Opinion of the Economic and Social Committee on 'Combating tax evasion in the single market'
Date: 2000-07-13
Institutions: European Economic and Social Committee
Subjects: EU programme, fight against crime, judicial cooperation in criminal matters in the EU, single market, tax evasion

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Official Journal of the European Communities

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Opinion of the Economic and Social Committee on ‘Combating tax evasion in the single market’

(2000/C 268/12)

On 25 February 1999, the Economic and Social Committee, acting under Rule 23(3) of its Rules of
Procedure, decided to draw up an opinion on ‘Combating tax evasion in the single market’ (Single Market
Observatory).

The Section for the Single Market, Production and Consumption, which was responsible for preparing
the Committee’s work on the subject, adopted its opinion on 7 June 2000. The rapporteur was Mr Burani.

At its 374th plenary session (meeting of 13 July 2000) the Economic and Social Committee unanimously
adopted the following opinion.

1.

Introduction

1.1.
The Economic and Social Committee has decided to
look into the problem of fraud affecting Community finances;
among the initiatives proposed by the Commission, measures
to combat fraud are one of the most important in terms of
urgency and the resources required. Fraud — whether in the
field of indirect taxation and excise duties or in the field of
Community aid — is not only damaging to Community
finances but also hinders or distorts application of the internal
market rules, which are based on transparency and free
competition. The present study therefore focuses on the
damaging effects on Community finances and the concomitant
distortion of competition within the single market. Analysis of
the wealth of documentation available — and particularly the
1997 UCLAF report and the summary report presented to the
Helsinki Council of Ministers in December 1999 — reveals the
need to establish a basic framework for an EU policy to combat
to
organised crime. The Committee considers it helpful
contribute to the current debate on this matter by issuing an
opinion for the attention of the Commission, Council and
European Parliament.

1.2.
Fraud occurs wherever there is an opportunity to make
money or pay less: leaving aside moral considerations, fraud is
regrettably an aspect of economic life which it is virtually
impossible to eliminate totally. While aware of this constraint,
governments are nevertheless doing everything they can to
prevent, control and combat
legislative,
regulatory, investigative and judicial measures.

it by means of

1.3.
In the past, fraud — generally perpetrated by individ-
uals — could be seen as an ‘inherent’ aspect of the economic
system;
its scale tends to be in inverse proportion to the
strength of legal and regulatory structures, the efficiency of
checks and the dissuasive power of sanctions. This type of
fraud remains endemic, and indeed appears to be on the
increase. Various factors play a part: the shadow economy, the
reduction in physical checks, and to some extent — as will be

seen below — shortcomings in Community legislation and a
lack of coordination between national regulations. In the last
ten years in particular, there has been a worrying rise in
‘pathological’ fraud, resulting from the involvement of organ-
ised crime.

In a desire to protect

1.4.
the Community’s financial
interests, the Commission pays particular attention to fraud in
the context of organised crime, without losing sight of the
problem as a whole (1):
‘Both on the income and on the
expenditure side organised crime is defrauding the budget.
International criminal networks are targeting highly taxed
products (cigarettes or alcohol), agricultural products of high
value or with a high world market/internal market price
differential
(e.g. beef, olive oil, butter) and finally goods
from third countries traded under a preferential tariff regime
(fisheries, textiles, electronics, motor vehicles)’.

from a different angle:

The ESC is submitting this opinion on the same basis,
1.5.
fraud — and tax evasion in
but
particular — is only one of the activities of organised crime
networks, which operate across the board and are involved in
all types of illegal activity: drugs, arms trade, illegal immi-
gration, smuggling, prostitution, counterfeiting and credit-card
fraud. The proceeds are then used for the further crime of
money laundering. It follows that measures to combat fraud
must not be an end in themselves but should be regarded as a
means of combating organised crime. In other words, they are
merely one piece in a jigsaw in which intelligence-gathering
can certainly help to counteract individual
illegal acts but
should also help to form an overall framework for attacking
the root of the problem: crime itself.

(1) COM(1998) 276 of 6.5.1998, ‘Protection of the financial interests
of the Communities — Fight against fraud — Annual report
1997’, Introduction. The concept is also mentioned several times
in the 1998 Annual Report (COM(1999) 590 final of 17.12.1999).

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2. Organising anti-fraud measures

2.1.
The European Union now has its own autonomous
structure (OLAF), which has taken over from the Unit on
Coordination of Fraud Prevention (Uclaf) which was part of
the Commission. The basic — and significant — difference is
that, in its operational activities, OLAF is entirely independent
of the Commission; its task is to investigate fraud against the
Community budget, both in the Member States (external
investigations) and within individual Community institutions
and bodies (internal investigations). The ‘external’ aspect gives
the Office the powers of a genuine fiscal investigatory body,
whose investigations will be prepared and initiated ‘in close
cooperation between the Member States concerned, the Office
and the Commission’ (1).

2.2.
However, there are limitations to OLAF’s activity, as it
can only step in — autonomously, but not independently —
when a ‘fraud’ (and not an ‘irregularity’) has been notified by
the authorities of a Member State. The problem is that Member
States are obliged to notify all irregularities, including suspected
or proven fraud; however, even after OLAF has stepped in, it
is up to the local courts to decide whether the case constitutes
an irregularity or a fraud. The EU thus has no means of
intervening directly to protect its finances, as competence lies
solely with the national authorities. At all events, it is in the
Commission’s interest to recover sums due to it, whether from
fraud or simple irregularities.

