mrs Wright answers, I do not know if Lord Temple-Morris would like to add anything. You had some questions, both about the prosecution and about the effectiveness. Maybe you would like to ask those questions and we can deal with them all together.

Q175 Lord Temple-Morris: It is very close to what Lord Elystan-Morgan was saying. Overall, how effective is OLAF? Do you have the resources, the capacity, to launch investigations commensurate with the information that you receive? Directly following Lord Elystan-Morgan, and without repeating, the Commission is forever somewhat expectantly— in 2004 and 2008, and now again in 2011—giving all sorts of plans and schemes and God 194

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) knows what. It struck me the phraseology bears out what my friend here was saying with regard to the reform of OLAF. I will just quote the Commission in 2011; he quoted something very similar. You did seven hard-working years there; this probably is just taking a lid off things you had to deal with—nightmares probably. “Cooperation and exchange of information between OLAF, Europol, Eurojust and international organisations, would be encouraged”. It seems to me incredible phraseology if it does not take place already anyway. Then you jump on to governance: the main changes would be that, “The role of the Supervisory Committee”, that is what you were on for seven years, “would be clarified”. It is out of this world, really. Finally, “Periodic exchanges of views will take place between OLAF and the Supervisory Committee, and the European Parliament, and the Council and the Commission.” It seems to me quite staggering that they did not take place anyway. I am wondering what the Supervisory Committee was doing if this sort of thing is served up as being a third effort over a decade to stiffen up the system. Rosalind Wright: A lot of questions have been asked about a lot of different areas. Let me take them in turn: first of all, my Lord Elystan-Morgan asked about the thrust of investigation in Member States, and that is a big area in itself. There are 27 Member States; some are much better than others at tackling fraud, as you would expect. There is an awful lot of fraud in some areas and almost none in others. Some report an awful lot of fraud, but we do not know if that is an indication that they have more fraud than others who report less, or whether they just report more; that is very difficult to tell. Some are assiduous in reporting almost everything, including very minor offences, and then dealing with them themselves, prosecuting their own nationals in their own jurisdictions, and others are not. It varies from state-to-state, and with 27 Member States you can imagine that it does vary from state-to-state. There are problems: you heard about time barring; Mr Denolf mentioned that to you. We do not have that problem in the UK, as you know. Criminal offences are not time barred except for very minor road traffic ones, but everything else is up for grabs and you can prosecute somebody irrespective of when the act was committed. That is not the case in very many Member States. The second thing is about the role of the Supervisory Committee. The role of the Supervisory Committee is fairly clear, and it is set out very clearly in Regulation 1073 of 1999, Article 11 as being the guarantee of OLAF’s independence. That is what its primary function is. It is also there to oversee and supervise, as its name suggests, the investigatory function of OLAF. To that extent it needs to have access to the investigatory casework of OLAF to ensure that, for example, fundamental rights and freedoms of people under investigation are respected; that cases are being investigated efficiently, effectively and with all due economy, having regard to the European budget; and that the management of OLAF itself is commensurate with the task in hand of investigating these cases properly, and that there are no undue delays. There has been a lot of criticism, particularly in the European Parliament, in the Budgetary Control Committee, of the delays that have taken place in OLAF investigations over the years. While I was on the Supervisory Committee between 2005 and this year, we took that task very seriously, and we issued a number of reports on an annual basis. You can have a look at them; they are all on the OLAF website. You can see the extent of the work that we did, particularly looking at undue delays, explanations for undue delays in cases, looking at case planning, and looking at any factors that might impugn the independence of OLAF. Until the very last year of our mandate we did not find anything that could be said to impugn the independence of OLAF, but in the very last year we were somewhat troubled by 195

