Verbatim report of proceedings

Wednesday, 10 October 2007 - Brussels

23. Combating cigarette smuggling (EC-Philip Morris agreement) (debate)

  President. − The next item is the report (A6-0337/2007) by Bart Staes, on behalf of the Committee on Budgetary Control, on the implications of the agreement between the Community and the Member States with Philip Morris on intensifying the fight against fraud and cigarette smuggling and progress made in implementing the recommendations of Parliament’s Committee of Inquiry into the Community Transit System (2005/2145(INI))

  Bart Staes (Verts/ALE), rapporteur. – (NL) Mr President, Commissioner, ladies and gentlemen, the reports by the Committee on Budgetary Control often contain fairly bad news – it is the EP’s anti-fraud committee, after all. This often concerns weaknesses, irregularities, trickery – sometimes even fraud and deception. I am glad, ladies and gentlemen, that today I have something positive to report, a success story, a story that demonstrates how the cooperation between the European Commission, the European Parliament and the Member States can ensure the resolution of problems.

What is the context? At the start of the 1990s, fraud involving cigarette smuggling was found to be big business. Hundreds of millions of ECU – in those days we still spoke in terms of ECU rather than euro – disappeared into the pockets of criminals at the expense of the budgets of the European Union and the Member States. Back in 1994 the then UCLAF – the predecessor of OLAF – set up a Cigarettes Task Force. In 1996 and 1997 an EP Committee of Inquiry – which, incidentally, was the very first Committee of Inquiry launched under the Treaty on European Union – examined all aspects of transit fraud.

The Committee of Inquiry found that the monitoring system in the transit sector was archaic. Lorries in transit had to have a document stamped at the customs office where the goods entered the Union, then drive through the Union and have the same document stamped again at the customs office where the goods left the Union. The document then had to be sent back to the customs office of import. A great many problems arose in this connection. The documents arrived back much too late: sometimes three or four months. There was the problem of forged documents, and also of forged stamps. Consequently, one of the most important recommendations of the Committee of Inquiry was the replacement of this whole archaic system, based on paper and stamps, with a computerised system.

This New Computerised Transit System (NCTS) was gradually introduced and is now operational in all Member States. It helps the customs services detect in real time whether goods are illegally escaping customs supervision – and thus represents tremendous progress. This does not, of course, rule out false declarations still being made, and that is why we are asking the Commission to set up a system for this, too, to prevent the false declaration of goods. We also ask that OLAF be given direct access to this computerised system.

As has been said, the Committee of Inquiry concentrated on the problem of cigarettes. Cigarettes were transported across the territory from one border point to another, but very often those goods, those cigarettes, ended up on the black market. In addition, those goods were very often smuggled back into the Union. This led to immense problems, even sometimes to violence. In Italy, for example, two agents from the financial police were even murdered.

The overall investigation also revealed that some tobacco companies were in league with the smugglers, and on the basis of that information the Commission, together with a number of Member States, brought an action against Philip Morris before a court in New York. It gradually became clear that Philip Morris would find it particularly difficult to win the action, and in 2004 a deal was struck with the company. In exchange for USD 1.25 billion, to be spread over a 12-year period, the Commission and the Member States refrained from proceeding with the action before the New York court.

In fact, the second part of the agreement with Philip Morris was perhaps even more important. It comprised provisions on cooperation between Philip Morris and the European Union in tracking and tracing cigarettes. If the customs services found cargoes of cigarettes, and the provisions of this agreement had not been followed, Philip Morris was bound to pay the evaded customs duties immediately – and the figure in question can be up to EUR 1.5 million per container of cigarettes.

To reiterate, this is a success story: it demonstrates how Parliament and the Commission can work together. I do have a few criticisms, however. When the USD 1.25 billion was distributed among the Commission and Member States, only 9.7% went to the Commission, and the lion’s share to the Member States. I do not think this fair, particularly as OLAF and the Commission do the lion’s share of the work.

