Britain faces a potential €2 billion bill from Brussels after EU investigators found that U.K. authorities turned a blind eye to a massive fraud network that allowed ultra-cheap Chinese goods to flood into Europe.

The EU’s anti-fraud office OLAF, uncovering allegedly one of the biggest fraud rings in its history, concluded that British customs played a central role by repeatedly ignoring warnings to take action over Chinese textiles and footwear pouring into the EU at a tiny fraction of their cost of production.

OLAF calculated that U.K. customs' “continuous negligence” deprived the EU of €1.987 billion in revenues in lost duties on Chinese merchandise. The highly sophisticated organized crime network also stripped €3.2 billion from the value-added-tax income of major EU countries such as France, Germany, Spain and Italy, the investigators said.

In an attempt to recoup some of the funds, OLAF has sent a recommendation to the European Commission’s Directorate-General for Budget that the U.K. government should be forced to pay the €2 billion directly into the EU budget. Any recovery of the funds will depend on talks and legislative procedures between the U.K. and the Commission.

The anti-fraud investigators confirmed the details of the probe to POLITICO and said: "These losses to the EU budget are still ongoing since this fraud has not been stopped to date."

"Despite repeated efforts deployed by OLAF, and in contrast to the actions taken by several other member states to fight against these fraudsters, the fraud hub in the U.K. has continued to grow," a spokesperson for the anti-fraud office said, adding that Britain had also failed to open any criminal investigation into the fraud scheme.

OLAF declined to speculate on Britain's possible motives for offering easy customs clearance to Chinese goods, but people familiar with similar fraud schemes said it could be the lure of attracting greater traffic than competitor ports such as Rotterdam and Antwerp. The goods in the fraud ring enter the EU's single market through the U.K.

Her Majesty's Revenue and Customs (HMRC) said in a statement to POLITICO it had an "excellent record in tackling fraud and rule breaking of all kinds, securing more than £26.6 billion last year alone.” The agency was "considering" OLAF's findings and recommendations, it said.

Adding to the bills

The revelations come on the eve of Britain’s negotiations to leave the EU, which are expected to focus on the size of the U.K.’s exit bill, widely estimated at about €60 billion.

The investigation is a particular embarrassment because U.K. officials have consistently pushed the EU to avoid taking a harder line against Beijing for dumping cheap goods. This has angered southern European countries, led by Italy, which accuse the U.K. of sabotaging European trade defenses.

The investigation took place from 2014 to 2016 — also using evidence from 2013 — and focused on the English ports of Felixstowe and Dover, the main entry points for Chinese textiles and footwear coming into Europe. Britain has allegedly established itself as the prime destination for these deliveries; even goods that arrive by ship in Hamburg are ferried to Dover before clearing European customs.

To illustrate the generosity of Britain’s customs terms on these clothes, OLAF cited the case of women’s trousers which were declared with a value of 91 cents per kilo, undershooting the market price of cotton at €1.44/kg. The average price for the trousers declared at customs across the EU was €26 per kilo.

The goods were then trafficked to members of the criminal network across Europe, with the fraudsters setting up “phoenix” companies to take delivery of the goods, according to a joint OLAF-French investigation. These businesses would then disappear, only to be reborn elsewhere, like the mythical bird.

This strategy enabled the companies to avoid paying value added tax because the EU allows importers to pay VAT in the country where they intend to sell it, and not at their port of entry.

'Extremely vague'

Bruno Collin, a head of unit at the French National Directorate of Intelligence and Customs Investigations, attributed Britain's disinterest to the fact that it was other countries that lost the VAT revenue.

"U.K. authorities are not interested at all in cooperating in this field, probably because the phenomenon does not directly affect them," he said. Collin was in charge of Octopus, a joint customs' operation conducted by France and coordinated by OLAF last year, which found that the value of Chinese imports declared at U.K. ports was “discounted five to 10 times.”

Collin said that British authorities largely did not respond to French requests to help trace goods, for example by using tax registration numbers issued at the port of entry. When the British did reply, Collin said they offered only "extremely vague explanations ... They don't make an effort."

Last hold-out

Britain's alleged determination not to apply rigorous duties to dumped Chinese goods became evident to European authorities in an investigation in 2014 called Snake, a joint customs' operation between several EU countries and China.

Within one month, “major undervaluation hubs” were uncovered in the U.K., Slovakia, Malta, Portugal and Spain.

To curb the traffic OLAF asked the countries to introduce measures to reduce fraud.

All countries, including the U.K., initially complied with the requests, but the British customs introduced the new risk assessment tools for only four weeks, during Snake. As soon as the operation was over, they returned to business as usual, according to officials involved in Snake. Other countries kept the measures in place, pushing the fraudulent traffic to Britain, they added.

Over 2015 and 2016, OLAF held four bilateral meetings with British officials "where the magnitude of the fraud scheme and the related risks were drawn to the U.K.'s attention," the fraud office said in a statement to POLITICO. OLAF also held six “ad hoc meetings” where other EU countries were invited to discuss the growing problem.

According to sources briefed on the meetings, HMRC repeatedly came up with excuses for not implementing the measures to reduce fraud.

When confronted with details on how other EU countries had curbed the fraud, British officials said that most of the measures in other countries “would not comply with UK law.”

The Crown Prosecution Service, which also received the OLAF report, was not immediately able to comment. The European Commission also declined to comment.