Secretariat of the Committee on Budgetary Control Brussels, 22 November 2013 Budgetary Control Committee Delegation to Kaliningrad in the context of economic and financial impact for the Union by having a Russian enclave within the Union's border 8-9 July 2013 Feedback note In the Chair: Mr Jan MULDER (ALDE, Netherlands) EP Participating Members: Ms Ingeborg GRAESSLE (EPP, Germany), Ms Zuzana BRZOBOHATA (S&D, Czech Rep.), Ms Edit HERCZOG (S&D, Hungary), Mr Soren Bo SONDERGAARD (GUE/NGL, Denmark), Mr Boguslaw SONIK (EPP, Poland), Mr Joachim ZELLER (EPP, Germany) The final programme is to be found in Annex I. A question for oral answer with debate in Plenary sent to the European Commission on Cigarette production and smuggling in the Kaliningrad region is to be found as Annex II. 1 1. The aim of the visit of the CONT Delegation was to verify how the spending of EU funds on various projects in the region of Kaliningrad is done as well as to check the illegal flow of goods - mainly illicit trade of cigarettes and petrol products - into the EU from the region, which harms the income of the EU budget. 2. It aimed also to check how the customs control systems procedures are implemented in the EU external Polish-Russian border crossing point of Grzechotki-Momonowo. Fight against fraud and the protection of the Union's financial interests in general were also on the scope of the delegation. 3. Following intensive exchanges the delegation was invited by the regional authorities of Kaliningrad oblast as the Russian Parliament didn’t show interest in issuing an invitation to the Committee delegation. 4. On 8 July am the Delegation visited the Polish-Russian border crossing in Mamonovo II - Grzechotki, which has been built thanks to EU funds (13.3 million EUR under the TACIS CBC Programme). On both sides of the border Members held meetings with respectively the Russian and Polish customs authorities. 5. Mamonowo-Grzechotki is the main border crossing between the two countries and since its opening in 2010 the waiting time on the Pl-Ru border has been significantly shortened and the quality of services improved. Thanks to the modern equipment installed controlling all the freight entering into the EU, illegal goods are now less prone to entering through this border crossing. It seems that they are however shipped into the EU via other means. 6. The Delegation met also with representatives of the European Agency for the Management of Operational Cooperation at the External Borders of the Member States of the European Union (Frontex) and discussed the safety of the eastern borders of the EU as well as the specificity of each one of them (from Finnish-Russian to Romanian-Moldovan border). 7. On 8 July pm the delegation held meetings with the regional authorities of Kaliningrad oblast. The delegation encountered the Governor Nikolai N. Tsukanov as well as several other ministers of the Kaliningrad Government. The Members highlighted the problem of tobacco smuggling from the region and urged for a rapid intervention of the Russian authorities. 8. After the meeting a press conference was held which was highly attended by regional and local media as well as by some representatives of national Russian media. The issue of tobacco smuggling was raised as well and it was reflected in the press articles the following day. 9. Accordingly with public available sources that estimate that the cross-border cigarette smuggling from Kaliningrad to the European Union (particularly to Lithuania and Poland) is an illegal industry worth an approximate 1 billion US dollars1 CONT decided to send a delegation to Kaliningrad. The Committee paid therefore particular attention to the fight against cigarette smuggling and other forms of illicit trade of tobacco products at this external border of the European Union. 1 http://www.publicintegrity.org/2008/10/20/6353/made-be-smuggled 2 10. Analysis by FRONTEX confirms that cigarette smuggling is one of the main problems affecting the EU Eastern border, and suggests a significant scale of smuggling from the Western Balkan countries. It also suggests that cigarette smuggling significantly affects the work of order authorities on the Eastern land borders, including on the land borders with Turkey, and with Western Balkan countries2. 11. The second day of the visit focused on EU funded projects. The delegation visited a Long Term Control Plan and Drug Treatment Hospital in Kaliningrad, which obtained funds to develop services to contain the spread of HIV and Tuberculosis among injecting drug users in Kaliningrad oblast (331 thousand EUR under the TACIS program). This ongoing project is a successful one and the hospital authorities have already declared that they will attempt to continue funding the project once the EU funding has ended. 