A second criticism is that, according to the spirit of the agreement, this money was to be used in the fight against fraud. The Commission has done its work. It has spent a proportion of that money on the Hercules II programme. The Member States, on the other hand, have simply let the money flow into their treasuries, when they should really have been using it better to equip their investigative services, for example their customs services, and to step up the fight against this kind of fraud.

To recap, Mr President, this is indeed a success story, one that it may well be possible to apply to other products, such as alcohol and certain agricultural products. I also hope that this report has added a positive note to the important work being carried out by the Mr Kallas and the Commission and also our Parliament in the fight against fraud.

  Siim Kallas, Vice-President of the Commission. − Mr President, I must thank Mr Staes for this own-initiative report and the European Parliament for its support of these issues and finding solutions to these difficult issues.

In my statement I will speak first about the Community transit system, for which my colleague Lázló Kovács has responsibility. The European Parliament applauds the successful introduction of the new computerised transit system. It is indeed an enormous change compared to the archaic paper-based procedure. Full implementation of the upgraded system will take place by 1 July 2009.

Risk management is a modern control tool. The Commission is actively implementing the customs risk management framework to better target the checks. We are currently establishing criteria, priorities and the IT platform with the Member States. The new system will also provide for the possibility of regular monitoring of the effectiveness of the risk analysis made. The planned development of the anti-fraud transit information system will strengthen the capacity to analyse and counter risks in transit fraud, first with regard to sensitive goods and later for all kinds of goods in transit. This is conditional on Member States granting wider access for the Commission to the NCTS movement data. However, freezing further financing for the NCTS, as proposed in the report, would be counterproductive to the necessary further development of more effective transit control.

A few words on value added tax fraud. In its report, the United Kingdom’s House of Lords pointed to many factors behind the phenomenon of missing trader fraud. However, we do not see any proof that weaknesses of the transit system led to carousel fraud. I would like to clarify that, even though transit was not a priority during traditional own-resources inspections between 2001 and 2006 when change was ongoing, nevertheless it was not being ignored. As a result of many inspections, payments of own resources and interest were demanded. This approach represents efficient use of the Commission’s inspection resources and avoids falling back on ex ante audits.

I would like to turn now to the anti-fraud agreement with Philip Morris International, which comes under my portfolio. I must thank the Parliament for its continued strong support. The Commission has consistently stated that it hopes that the agreement can serve as a model for similar agreements with other companies. With regard to the funds coming from this agreement, the new Hercule Programme has received in Greece funding devoted to combating cigarette smuggling and counterfeiting, which are newly added objectives. We are considering whether the programme could be used to fund the establishment of a laboratory which would verify the authenticity of cigarettes.

But I must also say – and Mr Staes knows this very well – that the distribution of money was a real nightmare and it will be a nightmare in the next financial periods as well. Of course I am very happy about the support and the constant interest expressed by Parliament in the use of this money because I am also interested in having this money used for the purpose of fighting cigarette smuggling and other kinds of fraud.

With regard to seizure statistics, most Member States inform the Commission of the amounts on a quarterly basis. However, not all Member States indicate the brands they have seized and there is therefore no complete data available. Moreover, the notifications of seizures by the Member States do not always differentiate between genuine and counterfeit cigarettes, partly because it is not necessary for the purposes of the prosecution of offenders and the collection of duties and taxes and partly because it is sometimes extremely difficult to distinguish between counterfeit and genuine cigarettes. We continue to encourage the Member States to provide more complete figures.

Finally, the Commission is willing to prepare an OLAF report on this topic, as suggested by Parliament, but I consider that it would more beneficial to wait until 2010 for a comprehensive overview. This is due to the fact that many significant changes are in the pipeline in the customs area and a report in 2008 could only be an interim one, reflecting the state of play at that point in time.

  Jean-Pierre Audy, on behalf of the PPE-DE Group. – (FR) Mr President, Commissioner, ladies and gentlemen, my first words will be to congratulate the rapporteur, Bart Staes, who has managed to produce an excellent report on the difficult subject of the flaws in our Community Transit System. I am also most grateful to the European Court of Auditors which, in its report in December 2006, highlighted the scale of the problem very clearly.

