The incidence of fraud against the Community Budget first became a significant issue during the 1970s and 1980s, as spending on the Common Agricultural Policy (CAP) and the structural funds rose rapidly. A combination of growing public concern and pressure from some net-contributor member states led to the creation in 1988 of an internal anti-fraud unit, UCLAF (Unité coordinatrice pour la lutte anti-fraude), within the European Commission, followed by the insertion in the 1992 Maastricht Treaty of an obligation on the Union and its member states to ‘counter fraud and any other illegal activities affecting the financial interests of the Union’. The latter was empowered to ‘adopt the necessary measures … with a view to affording effective and equivalent protection in the Member States and in all the Union’s institutions, bodies, offices and agencies’ (Article 325 TFEU). The position of the Court of Auditors was also strengthened: it was made an EU institution in its own right and allowed to bring actions in the European Court of Justice (ECJ) against other institutions (but not member states) to protect its interests.
These moves had only limited effect, however, for two three main reasons. First, since over three-quarters of EU expenditure was (and still is) disbursed in the member states, by their governments acting on the Union’s behalf, there was less incentive for scrupulousness in financial reporting than might be expected. There was a strong suspicion that some national governments preferred not to take action that might reflect discredit on their own citizens and result in repayments to the central Budget. Second, for many years, most member states proved very reluctant to concede the logical solution to this problem, namely giving the EU institutions – whether the Commission or the Court of Auditors – the power to undertake investigations on national territory. Some governments opposed such a move for reasons of self-interest, others because of an ideological objection to the implicit loss of sovereignty. Third, the Commission itself was vulnerable to accusations of hypocrisy because its own procedures for internal financial management were defective in certain key respects. The House of Lords’ EU select committee talked in 1994 of a ‘public scandal’ in official attitudes towards fraud at several levels, with a ‘worrying absence of indignation’ and ‘lack of political will … to take remedial action’.
The turning-point proved to be the resignation of the Santer Commission in March 1999, itself a product of evidence of fraud and financial mismanagement in certain Commission programmes. At that time, nearly six per cent of the Union Budget was deemed by the Court of Auditors to show evidence ‘irregularities’ of some kind – even if a minority of those were not thought to be fraudulent. An irregularity is a failure to comply with the rules, whether through simple omission or deliquence, whilst a fraud is an irregularity committed intentionally which constitutes a criminal offence. An example of an irregularity would be a genuine payment made after the prescribed closing date. An example of fraud would be the import of goods into the Union under false papers.
The accusations levelled in the run-up to the Santer Commission’s departure, confirmed by a special report from a Committee of Independent Experts (CIE), prompted both the Commission and the Council of Ministers to take action. Jacques Santer’s successor as Commission President, Romano Prodi, assumed office committed to a ‘zero tolerance’ approach to fraud. Soon after, UCLAF was replaced by a more muscular and independent European Anti-Fraud Office, OLAF (Office pour la lutte anti-fraude). The Council agreed that OLAF should have the power to investigate fraud against the Budget, in any EU institution or body, wherever physically it might take place. The body is permitted to carry out ‘on-the-spot inspections and checks in the member states … and third countries’. The wording of the regulation establishing OLAF is ambiguous about how far action prejudicial to the ‘financial interests’ of the Union embraces corruption, as distinct from fraud, if it has no direct budgetary consequences. The European Court of Justice has established that OLAF’s remit extends to other EU bodies, such as the European Investment Bank (EIB), whose activities are not funded by the Budget (Commission v EIB, Case C-15/00). However, much to OLAF’s annoyance, the European Parliament has successfully insisted that the rights enjoyed by its members (MEPs) under Protocol 7 on the privileges and immunities of the European Union, annexed to the Treaties, means that their offices cannot be raided unless the Parliament itself chooses to lift their immunity, following a specific request from a national prosecuting authority (rather than OLAF). As well as investigating fraud, OLAF advises the institutions on anti-fraud policy, and is tasked with coordinating the anti-fraud activities of the member states and promoting cooperation and best practice among them.
Even if OLAF still forms part of the Commission, it enjoys a high degree of budgetary and administrative autonomy, and its investigations are conducted entirely independently. It may neither seek nor receive instructions from any government or EU institution (including the Commission) and is overseen by a supervisory committee composed of outside figures. Today, OLAF receives about 1,000 notifications a year, some anonymous, and usually finds that around a third merit formal investigation. In 2010, OLAF had a staff of about 470 officials (of whom 160 were investigators) and a budget of € 77.6 million, of which € 20.5 million was used for operations within member states and third countries.
Several other initiatives were taken to reflect the higher priority accorded to the fight against fraud. The law was amended to require the member states to report suspicions of fraud against, and other irregularities in the spending of, the EU Budget to the Commission. The staff regulations of EU officials were updated to make it a legal obligation on them to report suspected fraud to their administrative hierarchy in writing. In addition to the Court of Auditors’ annual report, the Commission began to present its own report on the protection of the EU’s financial interests. The Commission established an Advisory Committee for the Coordination of Fraud Prevention (Cocolaf), consisting of national officials working in this field. Cooperation on anti-fraud work became a routine feature of international agreements concluded between the Union and third countries, both to monitor any EU spending programmes in those countries and to assist in countering smuggling. Since 2007, the member states have been obliged to present a quarterly summary of irregularities and fraud in their individual jurisdictions. Several member states – Britain, the Netherlands, Sweden and Denmark so far – have begun to issue their own ‘voluntary national declarations’ on the reliability of their domestic EU spending, separate to the overall ‘statement of assurance’ which it is the responsibility of the Court of Auditors to issue. The European Parliament has called for this voluntary national declaration process to be made obligatory for all member states.
By definition, figures on the volume of fraud are difficult to establish definitively, and it naturally tends to be assumed that those published by the EU institutions underestimate the problem. Based on the work of OLAF, the European Commission reports annually on irregularities and fraud in the spending and financing of the EU Budget. It states that there were just over 10,000 cases of reported irregularity in EU spending in 2010. These affected 1.5 per cent of total expenditure – or € 1.80 billion out of € 120.5 billion. Within this total, the volume of suspected fraud amounted to € 478 million (or 27 per cent). Fraud is most prevalent in the structural funds and the CAP – the two biggest EU spending programmes undertaken in the member states. Recently, a disproportionately high incidence of fraud has also been witnessed in spending in programmes to assist the pre-accession states. By contrast, spending programmes managed entirely centrally by the Commission have always boasted a much lower fraud ratio (recently of only 0.01 per cent).
Although fraud predominantly affects the expenditure side of the Budget, the Union’s income is also vulnerable to abuse. According to the Commission, in 2010, there were over 4,700 irregularities in the collection of the Union’s ‘traditional’ own resources (TOR) – namely, agricultural and sugar levies and customs duties – even though these now amount to less than an eighth of total EU revenue. Irregularities on the revenue side amounted to € 393 million, of which € 139 million was thought to be fraudulent. Equally, the Union receives a small component of the member states’ receipts from value-added tax (VAT), itself open to fraud. The widespread practice of cigarette and alcohol smuggling affects revenue to the Union from both customs duties (TOR) and VAT. Added together, the Commission indicates that suspected fraud against both sides of the Union Budget amounted to some € 617 million in 2010, equivalent to 0.25 per cent of combined income and expenditure.
Copyright: Anthony Teasdale, 2012
Citation: The Penguin Companion to European Union (2012), additional website entry