Analysis: “The UK failed to fulfil its obligation to combat undervaluation fraud, maintains AG Pikamäe” by Ondřej Serdula
On 9th September 2021, Advocate General (AG) Pikamäe delivered his eagerly awaited Opinion in the Grand Chamber case Commission v UK (C-213/19) concerning the undervaluation fraud case of textile and footwear imports from China to the UK. In this mammoth, over hundred-page-long Opinion, the AG proposes to the Court of Justice to rule that the UK failed to fulfil its obligations to counter fraud and to protect the financial interests of the EU. However, the AG is of the opinion that based on the arguments put forward by the Commission, the Court of Justice is not able to rule with certainty on the precise scale of the losses to the EU budget.
Since the abolishment of quotas on imports of textiles in 2005, a high risk of importation of undervalued goods from China has been identified. To combat this fraud, the European Anti-Fraud Office (OLAF) developed a risk assessment tool consisting of calculating a ‘cleaned average price’ for each textile based on EU-wide data. The value corresponding to 50% of this price then represents the ‘lowest acceptable price’, which is understood as a threshold value enabling the customs authorities of the Member States to identify high-risk imports and adopt appropriate measures. However, from 2011 to 2017, the UK did not systematically adopt this risk analysis tool or take any preventive measures in this regard, and instead focused on ex-post targeting of concrete traders specialising in that type of fraud.
First of all, AG Pikamäe concludes that indeed the measures taken by the UK during the infringement period cannot be regarded as effective for the purposes of Article 325 TFEU and the provisions of secondary legislation in the customs field. According to the AG, the UK failed to carry out customs controls based on risk analysis and controls prior to release of the goods, and also failed to require security before those goods were released for free circulation. The measures adopted by the UK are thus considered ‘manifestly ineffective’ by the AG, given the characteristics of the fraud at issue, which included using so-called ‘phoenix companies’ that often do not have any assets and tend to disappear as soon as their goods are released for free circulation.
AG Pikamäe then elaborates on the most crucial but also the most delicate question of the case, which is how to determine the scale of losses to the EU budget in cases like these. Given the impossibility to identify the actual value of imported goods retrospectively given that they have been already released for free circulation, the Commission estimated the losses based on the OLAF methodology mentioned above. The Commission first identified goods that were imported under the ‘lowest acceptable price’, and then calculated the custom duties payable from the difference between the declared price and the ‘cleaned average price’. According to the AG, where the impossibility of determining the actual losses of the EU budget is the inevitable consequence of a Member State’s failure to fulfil its obligations, it is indeed possible to determine the lost amounts based on statistical data. The methodology chosen by the Commission is then considered by the AG to ‘not manifestly overestimate the volume of goods that were undervalued during the infringement period’ and to be ‘appropriate and not arbitrary’ given the circumstances of the case.
Nevertheless, AG Pikamäe does not accept the actual estimate of the Commission because of two issues. Firstly, the AG maintains that for the period from 2011 to 2014, the Commission focused the arguments underpinning its action before the Court of Justice solely on the fraudulent imports identified in so called ‘Operation Snake’ aimed at combatting the undervaluation fraud. Therefore, the Commission cannot claim losses for all of the imports that satisfied the above-mentioned criteria for undervaluation during that period. Secondly, for the period from 2015 to 2017, the amount claimed cannot be accepted because the Commission did not take into account the amounts corresponding to the eight cases where the UK did actually use the OLAF methodology and issued corresponding payment notices as a part of the so-called ‘Operation Breach’. Stating that it is not for the Court of Justice to correct these shortcomings of the Commission’s action, the AG suggests that the Court declares the failure by the UK to fulfil its obligations, without specifying actual amounts that the UK was supposed to pay to the EU budget.
AG Pikamäe also concludes that the UK could not be responsible for the possible loss of VAT from these undervalued imports, mainly because the VAT does not correspond to the customs value of the goods, but rather to the sale price charged to the final purchaser. Last but not least, the AG agrees with the Commission that the UK breached the duty of sincere cooperation by failing to disclose all the information necessary to determine the amounts of own resources lost.
The importance of the case cannot be overestimated. Not only because of the incredible amount of money claimed by the Commission (circa 2.68 billion euros) from the UK. Much more important are the possible implications for the other Member States and for the system of traditional own resources as a whole. Would the Court of Justice rule that the UK failed to fulfil its obligations simply by not adopting preventive measures with regard to every import under 50% of the ‘cleaned average price’, it could mean rather a drastic narrowing of the discretion that is offered to the Member States by the relevant legislation. Taken together with the possibility to estimate retroactively the amount lost up to the ‘cleaned average price’ and very high interest rates, the implications for the budgets of other Member States not applying the approach suggested by the Commission and OLAF in the past might be tremendous. However, one must not forget that the conclusions of AG Pikamäe seem to be deeply based on the fact that the UK authorities seemed to be extremely lax in this regard, not using any effective risk analysis tools and generally adopting only the measures considered by the AG to be ‘manifestly inefficient’.
Ondřej Serdula works at the EU Law Department of the Ministry of Foreign Affairs of the Czech Republic and is Ph.D. candidate at the Charles University in Prague. The views expressed above are his own.