I am disappointed, in this regard, that we are confusing the repercussions of the Philip Morris agreement, which we must remember is an agreement to drop legal proceedings and not a partnership agreement, with the serious problems of Community Transit. That is the reason for the amendment I tabled on behalf of the PPE Group, which aims to prevent the confusion.

On the subject of the industry, I propose that the European Union and the whole of the tobacco industry jointly finance a programme to combat cigarette smuggling and counterfeiting.

However, I want to focus my comments on the flaws in our Community Transit System. The European Commission tells us that it has strengthened the customs transit system by introducing a modern, robust computer system. It is forgetting that, though a computer system is necessary, it is never sufficient, and the reality is that it is the system itself that is flawed. It is flawed because it is conducted under the authority of the Member States, which means – as our rapporteur and the European Court of Auditors quite rightly pointed out – that the Member States are applying the new Community Transit rules with serious weaknesses.

In 1997 Parliament set up a Committee of Inquiry, which clearly stated that the EU should set up a framework to enable the customs services to function as one. We are a long way from this.

In 2005 our fellow Member Herbert Bösch highlighted in his excellent report the scale of the problems and the need to fight fraud and errors. The reality is, ladies and gentlemen, that this report invites us to think much more widely about the quality of our customs system, our financial circuits and, more generally, about the protection of the financial interests of the European Union.

In this, Commissioner, you have the full support of MEPs.

  Herbert Bösch, on behalf of the PSE Group. – (DE) Mr President, we expressly welcome this report, which is excellent. The term ‘own-initiative report’ is not quite accurate. What we are doing here is persevering with the subject of Parliament’s first Committee of Inquiry – and we shall continue to do so. I do not want to complain, but it is a shame that we have to do this at such a late hour. I note with interest on the list of speakers the groups that have asked to speak on this subject today. It seems it is always somewhat easier to complain about the scandals in the EU than to work on specific, positive solutions. The road there is sometimes long – we are talking about cigarettes – but it is a good one to take. We are making progress, and the Staes report shows this very clearly.

Of course, we have the incompleteness of European integration to contend with in this field. Various Ministers for Finance still cannot resist simply raising the tax on tobacco a little when the treasury is starting to look a little empty, wrongly earning praise from some health politician or other in the process. I say ‘wrongly’ because consumers of cigarettes simply switch to smuggled cigarettes or, increasingly, to counterfeit cigarettes. The profit from this kind of fraud goes directly to organised crime.

The fact that there is cause for us all to celebrate progress this evening makes me even more inclined to remind the House of an episode that does less credit to Europe, and particularly the Commission. There is evidence that, in the period 1992–2001, approximately 10 000 lorry-loads of cigarettes were smuggled into the EU via Montenegro, particularly heading for Italy. This is probably the biggest fraud against the EU budget of all time. The public prosecutor’s office in Augsburg, Germany, has made 60 requests for legal assistance in this connection. There have been confessions, convictions and all such things in Switzerland. Yet the European Union has not submitted any claims for recovery of own resources against the Republic of Montenegro. Commissioner, I should like us to be able to stand before our taxpayers and say, ‘We have looked into this matter, too’.

There are petty customs officials in Germany, Austria and Central Europe who have done great work in this field, but who it seems have been rather let down by the European Commission. We must deal with this mammoth affair, for which the limitation period is not yet at an end. That would be my wish in connection with what is by and large a very pleasing occasion for today’s debate.

  Ingeborg Gräßle (PPE-DE). – (DE) Mr President, Commissioner, ladies and gentlemen, the House much prefers dealing with expenditure to revenue – and so it is to Mr Staes’ great credit that we are today turning to the trifle of revenue for once. All the same, this is a matter of EUR 17 billion in VAT and own resources and EUR 14 billion in customs duties – which is almost 30%. In my opinion, it is good that we are addressing this issue today.

