Subject: House of
Lords Select Committee Enquiry into EC Accounting - Submisstion by Ashley Mote
MEP
Ashley Mote
Independent, SE England
Member of the European Parliament's Budget Control Committee
11 April 2006
Lord Radice
House of Lords
London
SW1A 0PW
House of Lords Select Committee Enquiry into EC Accounting
Here is my submission to your House of Lords Select Committee's sub-committee
enquiring "into the mechanisms and audit of the revenue and expenditure of the
European Communities". It omits references to the revenue side of the EC's
accounts since that is directly controlled by the governments of the member
states.
As an active member of the European Parliament's Budget Control Committee
since my election in June 2004, I have made a close study of the EU's lax
financial management. I have had the invaluable assistance of a highly
experienced British forensic accountant, Christopher Arkell, who has freely
given of his time.
I have also worked closely with two other MEPs with a track-record in this
field - Paul van Buitenen, a former whistle-blower himself and now a green MEP
from the Netherlands, and the Austrian socialist MEP Hans-Peter Martin. Both
were elected on financial transparency mandates.
We have all had the benefit of advice, information and guidance from Marta
Andreasen, the European Commission's former chief accountant who was dismissed
by vice-president, Neil Kinnock, for whistle-blowing on financial
mismanagement within the commission itself.
Mrs Andreasen sacrificed her career following several incidents when she was
'told' to authorise substantial payments without any information as to the
purpose, probity or budget line on which to base each authorization. Being
ultimately responsible, she refused and paid a heavy price.
It was and is Mrs Andreasen's view, to which we MEPs now concur, that the core
of the EU's financial mismanagement problem lies within the commission and its
opaque structure. All the public focus on what happens downstream - important
through it is in its own right - appears a calculated distraction.
My office is now stocked with many files of original documentation. This
includes numerous reports by commission officials and others (some leaked),
and several lengthy submissions to the Serious Fraud Office in London. I also
hold much correspondence with the president of the commission, Jose Manuel
Barroso; the commissioner responsible for the fight against fraud and
corruption Siim Kallas of Estonia; Dalia Grybauskaite from Lithuania who is
the budget commissioner; Hebert Weber, the president, and other members of the
EU's Court of Auditors; the president of OLAF, Dr F-H Bruner; Douglas
Alexander MP and his predecessor as minister for Europe Denis McShane MP; the
CEO and senior staff at the National Audit Office in London; and Stephen Timms
MP, junior minister at the Treasury who answers for the Chancellor on these
matters.
In addition I have reports, documents, letters and records of meetings with
individuals and organisations who have had to cope with the EU's financial
mismanagement, sometimes with catastrophic personal consequences.
Should the sub-committee so decide, I would be more than willing to provide
copies of any of this material. And, of course, I am more than willing to
give oral evidence if the sub-committee wishes. Were this to occur, I ask
that Mr Arkell be invited to accompany me. His expert knowledge will be of
far greater assistance to the sub-committee than any of my layman's comments.
I enclose my
statement as requested, with some ideas about finally resolving this huge
problem.
Ashley Mote MEP
(Letter ends)
The Problems with EU Financial Management
A Summary from Ashley Mote MEP, Independent, SE England
Member of the European Parliament's Budget Control Committee
April 2006
Lord Radice asked a series of questions in the letter of invitation. These
are my answers:
What are the Fundamental Problems?
Basic Enforcement Weaknesses
1. The Court of Auditors (CoA) admits that 80% of all taxpayers money is
never properly accounted for. Some estimates put the figure as high as 95%,
based on the CoA's admission that only administrative expenses (five per cent
of the total) are fully audited and signed off. One CoA member freely
admitted - in answer to my direct question - that the EU was already too big
ever to be audited properly.
2. At a meeting of the Budget Control Committee (Cocobu) last year, the
president of the Court of Auditors said that responsibility for combating
fraud was a matter for the commission, not the court. The commission's
representative at the meeting then directly contradicted him and said that
control of fraud was a matter for the member states. The president did not
respond.
