Questions and Answers: The protection of EU financial interests and the fight against fraud
European Commission - MEMO/10/332 14/07/2010
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Brussels, 14 July 2010
Questions and Answers: The protection of EU financial interests and the fight against fraud
How does the Commission compile this annual report?
This Report is compiled mainly using data and information submitted by the Member States. The remaining part of the information comes from data collected by Commission itself. There are two ways in which the information is communicated to the Commission. Firstly, Member States report irregularities and suspicions of fraud in the areas of shared management. Statistics appearing in the report are elaborated on the basis of these data. Member States also contribute to the report via an annual questionnaire addressed to them by the Commission. The topics of these questionnaires are agreed in advance between the Commission and Member States, with a view to gathering more information on areas that could help improve the protection of the EU's financial interests. For 2009 the chosen subjects were ‘the cooperation between the Commission and the MS for the implementation of Regulation 2185/1996 concerning on the spot checks’ and ‘precautionary measures taken by the MS for the recovery of irregular amounts’.
What is the purpose of this report?
First, the report is part of the Commission's policy of transparency in EU financial management. Second, by compiling statistical data on the measures taken by Member States and the Commission to counter fraud and any other activities which negatively impact the EU's financial interests, it helps to identify areas where more focus may be needed in the protection of EU funds. This Annual Report is provided for in the Treaty (article 325) and is presented to the Parliament and the Council.
What is the difference between "irregularities" and "fraud"?
An irregularity is when a beneficiary is not in compliance with the EU rules and requirements linked to the spending of EU funds, with a potentially negative impact for EU financial interests. Irregularities are often the result of genuine errors. Fraud is a deliberately committed irregularity, which constitutes a criminal offence.
EU Own Resources: What types of goods were involved in irregularities and fraud in 2009, and what were the main countries of origin of these goods?
The goods involved in irregularities and fraud related to EU own resources are very diverse. As in previous years, TVs and monitors, clothing and tobacco are the most numerous categories of goods involved in registered cases of irregularity or fraud. These goods originated from various countries although some (China, USA, Japan) continuously remain at the top of the rankings.
How can the rise in reported irregularities in certain sectors in 2009 be explained?
An increase in the number of reported irregularities should not be considered negatively per se. In general; an increased number of reported irregularities coincides with an increased level of checks and audits, and consequent good reporting from the authorities concerned. Moreover, there are other reasons which may explain these increases, depending on the budget area concerned:
Agriculture: A new internet based reporting system was introduced at the end of 2008. The internet access has allowed for a substantial increase in the number of users (reporting authorities in the Member States) in comparison with the previous system and has facilitated and speeded up the reporting activities. As a result of this, a substantial raise in quality and quantity of reported irregularities has been observed.
Cohesion Policy: The Cohesion Policy works on multi-annual programming periods. Because of their very nature, these periods may at certain points in time overlap. At present, the current period 2007-2013 is being implemented, the 2000-2006 programmes are on the verge of being closed, and some 1994-1999 programmes are still partially open. In terms of irregularities reporting, this means that the Commission is receiving now reports concerning three programming periods. Furthermore, the closure of the programming period 2000-2006 implies increased check and audit activities on these programmes, resulting in a higher number of irregularities detected and reported. This increase is in line with that observed at the moment of closure of the programming period 1994-1999. Lastly, Bulgaria and Romania have recently started implementing their programmes for the 2007-2013 period and have consequently started reporting irregularities.
Pre-Accession: Pre-Accession Assistance is implemented through national programmes which run for several years. Irregularities and suspected fraud cases may be detected at any stage of the implementation cycle but they are most frequently detected in the time leading up to the final payment being made (linked to final audits). The number of irregularities reported from the EU-10 is continuously decreasing, as these countries are phasing out from this type of assistance, while the number of irregularities reported by Romania and in particular Bulgaria is increasing as programmes are gradually coming to a close. The steep increase in the number of irregularities reported by Bulgaria also reflects a better understanding of the obligation to ensure sound financial management following the Commission's efforts to improve the reliability of the national systems. In 2008, the Commission suspended payments to Bulgaria pending serious efforts by the Bulgarian authorities to combat fraud, corruption and irregularities more efficiently; in parallel, the Commission multiplied its direct monitoring activities in Bulgaria. These combined efforts led to a much higher detection (and subsequent reporting) rate.
Does a higher number of reported fraud cases mean a higher level of fraud in a Member State?
A higher suspected fraud rates may not necessarily mean that more fraudulent activity affecting the EU’s financial interests is taking place in certain Member States. It is rather an indication that the anti-fraud systems in place are performing well (capable of detecting fraud and willing to report it), which always produces higher results.