Evidently, there are only winners here, and the Commissioner, too, deserves our congratulations for this. We are pleased that we have managed to find a way –in cooperation with the Member States. It is essential to shore up the future of OLAF, the European Anti-Fraud Office, to enable it to play its role within the EU even better and more efficiently. Congratulations are due for what OLAF has shown us so far and what we are seeing before us now. We are all very proud of these successes, as it was these experts, of course, who made them possible. It was not a foregone conclusion, particularly given the subject, that we would make real progress with the counterfeit tobacco products dossier or that the Member States, too, would cooperate.

We should like this scenario to be replicated in the case of other dossiers concerning the protection of the financial interests of the Union, for example the fight against VAT fraud. Then we would have true winners: the European taxpayers who sent us here and have certain expectations.

I believe that continuing the fight against cigarette smuggling is an important task, that there is an urgent need to call in an investigator from OLAF in Beijing, and that we need to strengthen the anti-fraud presence worldwide. The question to the Commission now would be how to step up the pressure on other cigarette manufacturers to induce them to subscribe to the agreement between Philip Morris and the Community in the Member States. In my opinion, we must consider very specifically how to follow this up and how to continue working on this issue, as failure to do so would endanger our own credibility.

  Paulo Casaca (PSE). – (PT) Our rapporteur, and in this case also the European Commission, deserve all our congratulations. This was the biggest success I can remember the European Union achieving to date against smuggling and tax fraud.

The message already announced by our rapporteur and supported now by all speakers is, however, that we must also take this fight to other fields. It is fundamentally a case of ensuring that the movement of any kind of substance throughout the whole customs system should manage effectively to protect the financial interests of the European Union and of all the Member States and, from that point of view, I think there is still a lot to be done. I should therefore like, above all, to invite the European Commission to pursue the matter more assiduously.

  Monica Maria Iacob-Ridzi (PPE-DE). – (RO) The agreement between the European Commission and the Philip Morris company is a very good example of a Community financial instrument that simultaneously aims at several objectives.

First of all, the free access of the manufacturing industry to the market is not restricted, while the tax evasion of those who import counterfeit products is combated with a programme amounting to 1.25 billion dollars, entirely financed by the European company.

Nevertheless, a much bigger number of Member States should participate in the agreement signed.

The agreement was concluded in 2004, and, in the meantime, Romania and Bulgaria, both situated at the European Union border, have become Member States.

Following the entry onto the market of products that are not licensed in all the Member States of the Union, the European budget has recorded substantial losses from excises, and national budgets from unpaid profit taxes.

The fact that those who try to introduce counterfeit goods into the Community choose the European ports that are not equipped with advanced technologies, such as scanning and registering the pallets of merchandise, is a reality.

Since this situation affects the European Union’s tariff revenues, I consider it normal for the modernization of port facilities to be performed with Community financial assistance.

Due to the counterfeit products placed on the market at low prices, increasingly more young people have started to smoke, which, of course, in time, will cost the social insurance and health systems of the Member States considerable amounts of money.

The reports issued by the World Health Organization show that, in most cases, counterfeit cigarettes contain 75% more tar, 28% more nicotine and 63% more carbon monoxide.

Since we examine the disastrous effects of smoking, in general, irrespective of the legitimate or illegal source of the cigarettes, we should also meditate on another subject: while the European Union promotes policies for combating smoking, on the other hand, it grants substantial subsidies to tobacco crops, which, in my opinion, is a contradiction in the European health policy.

  Szabolcs Fazakas (PSE). – (HU) Thank you for the floor, Mr President. Most esteemed Commissioner Kallas, ladies and gentlemen, Mr Staes is right, and I would hereby like to congratulate him on his work, which is solid yet willing to make sacrifices, and on this present report.

The European Union and its institutions – including the Commission, the Court of Auditors, OLAF, the European Parliament and not least the Budget Control Committee – regard the agreement signed with Philip Morris in 2004 and its subsequent life and follow-up as a real success story, and rightly so.