12. The Delegation visited the town of Zelenogradsk on the Baltic coast, where one of the pumping stations of the project of Waste Water Management in Small Towns of Kaliningrad Oblast has been located (9.5 million EUR from the EU funds via the Nordic Environment Finance Corporation (NEFCO)). This project is a part of a series of ambitious projects of the EU aiming at improving the quality of water in the Baltic Sea. Despite long efforts of the Commission (lasting already 17 years), the water sanitation projects in Kaliningrad are unfortunately still not functioning. 13. The third visited project was the cross-border bicycle trail between Lithuania and Russia along the old post road on Curonian Spit EUROVELO-BALTICA in the Curonian National Park (225 thousand EUR under TACIS program). The Russian bicycle trail project has been rejected by the Russian Ministry of Environment and only the Lithuanian side of the route has been created. Members insisted that the National Park Authorities should guarantee that the project is completed in the Russian side as well. 14. This delegation follows up the 2012 delegation of the Budgetary Control Committee to Rotterdam and Antwerp, on customs control systems at the EU external borders and fight against fraud and illegitimate (smuggled and counterfeit) cigarettes and the hearing organised by the Committee on 17 September 2012 concerning "How to improve the capacity of the future Hercules III programme to promote activities in the field of the protection of the EU's financial interests?" 15. Recalls that in 2011 the amounts of cigarettes seized were 141.000.000 in Antwerp and 81.900.000 in Rotterdam harbours, further recalls that according to the figures provided by "The Dutch Cigarette Manufacturers Association" the illegitimate (smuggled and counterfeit) cigarettes consumption has been increasing year over year and therefore the EU (and Members States) financial interests are being damaged; 16. The Head of Section of the EU-Russia Cooperation Programme and the Head of Finance and Contracts Section of the EU Delegation in Moscow assisted in the delegation. 2 Stepping up the fight against cigarette smuggling and other forms of illicit trade in tobacco products - A comprehensive EU Strategy - COM(2013) 324 final 3 CONT delegation observations and recommendations: 17. Insists that insufficient control at the EU external borders represents a significant decrease of the traditional own resources funding to the revenues for the European budget and therefore deserve from the political authorities greater attention; 18. Underlines that the Treaty states that the Union and the Member States share responsibility for protecting the Union's financial interests and fighting fraud and the Commission should exercise overall oversight, set standards and verify compliance; calls for close cooperation between the Commission and the Member States in order to protect the Union's financial interest effectively; 19. Regrets that annual losses of revenue in the European Union can be estimated, on the basis of seizures of cigarettes notified by the Member States, at about EUR 10 billion per year, of which about 10 % (i.e. 1 billion EUR) would be revenue to the European Union Budget and that it is estimated that 65% of the seized cigarettes are counterfeit3; based on these information the damage of counterfeit to the Union Budget can be estimated at around EUR 650 million per year, the damage due to contraband at around EUR 350 million per year; 20. Notes that accordingly with Frontex-coordinated Joint Operation Focal Points Land 2010 and 2011 the common borders are one of the most important entry points for smuggled cigarettes to the EU, followed by the Eastern Balkans (border with Turkey) and the Western Balkans; 21. Deplores that accordingly with public available sources the estimated cross border cigarette smuggling from Kaliningrad to the European Union (particularly to Lithuania and Poland) is an illegal industry worth an approximate 1 billion US dollars; 22. Notes that Western European countries are destination markets for both cigarettes smuggled from third countries to Member States but also those illegally produced on the territory of the EU and that in the case of Poland and Lithuania, an estimated 60–70% of all smuggled cigarettes are sold there while the rest are smuggled to other European countries; 23. Notes that the expanding flow of illicit goods is caused predominately by price differentials between the two sides of the common borders for a wide range of products, in particular excise goods; further notes that tobacco smuggling continues to be lucrative due to price differences between the EU and third countries and that the main destination countries for smuggled