This is a complex and thorny issue. The 1998 UCLAF
2.3.
report notes that the information received from the Member
States is not sufficiently precise to make a preliminary
distinction between simple irregularities and actual fraud (2).
For a legally valid definition one must await the verdict of the
relevant national authorities, which may take ‘a considerable
period of time’(3).

2.4.
Things are no easier when it comes to recovering the
sums owed to the Community budget. In all fields, and for
each budget heading (traditional own resources, EAGGF, etc.),
OLAF mentions delays that can last years, slow progress on
all fronts, and often — not to mince words — ‘lack of
cooperation’ (4). The report explicitly (4) questions the diligence
of the Member States.
In the own resources field alone,
between 1989 and 1998, only seven Member States notified a
total of 44 cases of unrecoverable debts. Such figures are
totally implausible and are a sign of unacceptable negligence,
if not something worse.

(1) See COM(1998) 717 — 98/0329(CNS), 1.12.1998, Explanatory

Memorandum, point 5.
(2) See 1998 report, point 1.1.
(3) See 1998 report, point 1.2.
(4) See 1998 report, point 1.5.1.

2.5.
The case of the EAGGF provides a particularly eloquent
example of the recovery of the sums due to the Community
budget: of a total of ECU 1 651 million to be recovered from
cases cleared up from 1973 to 1994 — a period of 21 years
— a full half (824 million) had still not been recovered by the
end of 1998. The report’s comment on this is both deprecating
and threatening. While noting that the Commission’s exhor-
tations to the Member States to clear the legacy of the past
have not yet borne fruit, it also states that, if the situation does
not change, it may be necessary to charge the outstanding
sums to the negligent Member States if they cannot prove that
the sums are impossible to recover. Here it should be noted
that the sums to be recovered are ‘inflated’ by the failure to
notify bankruptcies or the winding-up of companies promptly.
This is a clear indication of the inefficiency of some adminis-
trations.

2.6.
The facts and figures quoted in the preceding para-
graphs are all the more telling when one considers the number
of irregularities reported in 1998: 5 091 cases covering a total
value of ECU 577 million, at least 20 % of which (in both
number and value terms) can provisionally be deemed as
fraud. Taking all past and present fraud cases together, and
bearing in mind how slow and difficult it is to recover the
missing sums, it becomes clear that the nature and scale of the
phenomenon give cause for serious concern.

2.7.
The Committee would make the following call to the
Commission and the Council: the report is a public document,
and the EU public has a right to know in detail which
countries are not meeting their obligations and what sums are
outstanding. The European Parliament could discuss the issue
and exercise its powers to prevail on the Member States to act
morally in their dealings with the Community; such a step is
necessary if the Member States are to be credible when they
expect moral rectitude from their citizens.

2.8.
It seems clear that OLAF’s ‘external’ activity should
cover all types of fraud, regardless of the perpetrator. However,
given the scale and frequency of the fraud perpetrated by
organised crime networks and the concern shown by the
Commission,
it may be assumed that the bulk of OLAF’s
activity will focus on this area. This impression is borne out
by the 1998/99 work programme for the fight against fraud
(COM(1998) 278 of 6 May 1998). OLAF should therefore be
regarded as one of the bodies involved in the fight against
organised crime, albeit only in relation to fraud against the
Community. This perhaps rather obvious fact prompts the
ESC — in the following paragraphs — to put forward some of
its thoughts about European policy for combating crime.

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The Dublin European Council

2.9.
in December 1996
instructed a high-level group to draw up a comprehensive
action plan to combat organised crime, containing specific
recommendations and realistic timetables for carrying out the
work. The group produced a plan containing 30 specific
recommendations which was adopted by the Amsterdam
Council on 28 April 1997 (1): this is an extremely detailed
document which, in addition to very strict political guidelines,
sets out a series of coordinated measures, which together
form a comprehensive action plan hinging essentially on
cooperation between the Member States, the Council, the
Commission and Europol. The document had one fault: its
timescales were too optimistic: of the thirty measures planned,
most were to be completed by the end of 1998, and only two
by the end of 1999; very few of them have been completed on
time and actually implemented.

2.10.
The document is nevertheless a very valuable one;
among other things it stresses the principle that ‘fiscal fraud
linked with organised crime [should be] treated as any other
form of organised crime’ (2). The Council also stated that
‘Europol should be given operative powers’, decided to set up
its own multidisciplinary working party on organised crime
and specified that ‘in order to facilitate contacts with other
Member States, with Europol and with the Commission’ each
Member States should have ‘a single contact point providing
access to all the law enforcement agencies’. That was in 1997.
More than two years later, the Tampere European Council of
15-16 October 1999 called on the Justice and Home Affairs
Council ‘to provide Europol with the necessary support and
resources’. In other words, thirty months have gone by without
any significant developments.