Do irregularities mean that the money is automatically lost or wasted?
No. When an irregularity is detected, administrative and financial follow-up actions are initiated by the national competent authorities in Member States (for agriculture, cohesion and pre-accession funds), or by the European Commission (for direct centralised management). The money recovered can therefore be reused for financing other projects. EU Financial Regulation obliges Member States to prevent, detect and correct irregularities and to recover the unduly paid amounts.
How much money affected by irregularities or suspected fraud has been recovered?
It should be noted when looking at recovery rates that these figures related to recoveries done so far, on irregularities reported in 2009. Further recoveries will continue, in line with procedures outlined below. Under EU financial rules, all irregularities must be reported and the irregular amounts recovered.
Traditional own resources: At present, the recovery rate for irregularities occurring in 2009 is 44% (approximately 152 million). This is higher than last year's rate of 38%.
Agriculture: During the financial year 2009, Member States recovered 167.3 million and the out standing amount still to be recovered from the beneficiaries at the end of the financial year was 1 136.2 million euro.
Cohesion policy: For the 2000-2006 programming period recovery rates are good (exceeding 50%).
Pre-accession funds: In 2009 amounts to be recovered increased by 135%. the highest amount to be recovered comes from SAPARD programme. Member States concerned are requested to pay special attention to the recovery of the irregular amounts in question.
Direct centralised management: In 2009, partial recovery has been already announced in 478 cases. The Commission has recovered 15.5 million. In 463 cases, the full irregular amount has been recovered. An amount of 12 million euro remains to be recovered, concerning 242 cases. The Commission will continue procedures for the full recovery of the irregular amounts concerned.
What is the procedure for recovering the irregular amounts and following up on irregularities?
The procedure for recovering the irregular amounts varies depending on the type of funds concerned. In areas like Agriculture, Cohesion Policy and Pre-Accession, recovery of unduly paid sums is the responsibility of Member State authorities. In these areas, the Commission has a monitoring role both on the administrative/judicial procedures and on the financial procedures. Each sector, however, has certain specific rules concerning the recovery of the sums unduly paid.
With regard to direct expenditure, the Commission has responsibility to ensure the recovery of the irregular amounts.
Agriculture: Member States are obliged to ensure that agricultural payments are carried out and executed correctly, to prevent and deal with irregularities and to recover amounts unduly paid. The control chain would, however, not be complete without a mechanism which ensures that the Member States carry out their work properly and, if they fail to do so, pay the necessary financial consequences. This mechanism consists of the clearance of accounts procedures operated by the Commission, which include an annual financial clearance of the accounts of each paying agency and a multi-annual conformity clearance covering the conformity of the transactions with EU rules. As previously stated, Member States are obliged to recover sums lost as a result of irregularities following their national rules and procedures. If they succeed in getting the money back from the beneficiaries, they have to credit the recovered sums to the Funds. However, it is not always easy to recover the sums spent irregularly. If the Member State needs more than four years to recover, or eight years in case of national court proceedings against the beneficiary, the Commission charges 50 % of the outstanding sum to the Member State concerned thereby protecting the financial interests of the EU (the so-called 50/50 rule). This is done via the financial clearance procedure. After this accounting exercise, the Member State is obliged to continue its recovery actions. 50 % of the sums thus recovered are to be handed over to the EU budget. Under all circumstances, the Commission keeps an eye on the Member States’ recovery actions. If a Member State does not pursue the recovery or is not diligent in its actions, the Commission may decide to intervene via the conformity clearance procedure and to impose a financial correction on the Member State concerned.
Cohesion Policy: At the beginning of the programming period the Commission gives out an advance payment to the Member States through which they can initiate the financing of the specific programmes. Further payments from the Commission to the Member States happen, in general twice a year, on the basis of specific expenditure claims. A final payment happens at the closure of the programming period. Once an irregularity has been detected, Member States must make the appropriate financial correction which implies that the irregular expenditure is removed from the statement of expenditure, thereby repaying unduly paid EU contribution to the Commission and recovering the undue payment from the beneficiary. The recovery of undue payments follows the relevant national procedural rules.
For the removal of expenditure from the statement of expenditure, Member States can decide whether to do that immediately after the detection of an irregularity or waiting until the recovery procedure is completed and then removing the irregular expenditure from the claim to the Commission. The first option releases immediately the EU-funding for re-commitment to other operations, but in doing so, the Member State assumes the risk of failing to recover the irregular expenditure. The second option leaves less time for recommitting the EU funding but protects Member States financially should they be unable to recover the undue payment from the beneficiary. The Commission monitors that reported irregularities and expenditure claims are consistent.