3. The EU admits
to having 662 bank accounts in 45 different countries. It admits some of
them are offshore, but refuses to say how many, where they are, or why they
are there. It also admits to having "dealings with" another 214,000 bank
accounts across the globe.
4. And 416 of its accounts are imprest accounts, which means the recipients
of public funds can draw down the money on their own signatures. According to
Mr Barroso, the president of the commission, all imprest accounts can be and
are audited by the EC's own Court of Auditors. The CoA is adamant they are
not audited because the funds are then outside its remit. Do they ever talk
to each other?
5. If fraud is suspected, the EC's financial investigation team known by its
French acronym as OLAF is toothless. It has to rely on action by the member
state. In 2004, some 9400 cases of fraud were reported. Yet in the seven
years of OLAF's existence there has been no successful conviction of any major
wrongdoer and funds recovered. Indeed, recovery of public money from scams is
derisory.
6. One of the EU's financial regulations (2342/2002, Article 87 (4)) says
there is no need to attempt recovery of any sum less than a million euros.
There is clear evidence of this loophole being ruthlessly exploited. OLAF
knows, the commission knows. Nothing has been done.
7. The loophole can best be described as 'separation of financial
responsibilities'. The commission prefers to say 'shared responsibilities'.
The net effect is that no-one is ever to blame. Let me explain.
8. The EC makes a payment on a project to a 'responsible' local public
authority which is expected to release funds to those running the project.
They may be co-signatories on the account, but not necessarily. If suspicions
arise, the cash is now beyond the reach of the CoA. The member state's own
auditors may decide not to act - "not our problem, it's EU money". In such
cases, there is no enforcement of accountability on local officials. When
money disappears, everyone involved blames everyone else. Much argument,
investigations and reports later - little or nothing is likely to happen.
9. How can there be real improvement when each EU institution or department,
and each national audit office, works to different standards and criteria, and
they all pass the buck? Is the UK's NAO's 'liaison' with the CoA and OLAF
over fraud cases in the UK anything more than an exchange of information?
The NAO's March 2006 report talks of numerous British government departments
reporting suspected fraud, and passing the information to OLAF. But OLAF says
the investigation, prosecution and recovery of funds is a matter for the
member states. If each department in Brussels, and each NAO or equivalent in
the member states, takes such a narrow view of its responsibilities where,
exactly, does final accountability lie? Nowhere. Such a structure must be
deliberate.
10. OLAF can only advise member states, and the CoA can only advise the
commission. Both are answerable to the commission. Neither have genuine
independence or powers of enforcement. This is a merry-go-round of Alice in
Wonderland proportions. It is also deeply offensive to millions of British
tax-payers
11. Which brings us to the biggest question - who is watching Brussels, where
the real problems are?
The Heart of the Problem
12. With the help of expert forensic accounting analysis, we now know much
more about the way the EC manages its finances. Massive annual cash
surpluses, which were supposed to be returned to the member states, have
routinely been hidden by the use of three unlawful accounting strategies.
13. The first involves retrospective adjustments of the annual accounts
anything up to two years later. Example: 750 million euros-worth of sundry
debtors simply disappeared off the accounts between 2002 and 2003, of which
663 million were cash advances to 'financial intermediaries'.
14. The second entails making and later amending unspecified 'provisions' on
the balance sheet. The third involves recording billions of euros-worth of
pension liabilities on both sides of the balance sheet. This grossly distorts
the accounts. It also means the member states are liable to fund the generous
pensions of 39,000 past and present Eurocrats twice over, having already paid
for them - like all other EC expenditure - via the UK's normal 'club
subscription'.
15. All three of these financial devices are specifically prohibited by all
recognised international accounting standards. Two other routine practices of
the EC are also highly irregular. Advances are treated as expenditure, and
loans which disappear are written off.
16. So what are the structural weaknesses at the centre? There is no paper
trail recording transactions, agreements, commitments, payments, receipts or
evidence of delivery of the goods or services paid for. Inconvenient
information is deleted from the records - reports simply disappear.
17. None of which is helped by a lack of effective security controls over
access to accounting systems and records. Certainly up to 2005 there was no
way for management or auditors to trace when, why and by whom changes had been
made to the records. Post January 2005 procedures are cloaked in secrecy,
doubtless to give the impression all is now well.
