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Questions and Answers: The protection of EU financial interests and the fight against fraud

Commission Européenne - MEMO/11/649   29/09/2011

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MEMO/11/649

Brussels, 29 September 2011

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 which they have detected in areas of shared management. Statistics appearing in the report are elaborated on the basis of these data. Second, Member States 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 2010 the chosen subject was the risk of double financing cohesion policy projects.

What is the purpose of this report?

First, the report is part of the Commission's policy of transparency in EU financial management. Second, it helps identifying areas where protection EU funds can be reinforced 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. This Annual Report is provided for in the Treaty (article 325) and is presented to the Parliament and the Council.

How is the EU budget implemented?

The European Commission is responsible for implementing the EU budget. However, almost 80% of the total expenditure (agricultural and structural aid) is managed by Member State administrations. For this very reason, Member States are required to cooperate with the Commission to deliver assurance and accountability over the use of EU funds. This is the system of shared management.

What is the difference between an "irregularity" 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. Examples include for instance a person not correctly reporting on hours worked in a project or not respecting rules regarding a tender procedure such as requesting too few offers or accepting offers from unqualified bidders. Fraud is a deliberately committed irregularity, and constitutes a criminal offence.

EU Own Resources: What types of goods were involved in irregularities and fraud in 2010, and which were the main countries of origin?

The EU has its ‘own resources’ to finance its expenditure. Legally, these resources belong to the Union but Member States collect them on its behalf. One of the traditional own resources mainly consists of duties that are charged on imports coming from a non-EU state. The EU’s two other ‘own resources’ are based on value-added tax and gross national income in the Member States.

Various goods are subject to irregularities and fraud relating to the EU’s traditional own resources when importers try to qualify their goods for a lower tariff by producing a false certificate. As in previous years, TVs, machines, cars/motor parts, clothing and tobacco are the most common categories of goods involved in registered cases of irregularity or fraud. Vegetables and sugar gained significance.

The origin of the goods concerned is also varied, although some countries remain at the top of the rankings (such as China and the USA). Some Central and South American countries (e.g. Brazil, Ecuador and Mexico) gained importance in 2010.

How can the rise in reported irregularities in certain sectors in 2010 be explained?

This increase in the number of reported irregularities should be considered as a positive development. In general; more reported irregularities coincide 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: The rise in irregularities and suspected fraud cases is due to the new internet based reporting system which has allowed for a substantial increase in the number of reporting authorities in the Member States and has speeded up the reporting activities. It is also due to the fact that the 12 Member States which have joined the EU since 2004 have started to report for this sector.

Cohesion Policy: Cohesion Policy works on multi-annual programming periods. By their nature, these periods may overlap at certain points in time. At present, the current period 2007-2013 is being implemented and the 2000-2006 programmes have been closed. This means that the Commission is receiving reports concerning two 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. A similar increase was observed when the programming period 1994-1999 was closed. The new reporting system has also contributed to higher numbers reported through easier access and faster fulfilment of the reporting obligation.

Pre-Accession: The number of reported irregularities and the related financial volume has decreased substantially compared to 2009. This is because the 12 Member States which have joined the EU since 2004 are phasing-out of the pre-accession assistance phase. The exception is PHARE, a pre-accession instrument to assist applicant countries in their preparations for joining the EU, for which the number of reported irregularities has remained stable, though the financial volume has decreased.

The majority of the newly reported cases are, as in 2009, related to the SAPARD, a pre-accession instrument to assist applicant countries with structural adjustment in their agricultural sectors, in Romania and Bulgaria. In Bulgaria, irregularities and suspected fraud cases are now primarily detected by national services. The situation in Romania is different, with a large proportion of irregularities and suspected fraud cases detected following inspections by EU services or undertaken at their request.

Expenditure directly managed by the Commission: The identified irregularity rate remains low (0.27% in 2010). Only 2.1% of the issued recovery orders were qualified by the Commission services as suspected fraud. The main reason for the sharp increase both in the number of recoveries and amounts to be recovered is due to improved reporting by the responsible Commission Services.

Does a higher number of reported fraud cases mean a higher level of fraud in a Member State?

A higher suspected fraud rate does not necessarily mean that more fraud is taking place in certain Member States and affecting the EU’s financial interests. This rate is calculated on the basis of detected and reported (suspected) fraud cases and it is therefore an indication that anti-fraud systems are performing and reporting obligations are complied with.

Do irregularities mean that the money is automatically lost or wasted?

No. When an irregularity is detected (and reported), the competent authorities in Member States (for agriculture, cohesion and pre-accession funds) or in the European Commission (for Expenditure directly managed by the Commission) take administrative and financial follow-up actions. 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?