In the fight against smuggling and fraud, we have managed to achieve a serious result here, not only for the traders and consumers at the end of the process but also for a large international manufacturer at the beginning of the process. This agreement not only compensates financially for past losses but also covers their future prevention.

We have managed to make Philip Morris understand that it also has an interest in preparing a joint strategy against smuggling and fraud and in ensuring the financial instruments necessary to bring it to fruition. It is particularly pleasing and, for us newly acceded countries, very significant that the cooperation will cover not only the ten Member States in the agreement but also the new countries that are particularly threatened by smuggling and fraud, and thus also ensuring the financial and technical conditions for the fight against smuggling and fraud, albeit with varying degrees of success. Thank you.

  Bogusław Liberadzki (PSE). – (PL) Mr President, Mr Commissioner, I accept and approve of Mr Staes’s report, which will first and foremost lead to contraband being limited as far as possible. This is the strong point of this report. Secondly, it provides important advice on how to collect duty with maximum efficiency.

As someone who comes from a country which has a very long eastern border, that is to say Poland, however, I would like to draw attention to external borders. Herbert Bösch is entirely correct when he talks of using experienced customs people. These people will actually be much more crucial than equipment and systems, and so, Commissioner, I would earnestly request you to have a reasonably thorough look at the proposals and recommendations and take them to heart. Efficiency and effectiveness in combating contraband will be the indicative factor where the reputation of our Community is concerned.

  Siim Kallas, Vice-President of the Commission. − Mr President, thank you for your constant support for these issues raised. I must say the biggest problem is that all the competence in customs and value added tax is in the hands of the Member States.

I do not really understand why some Member States are so reluctant to give more possibilities to use the facilities which exist within the European Union institutions. For instance, OLAF has been extremely operational in several cases, in the Philip Morris operation and in the Diabolo fight against counterfeit operations, and this cannot happen without cooperation at European level and cannot happen without support from specific Commission services.

But legally, this is fully in the hands of the Member States, as is the strengthening of customs providing necessary resources. The Commission is doing whatever is possible to facilitate this cooperation. I must say that, without cooperation between Member States, an efficient, effective fight against cigarette smuggling, and especially value added tax fraud, is impossible.

I think that we have common interests here, and we should raise this issue constantly to increase cooperation. Also – and perhaps I understood incorrectly from the interpretation – the Philip Morris agreement was between 10 Member States and the European Commission on the one side and Philip Morris on the other side, which is quite unique. It was the Commission, its legal service and OLAF which achieved this agreement, and, with Ms Gräßle, this is continuing. So I think that we can tell something in the future.

But the main issue is really the reluctance of some Member States to accept the mutual administrative assistance proposal which has been put forward, which can serve as a platform. We are offering a platform for cooperation, and there are still some Member States, some of the bigger Member States (I myself have tried to convince certain ministers of the biggest Member State to be more open to this proposal.) Somehow, there is a lot of suspicion; but, at the same time, being a former finance minister, I know that to fight value added tax fraud and customs is possible only with cooperation between Member States.

  President. − The debate is closed.

The vote will take place on Thursday 11 October 2007.

Written statements (Rule 142)

  Francesco Musotto (PPE-DE), in writing. – (IT) As rapporteur on combating fraud in the EU, I welcome the important agreement with Philip Morris on combating cigarette smuggling at customs. Customs fraud is one of the main sources of damage to the financial interests of the Community, and fraud relating to cigarettes is one of the most vulnerable sectors.

OLAF’s recent operations – such as Operation Diabolo (135 million cigarettes seized, estimated loss of EUR 220 million) – have demonstrated that customs fraud can and must be combated: it is important to strengthen the operational capabilities of the European authorities. The agreement with Philip Morris may serve as an example not only in the field of tobacco, but also in other fields of combating counterfeiting. The proceeds of the compensation owed by Philip Morris, amounting to approximately EUR 1 billion, ought to be used to step up the fight against counterfeiting in the EU.