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) a number of factors that we thought might well prejudice the independence of OLAF, and we drew attention to those in our last report. As far as a dialogue between the other institutions and OLAF is concerned, you mentioned Europol, Eurojust and OLAF. As far as Europol was concerned, we had very little to do with Europol; they are extremely busy; they had other things to do. We used to invite them to come to our meetings, and they never did; in the six and a half years we were there, they did not come to any of our meetings. I do not blame them, because they certainly had other important things to do. Eurojust we had a lot of dialogue with. OLAF had a lot of dialogue. To be fair to both Europol and OLAF, they have quite an ongoing dialogue between the two on matters of relevance. Of course, both Europol and Eurojust have bigger fish to fry than just fraud on the European budget. They both deal with all sorts of criminal cases, terrorist cases, people trafficking—all sorts of terrible things that go on across Europe, across jurisdictions. Both Europol and Eurojust are looking at those too, so the OLAF side of their activities is a very small part. A far as inter-institutional dialogue is concerned, we had a very fruitful ongoing relationship both with the Parliament, through the Budgetary Control Committee, and with the Commission. In the very last year of our term in office, that particular committee I was on, we had a little trouble with the relationship between OLAF itself and the Commission. I am sure this has been gone over many times in front of your Committee, but the relationship between OLAF and the Commission is a rather ambiguous one. OLAF is part of the Commission for administrative and pay and rations purposes, but independent of it in relation to its investigative function. That creates a slight degree of—I would not say frisson but difficulty, especially if, as they do occasionally, OLAF needs to investigate members of the Commission’s staff. They do that for their internal investigations into such matters of procurement fraud and corruption, and that sort of thing. There is a problem there. We had a particular problem, and OLAF asked us to look into the situation where the Commission refused to allow OLAF itself access to personal data of Commission staff, when they had an allegation of possible abuse and conflict of interest in relation to procurement fraud. An allegation would come in from a Mr So-and-so that Mr Bloggs was giving contracts to his brother-in-law. They wanted to be able to establish, for example, the company was being run by his brother-in-law; they could not establish that because of the names being different, but they wanted to look at the personnel data held by DGHR within the Commission, and DGHR refused to allow them that access. There seemed to be no reason why they were refused access, but they, of course, prayed in aid data protection, as they always do. We went to the Data Protection Commissioner of the Commission itself, who looked at it himself, and he said there was absolutely no reason why OLAF should not have access to this data, but the Commission still dug their toes in and said they should not have that access. We gave an opinion, for what it was worth, saying that we agreed with OLAF; they should have that access. By the time we left, which was in January or February this year, they were still not being granted that access. Now, I have heard—and this is purely hearsay—that the relationship between OLAF and the Supervisory Committee, as you can see from the evidence given to you by Mr Denolf, seems to have deteriorated since we left. We had five years when Mr Franz-Hermann Brüner was Director-General of OLAF. There were extremely cordial relations with OLAF; a very close relationship. I was Chairman for the first two years, and I made a speech in Parliament—I am afraid it is a very hackneyed phrase, but it was quite new to them—saying that we were a critical friend. Mr Brüner latched on 196

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) to the word “friend” and did not notice the word “critical”, and he got rather upset every time we did put something slightly critical in our opinions, but we did have a very close relationship with him. He came to every one of our meetings; he was very open and frank with us. He gave us access to case reports; we had no big problems at all. Unfortunately, he died in January 2010. His deputy, Mr Ilett, who you met when he came with Mr Kessler to give evidence before you—I think you have met him in Brussels—took over as temporary Acting Director- General for a year, until Mr Kessler, the present Director-General, was appointed on Valentine’s Day—I will never forget the day—in 2011. Now, Mr Kessler is a very different kettle of fish from Mr Brüner, if I can use the jargon, and he has very different ideas where he wants to take OLAF. That does not necessarily match the way the Supervisory Committee wants to go. He does not see the value in having a supervisory committee at all, if I may say so. He said that to us informally at the end of our term; that he could not see why we were there at all, and I can only say I think things have got worse since we left. Mr Denolf, who is presently chairing the committee, is a man, as you have probably gathered, of very strong views, and there has been somewhat of a disagreement between the Supervisory Committee on the one hand, and Mr Kessler on the other, which is a great pity. I think dialogue and relations seem to have broken down.

The Chairman: Can I ask Lord Rowlands, because he tried to get in on the last question, and we have strayed quite a long way. Rosalind Wright: I am sorry, there were an awful lot of questions there, and a lot of answers.