This raises the question of whether the policy (or,
2.11.
more correctly, policies) pursued hitherto are consistent and
logical. The Justice Council considers the fight against organ-
ised crime with Europol, while the Ecofin Council only
considers the fight against crime when it involves fraud
affecting Community finances. The Tampere European Council
includes among its priorities ‘juvenile, urban and drug-related
crime’ as Europol responsibilities, but forgets that OLAF has
singled out other priorities which have also been endorsed by
the Council. At least potentially, there seems to be an overlap
of responsibilities, multiple priorities and ‘gaps’. The area is
not regulated in a systematic manner, as no ‘Justice’ document
mentions OLAF, and no ‘Ecofin’ document mentions Europol.

Any suggestion that the two bodies might cooperate, pool
information or share duties seems more remote than ever.

investigations,

Although OLAF is an investigative body confined to
2.12.
it should be entitled/obliged to
institutional
maintain contacts with national centralised bodies (which
incidentally have not yet been set up in many Member States)
and should have the possibility of receiving information and
assistance from all police bodies, not only those handling fiscal
matters. OLAF is making laudable efforts in this direction on
its own initiative and in some instances has been successful.
However, the main aim of the existing regulations appears to be
to establish working links with investigative and enforcement
bodies solely in the financial sphere (customs, VAT offices
etc.). Notwithstanding this fact, the Commission itself empha-
sises the link between ‘financial’ crime and other types of
crime: in 1997 UCLAF identified more than fifty networks
‘involved in other criminal activities as well as financial
crime’ (3).

The links between the different aspects of organised
2.13.
crime and the need for coordination at EU and national level
between the various investigative bodies are clear enough in
theory.
In practice, however, a host of obstacles prevent
effective practical action: national laws, the concern of many
bodies to retain their privileges, and the reluctance of the
national authorities to alter the status quo for fear of political
repercussions, to mention just a few. The result is that the fight
against organised crime — whether involving fraud committed
in relation to the Community budget or not — is losing
precious time. No doubt the Member States have excellent
explanations for the delays and inefficiencies, but the European
public is increasingly worried about the growing grip of
organised crime. As the voice of civil society, the ESC warmly
appreciates the results already achieved by those who are
fighting this most difficult battle. However, it also calls on
those who are responsible for the EU’s future to take practical
steps to eliminate forthwith the delays, obstacles and acts of
national self-interest.

2.14. Without wishing to prescribe solutions for problems
which experts know only too well, the Committee thinks that
basically it is necessary to wage an all-out war on crime, which
nevertheless — it is worth reiterating — must not focus solely
on organised crime. OLAF has a frontline role to play here,
and its activity would be more effective if it could act in
concert with other criminal investigation bodies. Nor should
these be limited to Europe, as crime knows no borders. A

(1) Action plan to combat organised crime, OJ C 251, 15.8.1997.
(2) Ibid. Part II, political guideline No. 12.

(3) COM(1998) 276 of 6.5.1998, ‘Protection of the financial interests
of the Communities — Fight against fraud — Annual report
1997’, point 2.1, p. 14.

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structured link with Interpol and with other investigative
bodies worldwide should be negotiated. It should also be
added — even though this is up to the discretion of each
Member State — that the usefulness of orderly cooperation
with local administrative bodies and police forces is sometimes
overlooked. It is often easier and less costly to gather infor-
mation locally at ‘micro’ level than to conduct investigations
‘from above’.

2.15.
However, one should not be pessimistic. There are
signs that some national authorities are waking up to the fact
that fraud is a global phenomenon calling for structured
cooperation. For instance, in February 2000 a cooperation
protocol was signed between OLAF and the Italian Anti-Mafia
Directorate (DNA), under which the two bodies are to exchange
information and data with a view to preventing, investigating,
verifying and suppressing illegal activities, and to identifying
and recovering illicit earnings from these activities.

3.3.
The ESC therefore notes a situation which cannot but
be deplored: the Council seems to be mainly concerned with
its own image and is laying down principles for cooperation
and impeccable programmes to combat fraud and organised
crime. But when it comes to putting good intentions into
practice, the reservations and delaying tactics of national
governments, parliaments and institutions come into play and
they seek to hide their opposition (not too successfully) behind
legal quibbles, administrative and legislative red tape, spurious
organisational obstacles and, above all, differences in national
laws which few people — aside from some expressions of
good will — seem to wish to change. All this results in
damaging delays in a fight in which every day lost strengthens
the enemy’s hand. The ESC regards this as an unacceptable
situation to which it would draw the attention of all parties,
urging them to shoulder their responsibilities. The Commission
in particular should resolutely step up its role as ‘upholder of
the rules’, eliminating delays which often give the impression
of being used as a deliberate tactic.

3.

Legal and regulatory infrastructure

financial

the protection of

3.1.
In the legislative and regulatory area a number of
conventions, protocols and regulations have been or are being
adopted concerning mutual assistance in the customs and
agricultural areas,
interests as
regards money laundering and judicial cooperation, and the
achievement of equivalent criminal law protection throughout
the European Union. In principle, then, there is a sound
legislative and regulatory structure capable of providing a
European defence against fraud. However, the best solution, in
the spirit of the Tampere Council conclusions, would be the
establishment of a European penal area. This presupposes the
abandonment of egoistic national stances, and acceptance that
European interests are worth a few sacrifices.