18. The introduction of double-entry accounting on 1 January 2005 has been
presented by the EC to the outside world as a panacea - the answer to all
their problems. It is nothing of the sort. There are still no official
accounting records. There is still no consolidation of accounts or central
control. There is still no effective transactional accounting. The
commission's accounts are merely the sum of the numbers proved by the
directorates, most of whom might say - next year - sorry we got some numbers
wrong last year. Hence the retrospective amendment of accounts published for
the year before.
19. Each directorate has its own financial staff who answer to one of 37
Directors General, not to the commission's chief accountant. The internal
departmental auditors are administrative rather than investigative. They
control rather than check. There is no effective departmental separation of
functions. The authorizing officer, who is responsible to the treasury, is
also the authorizing officer who originates a payment order, without having to
check supporting documentation. He then records the transaction in that
department's accounts. These insecure procedures were introduced by Neil
Kinnock when vice-president of the Commission, following the Santer scandal.
20. According to Marta Andreasen, this structure enables senior officials to
use the system for their own purposes, knowing they are unlikely ever to be
held fully accountable. That is why loans suddenly disappear between one
year and the next, or suddenly reappear as expenditure. That is why
pre-payments, loans and expenditure keep turning one into the other in a
perpetual merry-go-round.
To make matters
worse, two sources have confirmed that DG's are not averse to demanding
changes in their annual accounts, and deleting written criticism from their
internal auditor's reports.
Cash and Tax - More Serious Problems
21. Difficult
though it might be to believe, the potential and actual mismanagement of cash
is even more serious than the problems addressed above.
22. There is no central check on the authority of officials making payment
orders. There is no central list of authorised officials entitled to make
payments from the commission's bank accounts. Nor are any security checks
made on counter-signatories either concerning their level of authority or even
their physical existence.
23. This lack of security and suspect integrity of the banking function was
heavily criticized in 2004 by the European parliament. To date no evidence
has emerged suggesting that either banking security or the segregation of
duties has been addressed.
24. Never in the last 14 years has the Treasury department of the EC been
subjected to an independent audit by professional accountants. Yet it is at
the heart of financial operations. The same individual was in charge
throughout, until he quietly retired immediately after questions about the
non-auditing of his crucial function were first raised in Cocobu in 2004.
25. A Treasury operation with 21 billion euros-worth of cash in hand
at the balance sheet date would be externally audited two or three times a
year, as well as at year end, as a matter of routine.
26. Little of the EC's annual expenditure of some 100 million euros is paid
in advance. So to retain 21 billion euros in cash on its balance sheet is
extraordinary, especially as its debtors are the member states - which do not
go bust. The maintenance of such huge cash and near-cash balances suggests
a) the deliberate retention of member states' surpluses against EU rules.
b) the establishment of 'own-state' resources - the hallmark of an emerging
independent state.
c) no justification for the EC asking member states to make substantial
increases in funding from 2007.
27. Even more extraordinary was the Court of Auditors' reaction when asked if
- given the huge cash sums sitting in the EC's bank accounts - the overnight
money markets were used to maximise the value of public funds. No-one present
knew what we were talking about! Eventually a few mumblings about "risk"
confirmed it.
28. Of course the EC's own accounts are not subject to tax. Because they are
never fully signed off EC accounts live in a sort of legal limbo-land.
However, the EC 'trades' with taxable bodies. By implication, this must
directly encourage tax fraud, since the tax authorities in each member state
must find it almost impossible to establish with certainty what was paid to
whom, when and on what basis.
29. At one time the EC established a Contracts Committee to oversee the
issuance of contracts and to call for and analyse tenders. That committee
has been disbanded. The implications are inescapable - opaqueness is
preferred to transparency.
Are Proposed Improvements Adequate?
30. No. The doubtless well-intentioned 'road map' towards an 'Integrated
Internal Control Framework', championed by commissioner Kallas, is regarded in
Brussels as little more than a rearrangement of the deckchairs on the
Titanic. Fundamental flaws will remain, as indicated above.