Q176 Lord Rowlands: You have repeatedly mentioned that none of the organisations you have been talking about, Europol, OLAF, Eurojust, have a role specifically dedicated to the issue of fraud. Rosalind Wright: OLAF does.

Lord Rowlands: OLAF does. Is there a case for a sort of anti-fraud tsar who will drive the anti-fraud agenda? Rosalind Wright: There is a commissioner who is responsible for anti-fraud; that is Mr Šemeta. He has three briefs: he has audit and also taxation, but anti-fraud is there. He is responsible; if you like, he is the anti-fraud tsar. He should be driving it.

Q177 Lord Rowlands: Do you get the impression it is happening? I get the impression from your evidence that it is not. Rosalind Wright: He is not as hands on; his predecessor was Mr Siim Kallas, who had what we call the three As: audit, anti-fraud and administration. He found that the anti-fraud was the most interesting part of his brief, and he concentrated very much on it; he was much more active in the anti-fraud area. Mr Šemeta is a taxation specialist, so he goes on to the tax side rather more than the anti-fraud side. That is just a matter of the individual Commissioner’s interests. I can only tell you that is the way the setup goes; he is the anti-fraud tsar.

Q178 Lord Rowlands: What would his relationship be with OLAF? How would he exercise that?

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Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) Rosalind Wright: Due to the independence of OLAF, he is not allowed to tell OLAF what to do, or to tell the Director-General what to do in any sense. He has a high-level responsibility for OLAF. OLAF sort of reports to him, because it is part of the Commission and he is the Commissioner; that is his area of interest. Otherwise OLAF reports to the three institutions, particularly to the Commission, and then to Parliament and the Council. Its real responsibility is to the Supervisory Committee who supervise it; that is the present and rather unhappy situation.

Q179 Baroness Corston: Mrs Wright, one of our previous witnesses, Professor Spencer, when asked his opinion of OLAF, said that it was toothless in the sense that it can investigate, but then it has to hand the matter over to the legal authorities of the Member States. What is your view on the issue? Rosalind Wright: Yes, it does, and that is the problem, because it is only an investigative body. It is only, if I may say so, an administrative investigative body, and it does not have very extensive powers: it does not have the powers of a criminal investigative body. That is a severe limitation. As you know, it has two areas which it investigates; one is external fraud and one is internal fraud. The internal fraud is much easier: the internal fraud is fraud committed inside the institutions, whether by Commission officials, parliamentarians, parliamentary officials—I do not think it has ever investigated anybody from the Council, but it could. They are mostly investigated for breaches of expenses rules; that is the main thing. At one stage, when they did not have a de minimis rule, they were investigating extremely small amounts. Mr Brüner had a zero-tolerance policy. He said, “Fraud is fraud, and I will investigate everything that is deemed to be fraudulent”. At one stage, we rather raised our eyebrows at a very small investigation involving €47, which took 18 months to investigate. If you are a member of the Commission or parliamentary staff—I am sure you will be very envious of this—you can reclaim the cost of your prescribed medicines. One functionary claimed back for prescribed medicines which were prescribed, I think, to his girlfriend, but he had cut the top off the prescription so you could not see who they were prescribed for. This took OLAF 18 months to establish. Then, because it was an internal investigation, they had compulsory powers to require the member of staff to appear before them, and they did. They wrote to him and said, “You must appear before us; we are going to interrogate you.” He did not, and they just never followed it up. The whole thing was binned; it was sent off to the Belgian Judicial Authorities to prosecute, and they said, “We have got no evidence”, and they put it in the wastepaper basket. That took them 18 months, so that was an internal problem, where they do have compulsory powers. Externally, on fraud committed within the Member States—which is much bigger, of course, as you can see—and on the budget, they do not have these powers at all. Once they have remitted a case to the national judicial authorities they have no powers at all, either to require the national judicial authorities to take any action—they recommend that action be taken, but if none is taken they do not have any powers to do that—or to take part in any subsequent investigation. For example, in the UK they would like to be able to go out with the City of London Police to point out various documents; they could say, “Seize that document”, but they do not have those powers, and they are not brought into the subsequent investigation. It all has to be started all over again. That is a very unsatisfactory state of affairs. That is one of the reasons I think Professor Spencer thought they were toothless; they certainly do not have adequate powers.