3.2.
In practice, the situation is very different. In the period
1995-1997 the Council adopted two conventions and two
protocols in the context of the third pillar aimed at protecting
the European Communities’ financial interests. They gave a
legal definition of fraud and laid down the procedures for
judicial and investigatory cooperation between the Member
States and the Commission. The Amsterdam European Council
set mid 1998 as the deadline for ratification by the Member
States; in Special Report No 8/98 of July 1998 (1) it was noted,
with obvious disappointment, that ‘these instruments become
effective only when ratified by all 15 Member States; ... they
have not yet been ratified by any Member State’. Some Member
States have since ratified the conventions, but the overall
situation has not greatly improved.

(1) Special report No. 8/98 on the Commission’s services specifically

involved in the fight against fraud, OJ C 230, 22.7.1998.

3.4.
The run-up to the accession of the applicant countries
of central and eastern Europe is a particular problem. Apart
from assistance with training for crime-fighters, the Com-
mission is endeavouring to create the conditions for the
establishment of a legislative and regulatory structure consist-
ent with that of the Union. This is a commendable endeavour,
but at the moment it does not — on the whole — appear to
be bearing fruit on the ground. There are no signs of any
effective measures against financial fraud or of the consistent
presence of any plausible or effective cooperation. For the
purposes of membership, the European Union should look
not only at the factors specified but also at the position with
regard to organised crime in each of the applicant countries
and at the effectiveness of its crime-fighting arrangements. Pre-
accession measures should include staff training; some schemes
already exist, but they should be brought within a large-scale
programme with commensurate funding.

3.5.
In the fight against fraud affecting the Community
budget (whether or not organised crime is involved), the
Committee notes that some progress could be made as regards
judicial and investigative cooperation. Member States should
abandon conservative positions which often simply conceal
a last-ditch defence of national privileges, and, since the
Commission is directly involved in the matter, should regard
it as entitled to carry out investigations and pass judgement in
its own right, albeit in cooperation with the Member States. In
other words the concept of ‘federal crime’ applied in the
United States could be used as a model, at least in general

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terms. Unfortunately, Article 280 of the Amsterdam Treaty
would seem to provide an obstacle to this type of solution, as
it only speaks of ‘cooperation’ between the Commission and
the Member States; such a weak wording is ineffective in the
light of the situation. However, the next IGC could examine
this matter, if only to show that alongside national interests
there are European interests which the individual Member
States cannot be left to defend.

notched up considerable successes in the fight against cigarette
and alcohol smuggling. Such successes are obviously to be
welcomed. However, new threats are also appearing, especially
from mafia-like organisations in eastern Europe which work
closely with their counterparts in the EU Member States.

4.

Fraud in various sectors

4.2. Agricultural products

4.1. Excise duties: tobacco and alcohol

4.1.1.
As these products are subject to excise duty, fraud in
the tobacco sector generally takes the form of smuggling,
which tends to be a monopoly of organised crime. This is
a highly complex and labyrinthine activity requiring huge
resources and links at least as great as those of the large
multinational companies. Equally enormous are the resources
— in terms of investigative personnel, machinery and bodies —
which the Member States devote to anti-smuggling measures.
Similar considerations apply in the case of alcohol, although
with differing emphases and bearing in mind that
fraud
perpetrated by individuals is still quite common. The most
obvious conclusion — which the Commission has also reached
— is that the countries where the phenomenon is most
noticeable are those with the highest
taxation,
regardless of the efficiency of prevention and enforcement
measures.

levels of

4.1.2.
For each Member State, it would be useful to find
out the total cost of measures to combat smuggling and tax
evasion by tobacco and alcohol consumers, setting this against
the total tax recovered and the value of the seized contraband.
This would show the net contribution of duties to the national
budget. Such a calculation is of course complicated — if not
rendered mathematically impossible — by the fact that anti-
smuggling measures extend beyond tobacco and alcohol, and
also cover other criminal activities such as arms and drugs
trafficking and the smuggling of illegal immigrants. However,
even on the basis of rough figures, some of the Member States
could reflect on whether it is advisable, in terms of benefit to
public finances, to maintain a level of taxation which is so
high that it constitutes an incentive to fraud directed primarily
against themselves. The likely objection — that duties are
mainly designed to discourage consumption of alcohol and
tobacco — is easily refuted by the facts: smokers and drinkers
do not reduce their consumption, they simply resort to the
black market, which is thereby encouraged.

4.1.3.
Cooperation between Uclaf/OLAF and the national
authorities (including those of some non-EU countries) has

4.2.1.
Fiscal fraud with regard to agricultural products takes
various forms and may also involve health hazards for
consumers (for example powdered milk not intended for
human consumption, adulterated vegetable oil, beef from
prohibited sources etc.). The reports indicate that the phenom-
enon is very diffuse and difficult to control, particularly since
trade in agricultural products accounts for a considerable part
of intra-Community and international trade. Efficient and
speedy transport and the abolition of border checks are also
factors which facilitate the movement of goods under cover of
false or forged documents.

