British ambassador to the EU, Tim Barrow | Aurore Belot/AFP via Getty Images UK says EU’s €2 billion China fraud estimate ‘inflated’ The UK is disputing the calculation by the EU’s anti-fraud office.

The U.K. is disputing an "inflated" estimate by the EU that it owes €2 billion in lost duties and VAT connected to a Chinese fraud network.

In a robust four-page letter to the European Commission, obtained by POLITICO, the British ambassador to the EU, Tim Barrow, questioned the EU anti-fraud agency OLAF's methodology for calculating the bill as "overly simplistic."

The dispute — which is embarrassing for the U.K. at a time when it is attempting to win support in Brussels for its post-Brexit proposals on future customs arrangements — stems from a two-year investigation by OLAF concluded in March. It accuses London of having turned a blind eye to one of the largest alleged fraud rings it has ever uncovered, which allowed Chinese textiles and footwear to flood into Europe at a tiny fraction of their true cost of production.

OLAF calculated that U.K. customs’ “continuous negligence” deprived the EU of €1.987 billion 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.

The U.K.'s response comes on the eve of Britain’s third round of negotiations on its EU departure, which are due to take place next week.

The investigation concluded that British customs played a central role by repeatedly ignoring warnings from Brussels and by refusing to implement so-called "risk profiles" aimed at curbing the fraudulent traffic. EU investigators also accused the U.K. of having failed to open a criminal investigation into the fraud scheme. The alleged fraud is still ongoing, according to OLAF.

In an attempt to recoup some of the funds, EU investigators sent a recommendation to the European Commission’s budget department that the U.K. government should be forced to pay the €2 billion directly into the EU budget — so-called own resources.

Five months later the U.K. government has responded directly to the accusation. "The U.K. wishes to note that we continue to dispute OLAF’s assessment of the sums allegedly owed for own resources to the Commission for customs duty that has not been accounted for," Barrow wrote to Nadia Calviño, the director general of the budget department. The letter, dated August 8, is a response to two letters from the Commission on March 24 and July 28.

Barrow's letter says the "U.K. is taking this matter seriously" and is "continuing to investigate," but it identifies "concerns" with OLAF's calculation. It asserts that OLAF overvalued "goods identified as undervalued, thus generating an inflated customs duty liability from these imports," as well as identifying "instances of undervaluation where imports have been made by large high street traders who are importing genuinely low value goods."

The U.K.'s response comes on the eve of Britain’s third round of negotiations on its EU departure, which are due to take place next week. The timing of the dispute is awkward because the U.K. is hoping to move the Brexit talks on to Britain's future customs relationship with the bloc. It published a position paper last week outlining its proposals, but EU diplomats say the ongoing fraud dispute has dented the U.K.'s credibility on the issue.

The U.K.'s customs agency, Her Majesty’s Revenue and Customs (HMRC), said in a statement that it had made "clear to the European Commission that we do not recognise OLAF’s estimate of alleged duty loss," and that it intends to give "a detailed response in due course."

"[HMRC] has a very strong track record for tackling evasion and rule breaking of all kinds, securing a record £28.9 billion last year alone in revenue that would otherwise have gone unpaid," it added.

A spokesperson for the Commission's budget department declined to comment, saying the procedure is "ongoing." A spokesperson for the British Permanent Representation in Brussels said it would not comment on leaks.

OLAF's press office said the agency had "conducted its investigation in a comprehensive manner, and stands by the accuracy of its methodology and the results it yielded."