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Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) Q180 Lord Rowlands: Their annual report and the evidence we took with OLAF when we were in Brussels showed that it is a minority of the cases that they submit to the national authorities that are ever pursued. Rosalind Wright: 7% of cases referred by OLAF are prosecuted to conviction in Member States.

Q181 Lord Rowlands: In your supervisory role, were you in a position to check why that was happening? Was it a lack of quality of the investigation or lack of interest on the other side? Rosalind Wright: We tried very hard to establish why that was the case. It was a huge number of reasons, we managed to find out. In some cases it was because of time barring. In other cases there was just a complete lack of interest on the part of the national judicial authorities. In other cases they had other pressing priorities. You are sending a case over to national judicial authorities saying, “Investigate Mr So-and-so, who is a national of your country, who is alleged to have committed a large fraud on the European budget”. It is impossible to say if this is true, but your instinct tells you that in some cases they are reluctant to investigate their own nationals for a fraud on a subsidy that is being paid centrally from Brussels. I do not know if that is true, but that was certainly the impression you got. I do not think it is the quality of the investigation on the whole. In many cases, it has to be re-investigated; certainly the ones sent to the UK have to be. They do investigate them on an administrative basis, not on a criminal basis. If you want to bring criminal proceedings you have to do it all over again, investigating with criminal powers using PACE—the Police and Criminal Evidence Act—powers. You cannot do it using the evidence already obtained by OLAF. That is another problem.

Q182 Lord Rowlands: Are there any recommended changes you would like to make? Would you consider giving OLAF greater power? Rosalind Wright: I would; very much so.

Q183 Lord Rowlands: What would that be—to press national authorities to do more? Rosalind Wright: There is an obligation on Member States to cooperate with OLAF. There is no requirement forcing Member States to take action. I do not know that you could put in any kind of recommendation or any kind of legislation for that, because a lot of countries would baulk at that. To give OLAF more effective powers of investigation would be a very good thing. Regulation 1073 is in the course of being completely rewritten; the Regulation is under discussion currently. It is just about to go through. We said that was a golden opportunity to give OLAF those powers, but neither the Commission nor the Parliament wanted to do that.

Lord Rowlands: There is not the will there. Rosalind Wright: There is no will to do that.

Q184 Lord Dykes: To follow up, speculating about the future—though obviously that is unascertainable by definition—do you feel there is a real case for pressing that matter among the interested parties, the people of goodwill who would like to have OLAF getting stronger powers, which would make such a difference? For example, if you just had changes in administrative regulations, that would not be adequate I would have thought. But if the 199

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) European Parliament could be approached again, and work with the Council of Ministers and produce a strong recommendation, which would give specifically to OLAF substantial powers, that would make a big difference. Rosalind Wright: It would make a huge difference.

Lord Dykes: Is it achievable? Rosalind Wright: I do not think it is achievable, because this has all been discussed. There was no will to do it, but it would very much make a difference.

Q185 Lord Anderson of Swansea: What does strike me about your evidence is that so much depends on personal relationships. You mentioned the difference between the one director and the other, and those relationships may extend also to the relationships with national authorities. I suppose ideally, having done the investigation themselves, OLAF, if they had the personnel available, might second someone on a key investigation to work alongside national authorities. But national authorities may say, “Keep off our turf”. Rosalind Wright: They certainly do. Looking at the UK position, I mentioned MTIC or carousel fraud. Certainly under Mr Brüner it was suggested that they did second people from OLAF, who have a particular expertise in investigating this form of fraud, to work with HMRC over here. HMRC would not hear of it.

Q186 Lord Anderson of Swansea: That is part of the lack of will. What would happen if OLAF were to say to the national authority, “We referred a case which in our judgment is well worth investigating. Can you tell us what has been the result? Can you indicate to us stage-by-stage what is happening?” Rosalind Wright: They do that.

Q187 Lord Anderson of Swansea: Do they get cooperation? Rosalind Wright: In many cases they do. In many cases they get a reply saying what they have done.