4.2.2.
In the case of agricultural products, organised crime
networks are not always the guilty parties. However, there is
no doubt that no one single operator, on his own, could
perpetrate fraud on a significant scale:
it must necessarily
involve the exporter and the importer as well as intermediaries,
carriers, forgers and sometimes also producers. This leads the
Committee to think that perhaps national legislation should
systematically treat this kind of fraud — not only in the
agricultural sector — as being the work of ‘illegal organis-
ations’. The Commission could publicise this fact as a deterrent
to fraudsters, including those not moving within traditional
criminal circles.

4.2.3.
The ESC would like to add a subsidiary, but not
unimportant, remark. Looking at the various cases of fraud
which have come to light, there are often procedures which
have a common denominator: goods moving from one country
to another, warehousing under cover of false documents and
hence dispatch to various destinations before reaching the
country of consumption. Transport, warehousing, the oper-
ations of forgers and other intermediary accomplices, all this
costs money, and it is a cost which is not incurred by ‘honest’
goods. If despite all this — and allowing for the profits from
adulteration — fraud is still an attractive prospect, then the
conclusion would seem to be that in the case of agricultural
products there is a large — perhaps too large — difference
between producer prices and consumer prices. This is a point
worth looking into.

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4.3. Preferential tariff arrangements

4.3.1.
Reports in recent years show an increase in fraud
involving the preferential tariff arrangements granted to third
countries, either by means of false or forged declarations of
origin or through circumvention of social provisions or
regulations on dumping and environmental protection. The
cases cited by the Commission involve products which it
describes as ‘sensitive’, such as textiles, electronic products and
fishery products, but it may reasonably be assumed that the
phenomenon to some extent involves all the products covered
by the agreements.

4.3.2.
The Commission points out that this kind of fraud
‘distorts trade in ways which cannot be tolerated, penalising
fair traders’ and adds that ‘the Community’s interests... can
only be protected by coordinating the work of the Member
States and the beneficiary countries, with help from the
Commission’. This solution seems too simplistic, and over-
looks an aspect well known to operators (and clear from the
reports on the cases uncovered): the checks carried out by
exporting countries are often inadequate or even non-existent.
The Commission document (1)
‘Although
the Commission has negotiated administrative cooperation
arrangements with all the beneficiary countries to which it
accords preferential tariffs, each country retains control of
the legal system in which inquiries involving contentious
transactions are conducted. When collecting evidence, Com-
munity investigators are very much at the mercy of external
factors such as political or commercial interest, the effective-
ness of the local legal system and the effectiveness and goodwill
of the local administration’.

is quite explicit:

4.3.3.
The Commission would not have made such serious
affirmations without solid proof. The Committee strongly
urges that sanctions be taken against countries enjoying
preferential arrangements if they exploit these arrangements
in order to protect fraud or indeed to commit it themselves.

4.4. Fraud in the area of the common agricultural policy

The most worrying aspect here is that there are many
4.4.1.
instances of abuses in the common agricultural policy in which
‘fraud is spread more diffusely and benefits a wide range of
operators guilty of irregularities which adversely affect the
Community budget’. The cases detected are doubtless only the
tip of the iceberg; effective monitoring will require the full
cooperation of the Member States and direct and effective
checks by them.

4.4.2.
The impression is that the Member States do not
always carry out effective checks. On the one hand the high

number of operators involved calls for a big investment in
terms of administrative and statistical resources and people on
the ground, which is very costly. On the other hand, this is a
sensitive political area and the cases so far made public suggest
that the authorities are sometimes extremely wary of taking
enforcement measures. Enforcing financial penalties is often
difficult and does not seem to be an adequate deterrent: the
Commission and the Council should consider the possibility
of adopting more dissuasive measures, even going so far as
to exclude guilty parties from further CAP support. One
fundamental question is raised here — namely, whether the
procedures for requesting and allocating funds could be revised
in order to make fraud more difficult. At present, it would
appear that even the most inexperienced operator can circum-
vent the rules.

4.4.3.
This is confirmed by one particular case within the
agricultural field, namely the EAGGF Guarantee Section. This
case deserves special mention not so much because of the level
of fraud involved but because it is proof that fraud exists
wherever procedures are inadequate. In the 1997 report (2) the
Commission stated that
it had been running ‘a targeted
investigation into all
... projects’ financed by the EAGGF
Guidance Section and had found ‘systematic forgery, with
overbilling or bogus invoicing ...’. It concluded that ‘short-
comings in the procedures followed in Commission depart-
ments had also made it easier to carry out the frauds’. The
Committee considers that this statement is emblematic and
applies to many other fields. Therefore, what is needed is a
careful review of procedures and checks in all sectors where
Community funds are distributed for whatever purpose.

4.5. Value added tax (VAT)

4.5.1.
VAT is undoubtedly the most commonly evaded tax
at all levels, ranging from individual operators (small-scale
evasion) and firms, whatever their size, right up to systematic
and sophisticated fraud by organised crime networks. The
considerable role of the shadow economy — which by its very
nature avoids all taxation — must also be borne in mind. Not
only does this damage Community finances but there is double
damage to the Member States, in terms of both lost VAT
revenue and the accompanying, almost systematic evasion of
direct taxes. Assessing the scale of evasion is virtually imposs-
ible, but its knock-on effect cannot be ignored: all the statistics
on national production, intra-Community trade and Europe’s
international business must be regarded as distorted because
of the lack of reliable data on the true scale of the problems
found. VAT fraud is therefore by far the most significant type
of fraud in terms of scale and value, and the most damaging to
the internal market.