Will They Lead to a Positive Statement of Assurance?
31. No. The Court of Auditors has openly admitted it cannot enforce change.
It could not even oblige the commission to reconcile closing and opening
balances when the computer system switched from cash to double-entry accrual
accounting at end 2004. Previous annual bulk entries on the accounting
records attempted to reach a year-end balance of sorts. As a result, the
opening 2005 position on the new system cannot be trusted. Thus future
accounts can never be signed off as a "true and fair view".
What Else Should be Done?
Credit Rating
32. The EC's triple AAA credit rating in the financial markets must depend on
'true and fair' annual accounting statements. The credit rating agencies
might reasonably be asked to explain their inertia over the last 11 years.
They might also be reminded that the EU is a regulator, expected to observe
the International Financial Accounting Standards it enforces on others. It
plainly has not done so.
33. Failure to meet these standards opens it to the risk of challenges by EU
citizens in the ECJ or via the EU Ombudsman, or possibly via the courts in
member states where financial probity is demanded of the government by force
of law. A successful challenge via any one of these routes would finally
oblige the EC to prepare audited accounts or risk a collapse in confidence.
Urgent Action on Fundamentals
34. All the major weaknesses identified above should be addressed as a matter
of urgency and on behalf of the millions of hard-working, long-suffering
taxpayers who fund the EU - a point the Commission routinely forgets. This is
not EC money - it is taxpayers' money.
35. In addition, an injection of commercial reality is needed. The treaties
do not require any cost:benefit analysis of any project or proposal. No
official ever seems to stop and ask "do we need to do this? What will it cost
to implement, what will it cost the target group to comply, what will member
states enforcement cost, and will the perceived benefits outweigh those costs
by a worthwhile margin?"
36. Such questions are not difficult. Every commercial organization asks
itself its own versions of these questions every day of the week. So should
governments - especially the unaccountable EU.
Specific Proposal
37. On a more pro-active and fundamental level, there is much the British
government could do to improve EC financial management. It could all have
been addressed during the British presidency. A golden opportunity was lost.
38. The British government is required by law to produce accounts which
provide a "true and fair view" of its financial affairs. Where in British law
is exemption given to the funds sent to Brussels?
39. The UK government could unilaterally set a time limit to complete basic
reform of the EC's accounting structures and procedures so that they comply
fully with International Financial Reporting Standards.
40. Meanwhile, all British contributions to EU funds could be halted or
diverted into an escrow account, pending the introduction and enforcement of
proper IFRS auditing on the commission.
41. The legality of such action was established by Nigel Lawson when he was
chancellor. Mrs Thatcher's government planned exactly such a move during
negotiations over the original British rebate. A Bill was drafted. So the
present British government knows it can take such action.
42. To add pressure, the UK government could invoke, or threaten to invoke,
Article 49 of the 1969 Vienna Convention on Treaties. This says that 'If a
state has been induced to conclude a treaty by the fraudulent conduct of
another negotiating state, that state may invoke the fraud as invalidating its
consent to be bound by the treaty.'
Lessons from Other Countries?
43. New Zealand routinely produces fully audited and signed off annual
accounts, usually within three months of the end of its financial year. It
has done so by creating a financial infrastructure that uses exactly the same
accounting criteria demanded of any large company.
Are Methods, Staffing and Organisation of Court of Auditors Appropriate?
44. No. At present, the Court of Auditors (CoA) is a creature of the EU
system. At the end of the annual EC 'audit', the court answers to the
commission and reports to parliament. The CoA's membership is 25 placemen and
women, each nominated by their member state - academics, civil servants,
former politicians. Only a few are experienced accountants used to working to
international standards.
45. The EC's relationship with the CoA needs to be completely reversed. The
CoA should be fully independent and answerable directly and only to its
ultimate paymasters - the member states.
46. The court should consist entirely of senior professionals in the relevant
fields of accountancy, financial management and the law. It should have full
powers to investigate and audit the EC's financial activities at every level,
with the authority to enforce change and compliance.
47. Only then will the EU be directly and fully accountable to the member
states and their taxpayers.
(submission ends)