Q188 Lord Anderson of Swansea: Does that response vary very much from country- to-country? Rosalind Wright: Yes, it does.

Q189 Lord Anderson of Swansea: How do we perform? Rosalind Wright: We are not too bad.

The Chairman: Lord Elystan-Morgan, we did touch on the Supervisory Committee.

Q190 Lord Elystan-Morgan: I did ask a very comprehensive question; I hope I did not jump the gun. The question whether the thrust comes from Brussels or not is something that should be considered very early on in the discussion; if the thrust comes from Brussels, how can the thrust be made much more effective than it is? The only remaining part of the question is: what do you see as the Supervisory Committee’s role? Is there any role for it if there is a total deadlock between that Committee and OLAF? Rosalind Wright: There should not be a total deadlock. There is no question that there should be. Their role is to supervise OLAF; all they could do is to put out a very

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Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) strongly-worded opinion—I do not know what they intend to do, because I have not spoken to them—saying what the situation is and what they recommend. They could certainly draw attention to the fact. I know that Mr Denolf recently appeared before the Budgetary Control Committee brandishing a case report that he had from OLAF, which was redacted to the extent that almost every other line had thick black lines all over it. He said, “This is the sort of thing I am being handed by OLAF”. If that is what is happening, they cannot do their job properly, because they need to be able to oversee the quality of the work being done. Of course, there is a saving in the Regulation that you cannot interfere—this is the word used—in ongoing investigations, but this is not a question of interfering; this is a question of oversight and supervision. If they cannot do their job properly it is a matter for the Commission to sort out, because ultimately OLAF is administratively part of the Commission, and so is the Supervisory Committee.

Q191 Viscount Eccles: Could I change the ground a little bit? What is the political agenda? Is it really something where, if you look at Brussels, it is important for them to be popular? They are givers-out of money to 17 out of the 27 countries, and take most of the money that goes there from the big ones, etc. Fraud is an unpopular subject, which leads to people being fretful and not liking being accused and all that. Is there really something going on here that is a political agenda: this is something which really we are better not to do efficiently? Rosalind Wright: I do not think so quite honestly; I do not think that is the case. People do not like fraud, as you say, on a national level either. They want a good news story; they want to say everything is running smoothly and flowers are in the garden and smelling beautiful, and they do not want to say that there is a downside to all this. I do not think other than that there is any kind of political agenda. They want to root out fraud wherever it is and they want to crack down it, but the resources are not there, and the bureaucracy overcomes almost everything. That is a huge problem that we encountered.

Q192 Viscount Eccles: Maybe the resources are inappropriate. If you say on the one hand there are not enough resources, and on the other hand there is too much bureaucracy, there is a certain contradiction in that. Rosalind Wright: Yes.

Viscount Eccles: Is it a leadership problem? Why does it not get sorted out? Rosalind Wright: There are two things. First of all is fraud prevention within the European DGs in the Commission. OLAF itself, as I am sure Mr Kessler told you, has a fraud prevention role, and they should be rolling out lessons to other DGs, especially the grant-giving DGs, telling them where the problems lie: before you give out a grant you should do due diligence; you should make your inquiries extremely carefully before you give anybody anything. That is the first thing. A number of officials I spoke to—though not very high level officials—had never heard of OLAF, which is worrying. The message is not being got out there. The second thing is the quality of the staff themselves within OLAF, and it is a leadership issue. Since Kessler took over a number of experienced investigators have left. Apparently they are being replaced by people from inside the Commission, who are mostly what we would call in UK civil service terms generalists; they are not experienced investigators. The budget for training investigators is not a large one, and I do not think it has ever been a particularly well-used one. When I was there the external training was minimal, and internal 201

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) training was on all sorts of, I thought, not terribly essential core issues. They are keen on training in language skills, as you can imagine, and they are keen on training in all sorts of peripheral issues, but not on specifically interviewing witnesses, interviewing suspects—very core skills that require a lot of training if the experience is not there. A lot of these people do not have that experience. The people who do have the experience are coming in from 27 Member States, each of whom has got a completely different way of looking at investigating criminal offences, fraud or even irregularities that do not amount to criminal offences. You would get a mixed disciplinary team of, for example, a former Greek customs officer, a former diplomat from Sweden, a Latvian police officer, a French ex-juge d'instruction, and they would all have a completely different way of looking at the way a case could be investigated. They have got to have a common approach and they have got to be well-trained, and I do know that that is happening. I do not think it is happening; it certainly was not happening while we were there and I do not think it is happening at the moment.