Under EU financial rules, all irregular amounts must be recovered. Each sector has certain specificities and in general recovery rates cover the accumulated outstanding amounts. Due to the specificities of certain sectors, some recovery rates may concern a given programming period.

Traditional own resources: The established amount to be recovered following irregularities detected in 2010 is €393 million. An amount of €180 million has already been recovered by the Member States. The recovery rate for 2010 at the time of publication is 46%, compared with 50% in 2009.

Agriculture: Member States recovered €175 million during the 2010 financial year. A clearance mechanism at EU level provides a strong incentive for Member States to recover undue payments from beneficiaries as quickly as possible. As a result, by the end of the financial year 2010, 42% of the new European Agricultural Guarantee Fund (EAGF) debts since 2007 had already been recovered by the Member States. In 2009 this rate was 39%.

The outstanding accumulated amount remaining to be recovered from beneficiaries by national authorities at the end of financial year 2010 was €1.2 billion, of which about € 0.3 billion has already been paid to the EU Budget by Member States under the 50/50 rule.

Cohesion policy: Cohesion policy reports the highest recovery rate of all expenditure sectors in 2010 at 67%. In 2009 this rate was 59%. Cohesion policy is based on multi-annual programmes, which means that that some recovery procedures are delayed until the end of the programming period. Substantial difficulties were encountered after the end of the 1994-99 programming cycle and these were taken into account by the Commission and national services. For example, 67% of the € 2.9 billion of unduly paid EU contributions from the programming period 2000-2006 have been recovered (or withdrawn from expenditure claims), only one year after closure documentation was submitted by Member States to the Commission.

Pre-accession funds: An analysis of recoveries throughout the programming period 2002-2006 confirms the need for improvements in this area. The pre-accession funds show the lowest recovery rates of the expenditure sectors. Recovery rate for the year 2010 is at 10%, which is a lot lower than in the previous year (27%). Even if the recoveries for the past years are taken into account, the recovery rate remains low (around 30% accumulated for the years 2002-2006) and is especially low for Bulgaria, Turkey, Lithuania, Latvia and Slovenia. In cases of suspected fraud, procedures are becoming even lengthier and more complex, as showed by the lower recovery rate (14% on average accumulated for the same period). Apart from the lengthy procedures linked to suspected fraud cases, another explanation for the low rates could be the failure by Member States to update recovery information about irregularities.

Expenditure directly managed by the Commission: Full or partial recovery was recorded in almost all of the 791 cases in 2010, amounting to almost €25 million. The recovery rate in general increased to 58.5%, and the recovery rate following cases of suspected fraud is high (82.4%).

What is the procedure for recovering irregular amounts and following up on irregularities?

The procedure for recovering 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 sums unduly paid.

With regard to direct expenditure, the Commission has responsibility to ensure the recovery of 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 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 annual financial clearance of each paying agency’s accounts 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 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 from which they can start financing specific programmes. The Commission makes further bi-annual payments to the Member States on the basis of specific expenditure claims. Final payments are made 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 contributions to the Commission and recovering the undue payment from the beneficiary. The recovery of undue payments follows the relevant national procedural rules.

Member States can decide whether to remove expenditure from the statement of expenditure immediately after the detection of an irregularity, or wait until the recovery procedure is completed before removing the irregular expenditure from the claim to the Commission. The first option immediately releases 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 follow the steps already described for the Cohesion Policy.

What measures are in place to protect EU funds from fraud?

Under EU law, Member States have primary responsibility for preventing, detecting and following up on irregularities and fraud. They are responsible for collecting the EU budget revenues (traditional own resources) on behalf of the Community and for managing almost 80% of EU budget expenditure. 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 on the spot checks and inspections.

What role does Europe's anti-fraud office OLAF play in protecting EU funds against fraud?

OLAF’s main objective 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 2010?

OLAF opened 225 cases in 2010 (compared to 220 the year before).

What does the report say about the risk of double financing of projects in cohesion policy?

In 2010, the Commission circulated a questionnaire to Member States on the risk of double financing projects in the area of cohesion policy. Member States’ contributions to the report indicate that they have measures in place which should prevent double funding. These measures include legal provisions, risk analysis, administrative procedures, and cooperation between national authorities, information exchange and the use of electronic tools. However, more progress is needed on risk identification.

However, the use of the Central Exclusion Database, a database with information about all bodies and individuals excluded from EU funding, by the Member States under Article 95 of the Financial Regulation is still very limited. The Commission requests all Member States to start using this database.

Is the Annual Report on the Protection of EU's financial interests related to the Annual Court of Auditor's Report?

No. The Court of Auditors carries out its own audit. The report on the Protection of EU's financial interests is based on reported irregularities and suspected fraud detected by the Member States.


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