(1) Commission document, point 2.2.1.

(2) COM(1998) 276 of 6.5.1998, ‘Protection of the financial interests
of the Communities — Fight against fraud — Annual report
1997’, point 2.2.3.2, p. 30.

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4.5.2.
In addition to the damage caused by fraud in terms
of lost revenue, there is the cost of checks and enforcement,
on which all Member States spend huge amounts; the results
are hard to assess in the absence of data on the scale of
evasion as a whole. However, some statistics are quite telling.
According to a Commission report (1), around 24 million
traders in the EU are subject to VAT and around 100 million
declarations are submitted each year. In other words, each
trader submits an average of about four declarations per year
(presumably these are periodic declarations covering a number
of transactions, rather than one declaration per transaction). It
is estimated that there are around 30 000 VAT auditors in the
Community. According to the report, it would take 40 years
to check the declarations of all traders. At present, information
is collected and kept but is not checked for want of resources.

4.5.3.
The Committee is drawing up a separate opinion on
the case of intra-Community trade. Here it may be noted that
the abolition of border checks has increased the scale of
evasion, which was already considerable when the checks were
still in place; another factor is the constant increase in road,
rail and sea traffic. In addition to measures on the ground,
the Commission and the Member States have considerably
improved administrative and statistical checks by introducing
sophisticated computer
link-ups
between the various national data collection networks. Com-
ments on the systems for administrative control and infor-
mation exchange — which in general relate to all types of tax
fraud — will be found in points 5.1, 5.2 and 5.3. However,
despite the measures adopted, it appears that the problem of
VAT evasion is far from being resolved.

systems and computer

4.5.4.
The Commission is proposing that the transitional
VAT arrangements should be converted into a permanent
arrangement providing for the tax to be levied in the country
of origin, and subsequently allocated between the countries of
destination. The ESC commented on this plan in an earlier
opinion (2). Simply from the point of view of combating fraud
(and thus leaving aside other considerations), some people
— although not all — feel that the system would have the
merit of making checks easier as they would be conducted at
source, but would not eliminate fraud relating to undeclared
activity and the black economy.

solution at all. What
is probably needed is a bold and
dispassionate reappraisal of the policies conducted thus far,
without expecting any miracle solutions. This reappraisal
could start by noting that although the removal of border
checks has provided the public with visible proof of a single
market, it has also deprived the Members States of a powerful
check and deterrent.

4.5.6.
Checks in the field should therefore be stepped up.
Today such checks are only sporadic, partly because of staff
cuts in customs services and also — probably — out of
concern not to impede or slow the movement of goods and
traffic in general. Some past strategies should therefore be
brought back, adapting them to today’s needs: creation of
special areas for carrying out roadside checks on lorries, speedy
procedures for checking rail and air shipments, and above all
the use of adequate means — in terms of both human and
technological resources — to carry out frequent checks on
goods being transported or warehoused. Although the tra-
to
ditional
implement, innovations such as the ‘telepasses’ used at Italian
motorway toll-booths could usefully be explored in the case
of freight transport.

are obviously difficult

checking methods

4.5.7.
The cost of checks, which would be borne by the
Member States, should not be an obstacle in the fight against
fraud. An investigation is needed into why the physical risks
to officials conducting checks in tax evasion cases are so high,
and into possible ways of combating violence at various levels.
Member States should devote more efforts and resources to
the safety of these officials.

4.5.8.
Finally, the Committee wishes to comment on a
matter which, strictly speaking, falls outside the scope of the
present opinion. It is no coincidence that VAT is the most
commonly evaded tax. Alongside the need to revise the
tax system,
it may also be necessary to rethink taxation
mechanisms. The Committee neither wishes nor is able to
propose solutions, but those adopted so far have certainly
proved unacceptably weak.

VAT evasion has thus still not been successfully
4.5.5.
addressed. The measures taken hitherto have not brought a

5. Computerised checking and enforcement systems

There are various computerised systems for providing

5.1.
and/or communicating data:

(1) Report from the Commission to the Council and the European
Parliament: Third Article 14 Report on the Application of Council
Regulation (EEC) No. 218/92 of 27.1.1992 on Administrative
Cooperation in the Field of Indirect Taxation (VAT) — COM(2000)
28 final of 28.1.2000, point 5.5.

(2) OJ C 296, 29.9.1997.

— CIS — Customs Information System: used for customs
and agricultural data, it can be accessed by the relevant
departments of the Member States, ‘while safeguarding
data confidentiality and protecting personal information’;

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— SCENT/CIS — an electronic bulletin board with terminals
located at customs investigation departments, ports and
airports; it is an information exchange system rather than
a data collection system; the information, which is purely
administrative, is kept in the CIS only for as long as it is
being used for operational purposes;

— SCENT/fiscal — as above, but

for VAT and excise

operations;

— NCTS — New Computerised Transit System: for transit

operations (currently being set up);

— EWS — Early Warning System: for the exchange of early

warnings on traffic in transit.