Q193 Lord Anderson of Swansea: Mrs Wright, so far we have had exposed to us a number of deficiencies in the chain in the investigation, and the question was posed earlier to you: where should the thrust come from to improve this? I wonder if you could give us as frankly as you have already your view of the role of the European Parliament; could they be persuaded to take this more seriously; to suggest, perhaps on the basis of certain recommendations that we might make, an improvement? Rosalind Wright: The Budgetary Control Committee is very much on top of this; they always have been. I do not know if you have spoken to Mrs Grässle, who is the rapporteur? You have.

She is very much on top of this, and she is a very, very substantial driving force. They have always taken a great interest in anything she has had to say about OLAF and about the direction that OLAF is taking. Any recommendations that you make will be taken very seriously by her, and very seriously by the Budgetary Control Committee. That is, I am told, the most influential committee in Parliament, so if you can get them on side, you have got Parliament on side. The Commission is a different kettle of fish altogether.

Q194 Lord Anderson of Swansea: The Commission presumably, given the new arrangement of power, will increasingly take the Parliament more seriously. Rosalind Wright: One hopes so.

Q195 Lord Dykes: In that context as well, are you disappointed that HMRC does not encourage OLAF more or respond well to them? Rosalind Wright: Personally, yes, very much.

Lord Dykes: It is a big weakness.

Rosalind Wright: I think so. We have always been a bit out on a limb with HMRC; I can speak very frankly. Some years ago there was the Philip Morris Agreement, of which you may have heard, about cigarette smuggling; 26 member countries signed up to that in pretty short order, and the only one who held out was the UK. We held out for no good reason, if I could say it, at all, except to say that we had signed our own individual agreements with the various cigarette companies. OLAF was keen that the UK should sign up too. Despite a lot of representations made directly to the Treasury nothing was done. 202

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) Eventually—I’m sure this was ultra vires my own powers as chairman of the Supervisory Committee—I was asked by OLAF and I did write a letter to the Treasury at the time, saying I did not see any reason why they should not sign up to it and I thought there were very strong reasons why they should. In fact, the UK would benefit financially if we did sign up to the Philip Morris Agreement, and eventually we did, but it took at least three years to get that agreement. It has always come from that side; the reluctance to cooperate: it is not on the police side at all. It is all on the HMRC Treasury side.

Q196 Lord Rowlands: Why do you think that is? Rosalind Wright: I do not know. It is a bit of, “We are independent and we do not like being told what to do by Brussels”.

Lord Rowlands: VAT is a national issue. Rosalind Wright: Yes, that is a problem. We are talking about cigarette smuggling here, but anyway. Lord Dykes: It is a big thing. Rosalind Wright: It is, very.

Q197 Lord Stoneham of Droxford: We have largely dealt with the question I had, because you talked about a confusion of who OLAF dealt with in this country and I was greatly reassured by the attention Hampshire seem to be getting. I wanted to know if there was anything else you wanted to add on ways we could improve liaison work with OLAF in this country to make it more effective? Rosalind Wright: No. One of the problems, as I mentioned, was that they did have this Magistrates Unit for a long time and, in fact, when we first arrived in 2005 they had 17 members, all from different Member States, who were experts in the criminal and administrative legal systems of their own countries, and they could see immediately who should be the recipient of reports from OLAF and give advice about cases before they went to national judicial authorities. That is all gone: they do not have a separate Magistrates Unit any more, and they do not have that sort of expertise any more. That is a great pity. There is only one French magistrate within OLAF altogether, and he says all the time he has been there, since they abolished the Magistrates Unit, he has never been called on to advise about cases going to France. They have nobody from England who could give that sort of advice either. As I said, we always relied on an Irish gentlemen, an Irish lawyer, who dealt with the English side as well as Ireland. That is the problem, because they ought to know what the particular requirements are of the national jurisdictions, and they ought to know the people to liaise with in each one.