Pre-Accession Assistance The rules concerning recovery in Pre-Accession Assistance broadly follows the steps already described for the Cohesion Policy.
What measures are in place to protect EU funds from fraud?
Under the Treaty, Member States have primary responsibility for preventing, detecting and following up on irregularities and fraud. They are responsible for collecting the budget revenues of the EU (traditional own resources) on behalf of the Community and for managing almost 80% of the expenditure of the Community budget. In order to provide further protection against irregularities and fraudulent activities, the European Commission checks whether the national administrative practices are in line with EU rules, and whether the Member States’ control systems are working properly. The Commission also controls whether all substantiating documents are provided and are in line with the EU requirements for revenue and expenditure. In addition, the Commission may carry out checks and inspections on the spot.
What role does Europe's anti-fraud office OLAF play in protecting EU funds against fraud?
One of OLAF’s primary objectives is to protect the EU's financial interests and taxpayers' money against fraud. It can investigate fraud, corruption and any other illegal activity affecting the EU’s financial interests. When it comes to operational activities, OLAF is independent from the Commission and conducts its internal and external investigations in full independence. OLAF also assists the Commission and national authorities in combating fraud and contributes to strengthening EU legislation in the field of anti-fraud. It works closely with national authorities (investigation services, police, legal and administrative authorities, etc), to counter criminals and fraudsters who conduct illicit activities at an intra-EU and international level. In certain cases, it can set up task-groups to work on specific products such as cigarettes, alcohol or olive oil. Such task groups have shown that close cooperation between the Member States and effective coordination at Community level are extremely useful in uncovering large scale smuggling and fraud. OLAF also carries out administrative investigations inside the EU institutions and other EU bodies, to prevent, detect and tackle any fraud and corruption.
How many cases did OLAF open in 2009?
OLAF opened 220 cases in 2009 (compared to 204 the year before).
What measures were taken at international level by the Commission/OLAF to protect the EU's financial interests in 2009?
The protection of the EU’s financial interests and the fight against fraud and corruption go beyond the EU's borders. Therefore, this needs to be reflected in the international agreements that the EU concludes with third countries or in the multilateral conventions to which it is party. Anti-fraud and corruption provisions are included in many bi-lateral agreements which the EU has signed with third countries. In 2009, the European Commission negotiated the conditions for the implementation of the United Nations Convention against Corruption (UNCAC), and was an active participant in the activities of the European anti-corruption network, which was created by the Council in 2008.
The EU has also been a fore-runner internationally in tackling tax havens and tax fraud. The Commission works to promote the principles of good governance in tax matters worldwide, and has worked closely with OECD in this field. An anti-fraud agreement with Lichtenstein, which could serve as a model for similar agreements with other third countries, has been negotiated and is currently waiting for agreement by Member States in Council. The Commission has also asked the Council for the mandate to negotiate similar agreements with Switzerland, Andorra, San Marino and Monaco. In addition, the Commission is in the process of negotiations with Ukraine on a new and comprehensive agreement within the European Neighbourhood Policy to tackle fraud and protect EU's financial interests.
What does the report say with regard to on-the-spot checks in Member States by OLAF, related to fraud investigations?
In 2009, the Commission circulated a questionnaire to Member States with regard to their cooperation with the Commission (OLAF) on on-the-spot checks related to fraud investigations in their territories. On-the-spot checks are one of the most powerful tools for the Commission to conduct investigations related to the protection of EU financial interests and combating fraud. They rely on reciprocal cooperation between OLAF and the competent national authorities. The report underlines that the active participation of national authorities and the assistance provided to OLAF inspectors are essential in guaranteeing the success of an operation. In order to ensure efficient cooperation from the start of an investigation and identify the correct competent national authorities as quickly as possible, Member States have submitted the details of their national contact points to OLAF for all expenditure fields. OLAF will remain in close contact with them, ensuring that the information is regularly updated. The report also highlights that Member States should ensure that OLAF inspectors have access to all information about operations in the same way as national inspectors.
What does the report say about Member States' measures for securing the recovery of irregular amounts?
The second questionnaire circulated to Member States in 2009 related to their measures for securing the recovery irregular amounts. Member States' replies show that all of them have provisions in their national law for securing the recovery of irregular amounts as regards the revenue and expenditure sides of the EU budget. The report concludes that Member States' legislation should foresee legal instruments such as different types of guarantees, promissory notes, security deposits, insurances in the contracts etc to ensure that irregular payments can be fully recovered. Such measures would greatly speed up the recovery procedures and make them more efficient.