5.2.
These systems have something in common: they are
not available to all the bodies responsible for investigations
and enforcement, and they are concerned — in the ESC’s view
to an excessive and counterproductive degree — to protect the
confidentiality of personal data. While this makes sense in the
case of honest citizens and as regards access by third parties,
the same cannot be said for cases where the authorities are
combating crime and are in any case bound to maintain
confidentiality. One has the feeling that the data protection
issue is cited too readily and without proper thought.

Each of the existing systems is undoubtedly useful in
5.3.
the sector for which it was designed, but the ESC feels that
what is lacking is an overall view of the problem. It is true that
there is a need to combat fraud against Community (and
national) budgets, and that appropriate computerised systems
for prevention and enforcement are therefore necessary.
However, the root of the problem lies in identifying and
prosecuting the perpetrators of
fraud and other criminal
activities, whatever field they may be operating in. In other
words, the most dangerous and significant type of fraud is that
committed by criminal organisations, which are often active
in all sectors and not only the tax sector; the main aim of
enforcement measures is therefore to catch the offenders and
not simply to punish individual acts. This does not mean
turning a blind eye to fraud perpetrated by individuals,
however big or small; indeed, linking systems together and
making them accessible to all authorised bodies increases the
likelihood of success. The fact that a fraud is perpetrated by a
person acting alone makes it impossible for them to use the
cover provided by an organisation.

the Council’s action plan referred to in point 2.3, stresses ‘the
need for developing closer cooperation at the national level
between fiscal and law enforcement authorities’, while in
No. 10 it is stated that ‘Europol should be given operative
powers’ and should, ‘as soon as possible, ... be instrumental in
the collation and exchange of
information’ [between the
Member States and the Commission].

6.2.
The principle of the need for unified (or coordinated)
action between the tax and customs authorities and the police,
both at national and at European level, is one of the Council’s
political guidelines which was recently confirmed by the Justice
and Home Affairs Council of 4 October 1999. However, this
principle does not yet seem to have been adequately followed
up in some Member States, who seem not to appreciate the
urgent need to move from words to deeds. Recommendation
No. 2 in the abovementioned 1997 Action Plan stated that:
‘The Member States, and the Commission, should, where it
does not already exist, set up or identify a mechanism for the
collection and analysis of data which is so construed that it
can provide a picture of the organised crime situation in the
Member State and which can assist law enforcement authorities
in fighting organised crime.’ The plan was that this joint
action by the Member States, the Council, Europol and the
Commission should have been taken by mid 1998. The
October 1999 Council included it among the objectives still
to be achieved.

is also significant that

6.3.
Furthermore, the Council action plan mentions the
need for a ‘picture’ of the situation, but forgets to mention
Uclaf (which existed when the document was drafted and has
since been succeeded by OLAF) as one of the bodies involved
in the fight against crime.
the
It
document setting up OLAF does not specifically mention
relations or cooperation with Europol and other bodies that
fight money laundering. This would suggest the continuation,
in some circles, of the long established tendency among police
forces to draw a distinction between ‘ordinary’ and ‘money-
related’ crime (including tax evasion in the broad sense), with
each being considered to be the preserve of a separate state
body.

7. Conclusions

6. Cooperation between Community and national auth-

orities

Cooperation between Community and national auth-
6.1.
orities in the same sector is thus necessary but not enough on
its own; there needs to be close, unreserved cooperation with
law enforcement and investigative bodies at Community (and
where possible international) level. The principle is certainly
not a new one: it is repeatedly mentioned in the Commission
reports, and political guideline No. 12 in the basic document,

7.1.
There is no need to emphasise yet again the harmful
effect of fraud on the internal market: distortion of compe-
tition, unreliable data, presence on the market of unscrupulous
operators devoid of commercial ethics. Eliminating fraud
— or, to be realistic, containing it within reasonable bounds —
is a task which the Commission seems to be pursuing with
conviction but by means of measures which often give the
impression of not being targeted at what is ultimately the main
aim, i.e. getting to the root of the problem and combating

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19.9.2000

organised crime, without
forgetting fraud perpetrated by
individuals. Above all, the Commission should act more firmly
and decisively to defend its interests — which are ultimately
those of the EU public — against all other parties, including
even the Member States if necessary. In practical terms, the
fight against fraud must strike a balance between the needs of
an obstacle-free single market and the need to protect the
financial interests of the Union.

7.2.
The ESC believes, however, that the main responsibility
lies with the Member States, who must coordinate their
domestic policies for fighting crime as a precondition for close
and effective cooperation at EU level. The main difficulties
regarding pursuit of an overall policy seem to lie within the
Council. The Ecofin Council continues to handle the fight
against fraud (whether or not perpetrated by organised crime),
while the Justice and Home Affairs Council is responsible for
preventing and monitoring organised crime, as if these two
remits were not two sides of the same coin. For its part, the
European Council is concerned mainly with the fight against
crime; but while continuing to stress the need for cooperation
between Member States and with the Member States, it has
omitted to set up a mechanism for cooperation between the
bodies which it itself has set up.