Q198 Lord Stoneham of Droxford: The City of London Police are now putting themselves forward to be the lead body, so presumably that would be welcome. Rosalind Wright: That would be a great improvement. That would be very welcome, because they do know what is what, and they are the experts on fraud.

Q199 The Chairman: Would you suggest that everything went to them? Would you try and persuade HMRC that it would be farmed out to them by the City Police? Rosalind Wright: They probably would not like that either. Probably if it is a customs matter, it ought to go directly to HMRC. The side of OLAF that operated most effectively

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Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) was the customs side; there were very good investigators on the customs side, and the director of that particular directorate, that was then Directorate B, was a man called Ian Walton George, an ex-Treasury official who had worked for Customs and Excise years ago. He knew a lot of people—as you said, it is a matter of who you know—and he had very good relationships. Unfortunately he retired about two years ago, so he is no longer there; there is not anybody left, except for Mr Ilett, who was not working for the customs side, who is ex-HMRC within OLAF. That is a great pity, but it would be better for Customs cases to go to HMRC, just from the point of view of the amour propre of HMRC really. All police matters should go through the City of London Police.

Q200 Lord Anderson of Swansea: If it were the case that, say, for Customs cases the City of London Police were the first point of contact, ideally would you like them to just be a clearing-house fulfilling the role of that non-British individual within OLAF, and doing no more; or would you like them to have a more proactive role, not only distributing the cases to the appropriate UK body, but following them up and seeing what happens? Rosalind Wright: I do not know if they have got the resources to do that all the time; they are very pressed themselves. I do not know that Mr Leppard would welcome that extra role. I think it would be a very good idea but it is putting a lot of responsibility on them, and I am not sure that they have got the time or resources to deal with it.

Q201 Lord Rowlands: You have explained as much as you know, but why was the Magistrates Unit abolished? Rosalind Wright: I do not know. Mr Brüner abolished it, really. He first of all rolled it into a Judicial and Legal Advice Unit; they did not call it the Magistrates Unit any more, but Mr Kessler has completely done away with the whole idea of it, because he has reorganised the office. He has given you his organogram, which shows the way the office is organised now; there is no separate legal advice department at all. There are an awful lot of lawyers within OLAF and they are distributed generally throughout the organisation, and there is no central point that you could go for advice.

Q202 Lord Rowlands: Would you recommend us to recommend it be restored? Rosalind Wright: That is very difficult; one does not like to interfere with the way Mr Kessler organises his office. We tried at the Supervisory Committee, but got absolutely nowhere. You are very welcome, of course, to recommend that to him, but I do not know that he will—

Q203 Lord Rowlands: Can you testify to its value? Rosalind Wright: I think it would be extremely valuable to have it put back in place, yes, to have that function there.

Q204 Lord Temple-Morris: I am sure I speak for most of the Committee here; I have enormously enjoyed Mrs Wright’s evidence. On the last question I just wanted to wind it up a bit. It is a forlorn question as it is phrased rather bleakly here on my sheet of paper. Do we need a European Public Prosecutor? I think in the current European context the word “need” is somewhat optimistic. Do we need, are we likely to get, against a background— and this is where the question is coming—where you have this great lumbering entity there called the European Union and its Commission and OLAF, and everything else? It is pretty intelligent; it knows exactly what it wants to do, it says what it wants to do, and inevitably what it wants to do equals more Europe and not less Europe. In whatever context this 204

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) Committee has been looking at over its inquiries, it always comes down to the same sort of thing. Therefore, the question really is, deal with the public prosecutor bit, but from your experience, do you think that if, by some flashing light that came down from the heavens, we had a pro-European Government and a pro-European media, that we might make a constructive influence and difference if we came into Europe more than we have done? You have touched on various things; the example of the Customs and Excise is appalling, frankly. Would there not be other obstacles that would always be in the way, or do you think we might make some difference? Rosalind Wright: Well, this is asking me a political question, which I do not think I should answer.

