The European Commission has formally demanded that the U.K. pay for lost customs duties | Matt Cardy/Getty Images Brussels demands UK pay €2.7 billion in lost customs duties Customs fraud case is a massive embarrassment to the UK as it seeks to cast itself as reliable partner in EU trade talks.

The European Commission today formally demanded that the U.K. pay €2.7 billion into the EU budget after investigators found that British authorities allowed a massive Chinese fraud network to evade paying the appropriate level of customs duties.

The network — which imported ultra-cheap Chinese goods into Europe — was first revealed in March last year by the EU’s anti-fraud office OLAF. The EU concluded that British customs allowed those importers to use "fictitious and false invoices and incorrect customs value declarations at importation."

"Despite having been informed of the risks of fraud relating to the importation of textiles and footwear originating in the People's Republic of China since 2007, and despite having been asked to take appropriate risk control measures, the United Kingdom failed to take action to prevent the fraud," the Commission said in a statement.

"The United Kingdom is liable for the financial consequences of its infringements of EU legislation."

While any recovery of the funds will depend on negotiations between the U.K. and the Commission, London has already been in contact with Brussels to complain about the almost €3 billion bill that the government is facing for infringement of EU law.

The U.K. argues that OLAF has overestimated the amount missing from state coffers because its figure is based on EU average prices and fails to take account of the high amount of low value clothes entering the U.K. clothing market.

London has also told Brussels it has implemented around 100 measures since 2010 aimed at fighting against fraud, resulting in savings of £175 billion that would have otherwise gone unpaid. One such measure includes selecting a greater number of containers for pre clearance inspections.

“We do not recognise the European Commission’s estimate of alleged duty loss. We take customs fraud very seriously and we continue to evolve our response as new threats emerge," Her Majesty’s Revenue and Customs said in a statement, adding that it would "carefully examine the formal notice from the Commission and respond in due course."

Still, London could yet be saddled with an even greater bill as the Commission also said that the U.K. infringed EU laws in relation to the collection of Value Added Tax.

The probe conducted by OLAF took place from 2014 to 2016 and focused on the English ports of Felixstowe and Dover, the main entry points for Chinese textiles and footwear coming into Europe.

To reveal the level of abuse 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 per kilogram. The average price for the trousers declared at customs across the EU was €26/kg.

Once the goods entered the U.K., they were then trafficked to members of criminal networks across Europe. The fraudsters then set 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.

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