In examining the situation, the ESC has not looked at
7.3.
the problem of piracy and counterfeiting, which has already
been dealt with in another opinion (1), or that of money
laundering, as this is a broader issue which was also dealt with
in a recent opinion (2). Here the Committee would merely
point out that the proceeds from all sorts of crime often end
up being laundered, so that catching the money launderers can
help to track down criminal organisations of all
types,
including those which take funds from the Community budget.
Hence the need to establish systematic links between OLAF
and the bodies investigating money laundering.

do much to reduce undeclared work, which is not only
damaging to national and Community finances but also
distorts competition within the single market and — paradoxi-
cally — causes unemployment.

In issuing an opinion that focuses on the fight against
7.5.
fraud committed by organised crime, the Committee does not
mean to overlook the importance of fraud perpetrated by
individuals and by companies, which must be tackled with
equal determination. The Committee would however point
long-term action is needed to
out firstly, that large-scale,
rekindle the public’s sense of civic duty; and secondly, that the
specific measures to be adopted must be commensurate with
the costs and problems which they would inflict on honest
businesses. The single market must not become a ‘police state’;
it needs simple and sensible rules, efficient but not oppressive
checks, and renewed confidence in the institutions.

The Committee therefore recommends political action

7.6.
within the following domains:

— charging outstanding sums to the negligent Member

States; (2.5)

— making public which countries are not meeting their

obligations and what sums are outstanding; (2.7)

— providing Europol with operative powers and the necess-

ary support and resources; (2.10)

— taking practical steps to eliminate forthwith the delays,

obstacles and acts of national self-interest; (2.13)

— negotiating a structured link between on the one hand
OLAF and on the other hand Interpol and with other
investigative bodies worldwide; (2.14)

— establishing a European penal area; (3.1)

7.4.
Attention should also be drawn to a further significant
aspect which is not discussed here as it has already been
considered in another ESC opinion (3). Combating fraud can

— stepping up the Commission’s role as ‘upholder of the

rules’; (3.3)

— looking at the position with regard to organised crime in
each of the applicant countries and at the effectiveness of
its crime-fighting arrangements; (3.4)

(1) OJ C 116, 28.4.1999.
(2) OJ C 75, 15.3.2000.
(3) Opinion of the Commission communication on undeclared work,

CES 63/99, OJ C 101, 12.4.1999.

— establishing judicial and investigative cooperation, using
the concept of ‘federal crime’ applied in the United States
as a model. (3.5)

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The Committee also recommends concrete action concerning
fraud in areas such as excise duties on tobacco and alcohol,
agricultural products, preferential tariff agreements, the CAP,

VAT, as well as the role of computerised checking and
enforcement systems.

Brussels, 13 July 2000.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

Opinion of the Economic and Social Committee on ‘Customs cooperation in the single market
(SMO)’

(2000/C 268/13)

On 27 May 1999 the Economic and Social Committee, acting under the third paragraph of Rule 23 of its
Rules of Procedure, decided to draw up an opinion on ‘Customs cooperation in the single market’.

The Section for the Single Market, Production and Consumption, which was responsible for preparing
the Committee’s work on the subject, adopted its opinion on 3 May 2000. The rapporteur was
Mr Giesecke.

At its 374th plenary session (meeting of 13 July 2000) the Economic and Social Committee adopted the
following opinion unanimously.

1.

Introduction

As part of its redoubled efforts over recent years to
1.1.
protect the Community area against the advance of organised
crime, the EU has substantially stepped up its fight against
fraud affecting Community financial interests and the protec-
tion of its external borders. Throughout this process the ESC
has closely monitored, reviewed and generally welcomed
individual proposals in the various fields, recommending their
implementation. This is equally true for customs, a sector at
the forefront of concrete action:

— Opinion on the ‘Proposal for a European Parliament and
Council Decision adopting an action programme for
Community customs (Customs 2000)’ (1)

— Opinion on the ‘Proposal for a European Parliament and
Council Decision amending the Decision of 19 December
1996 adopting an action programme for customs in the
Community (Customs 2000)’ (2)

— Opinion on the ‘Proposal for a European Parliament and
Council Regulation (EC) amending Regulation (EEC)
No. 2913/92 establishing the Community customs code
(transit)’ (3)

— Opinion on the ‘Proposal for a European Parliament and
Council Regulation (EC) amending Council Regulation
(EEC) No. 2913/92 establishing the Community Customs
Code’ (4)

— Opinion on the ‘Proposal for a Council Regulation (EC)
amending Regulation (EC) No. 3295/94 laying down
measures to prohibit the release for free circulation,
export, re-export or entry for a suspensive procedure of
counterfeit and pirated goods’ (5)

1.2.
The 1998 annual report recently submitted by the
Commission entitled ‘Protecting the Communities’ Financial
Interests and the Fight against Fraud’ (6) provides another
opportunity to carry out a kind of interim review of the
effectiveness of measures to date, to identify areas where
improvements can be made and, above all, to draw attention
to measures not yet embarked upon or approved.

(1) OJ C 301, 13.11.1995, p. 5.
(2) OJ C 138, 18.5.1999, p. 1.

(3) OJ C 73, 9.3.1998, p. 17.
(4) OJ C 101, 12.4.1999, p. 6.
(5) OJ C 284, 14.9.1998, p. 3.
(6) COM(1999) 590 final.