Lord Temple-Morris: Just from your experience?

The Chairman: That is why we said “need” rather than “should we have one”. Rosalind Wright: Let us start with the public prosecutor. There are two reasons why you might think a public prosecutor might be a good idea; the first is, as you can see, a lot of Member States are not taking cases forward, and it rests entirely on national judicial authorities’ whims, if you like, whether they take a case forward or not. If there were a European Public Prosecutor, the prosecutor’s office—it is now being called the European Public Prosecutor’s Office rather than the European Public Prosecutor, which I think is interesting and significant—could direct somebody in each Member State, under the subsidiarity principle, to take action where there was a case of fraud against the European budget. That would justify having a European Public Prosecutor’s Office. The second reason is because most of these very large frauds are committed across national boundaries; you do not tend, unless they are pretty small cases, to get a case wholly within one jurisdiction. Where you get cases where possible defendants are in several different jurisdictions it would be extremely practical to have somebody who is able to cross national boundaries and say, “We will take X, Y, and Z. There is a chap at the moment in Estonia; one in Sweden”—we have had a case like this, which came through Europol—“one in Germany, one in Brussels, one in England, and deal with the whole lot together in one jurisdiction”. That would be a very good solution, because certainly, when I was at the Serious Fraud Office, where we had people in different states, and different Member States—it did not matter whether they were Member States—we could not, for some reason, bring them all together. You get the dreadful situation where one blames everybody else who is not there, and the chap you have in the dock gets off. Then you get everybody else to come over, and they blame the chap who has just got off, and then they get off. You get that very unsatisfactory situation. It would be very nice to have them all together in one jurisdiction and deal with them on one basis. From that point of view a European Public Prosecutor would be a good thing, but how it is all going to work is completely different.

Q205 Lord Temple-Morris: Can I rephrase my question quickly? From your experience, which is very considerable, and also your ability to express conclusions from that experience, a constructive influence in Europe: would it make a difference? Rosalind Wright: Yes it would. Currently England is regarded very much as an outsider. We are not seen as playing a particularly active or willing role in most areas in Europe. That is certainly the feeling I got when I was on the Supervisory Committee. We are seen as being reluctant to take on any particular role or any particular responsibility. They see us as saying, “Europe is there, we are not part of Europe”, and they resent that. If I may say so, it is completely outside your own area of interest at the moment; the suggested opt out on 205

Rosalind Wright CB QC, former Director Serious Fraud Agency and former Member and Chairman of OLAF Supervisory Committee—Oral evidence (QQ165-207) the third pillar arrangements is something that is going to cause even more friction. Here we have got 133 measures, including the European arrest warrant, which the Leader of the Conservative Party has already announced he intends to opt out of. This is already creating a lot of discomfort, if I can put it that way, in Europe, because if we want to opt back into any of them we would have to ask their permission to opt back. It may well not be forthcoming, or we may have to pay the price for whatever we want to opt back into.

Q206 The Chairman: If you will forgive the sales pitch, we have issued a call for evidence, because we are conducting an Inquiry into the protocol 36 opt out Rosalind Wright: Good.

The Chairman: You can submit by 14 December. Rosalind Wright: Excellent, I will do so. I hope you will ask Professor Spencer, because he has written seminal work on this, and he is really an expert in this.

Q207 Earl Sandwich: You said the use of the word “office” by the Commission might be a significant word. Is that because you fear the unmanageable bureaucracy it is becoming? Rosalind Wright: I think so. I think they are now respecting the idea of more subsidiarity in this area; that it is not going to be one central person who is going to be the European Public Prosecutor as such; that there is going to be an office including public prosecutors.

Earl Sandwich: There will be one for every Member State. Rosalind Wright: Member States will be able to use their ordinary national judicial people to have this role; yes, I think that would probably be more practical.

The Chairman: Thank you very much indeed. Any further questions from the Members? Are there any questions you think we should have asked? Rosalind Wright: No, I think you asked quite enough.

The Chairman: Thank you very much indeed it is very much appreciated. We shall look forward to your submission for our other inquiry.

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