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Questions and Answers: The protection of EU financial interests and the fight against fraud
Commission Européenne - MEMO/12/577 19/07/2012
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Brussels, 19 July 2012
Questions and Answers: The protection of EU financial interests and the fight against fraud
What is the purpose of the Annual Report on the Protection of the EU's Financial Interests?
Member States, in cooperation with the Commission, have to adopt necessary measures to counter fraud and any other illegal activities affecting the financial interests of the EU. This Annual Report, which is provided for in the Treaty (Article 325), is presented to the European Parliament and the Council to inform them of any such measure adopted, as well as the results achieved at EU and national level in combating fraud and other activities negatively impacting on EU financial interests. In this respect, the report is part of the Commission's policy of transparency for financial management. Importantly, it also helps to identify areas where the protection of EU funds can be reinforced.
How does the European Commission compile this annual report?
This report is compiled mainly using data and information submitted by the Member States, given that they are first in line for managing and controlling 80% of EU expenditure. The remaining part of the information comes from data collected by the Commission itself. There are two ways in which the information is communicated to the Commission. Firstly, Member States report irregularities and suspected fraud which they have detected in areas of shared management. Statistics in the report are compiled on the basis of this data. Secondly, Member States contribute to the report via an annual questionnaire addressed to them by the Commission. The topics of these questionnaires are chosen with a view to gathering more information on areas that could help improve the protection of EU financial interests. For 2011, the chosen topic is the controls to combat fraud and irregularities in the area of cohesion policy.
What are the EU financial interests?
EU financial interests consist of the EU budget on both the spending and revenue side. The revenue side of the budget is made up of customs duties, value added tax and a share of the gross national income of EU countries. For 2011, the financial resources available to the EU amount to €125.5 billion (in payment appropriations), i.e. about 1% of the EU-27 Gross National Income (GNI).
Through these resources the EU finances its policies, which are divided as follows: 45% goes to support sustainable growth (research and innovation, employment and regional development programmes); 42% to the preservation and management of natural resources (agricultural expenditure and direct aids to farmers, rural development, fisheries and environment); 1% to citizenship, freedom, security and justice (strengthening of active citizenship, immigration, fighting of terrorism and crime, …); 6% to the EU as a Global player (Common foreign and security policy; EU neighbourhood policy; pre-accession assistance, humanitarian aid and development cooperation); 6% to administrative expenditure (running costs for the EU institutions).
For more information, see MEMO/11/469.
How is the EU budget implemented?
The Commission is responsible for implementing the EU budget. However, almost 80% of the total expenditure (e.g. agriculture, fisheries, regional and social policies) is managed by Member State authorities under "shared management". This means that it is a decentralised system, with the first level controls and checks carried out by the national authorities. Member States are also responsible for recovering any money which has been subject to irregularity or fraud from the beneficiaries. Checks at various levels (project level, national and EU) aim to ensure the taxpayers' money is protected.
What is the difference between "irregularity" and "fraud"?
An irregularity is when a beneficiary does not comply with the EU rules and requirements linked to the spending of EU funds, with a potentially negative impact on EU financial interests. Irregularities are often the result of genuine errors e.g. not filling out a form correctly, or not respecting the proper procedures for the tender procedure. Fraud is a deliberately committed irregularity constituting a criminal offence. When reporting an irregularity to the Commission, Member States must indicate whether any fraud is suspected or established in each case. In the PIF report, suspected or established fraud are referred to as "irregularities reported as fraudulent".
How can the fall in suspected fraud in certain sectors in 2011 be explained?
In 2011, there was a general decrease in both irregularities reported as fraudulent and irregularities not reported as fraudulent. This decrease concerned the number of reported cases and the related amounts and should be considered as a positive development. A general improvement in management and control systems is one of the reasons for the decrease. For example, in the area of the Cohesion Policy, (structural funds) in the last years the Commission has implemented a Fraud Prevention Strategy, which has contributed to the awareness raising of national authorities in relation to fraud
Additionally, the following are specific technical explanations for the decrease in each budgetary sector:
Traditional Own Resources: the decrease in number of cases reported as fraudulent is ongoing for a number of years. National authorities have been recommended to target especially high risk areas, and this seems to be paying off.
Agriculture: For the past few years, there was a spike in the fraud cases reported in agriculture, due to the introduction of the internet-based Irregularity Management Reporting System (IMS). Reporting through this system appears now to have stabilized, which is reflected in the decreased number of reported fraud cases in 2011.
Cohesion policy: The marked decrease in cohesion policy was expected for 2011. This is because of the improvements in management and control systems, but also the fact that, last year, the closure of the 2000-06 programming period led to a sharp increase in reported irregularities. The cyclical nature of the programmes financed under the cohesion policy means that by the end/closure of the programming cycle, the control activities increase proportionally to the number of projects implemented and finalised, while in the initial stages of the programming phase implemented projects are fewer and therefore less irregularities are in principle detected and reported.
Pre-accession: The decrease in cases concerning pre-accession assistance can be explained due to the phasing-out of a number of beneficiary countries for the pre-accession policy. These are, in particular, the Member States which joined the EU between 2004 and 2007.
EU own resources: What types of goods did irregularities and fraud in 2011 concern, and which were the main countries of origin?
The EU's ‘own resources’ finance its expenditure, but Member States collect them on its behalf. The Traditional Own Resources primarily consist of duties that are charged on imports originating from non-EU countries. Goods may be subject to irregularities and fraud when importers try to qualify their goods for a lower duty by producing falsified certificates. In 2011, TVs were once again the predominant goods subject to cases of irregularities and fraud, with tobacco, cigarettes and oil gaining importance.
As to the origin of goods subject to fraud and irregularities, China and the USA remain very much affected; the number of cases originating from Indonesia, Taiwan and Malaysia increased.
Does the number of reported fraud cases correspond to the level of fraud in a particular Member State?
Not necessarily. The rate of fraud indicated per Member State corresponds to the amount of detected and suspected cases reported by the national authorities. Therefore, a higher level of reported fraud could be an indication that the anti-fraud systems in a particular Member State are working well, and that reporting obligations are being met. Conversely, the Commission has asked for more information from Member States that report particularly low rates of fraud, and urges them to ensure that their reporting and control systems are of a high enough standard.
Do irregularities mean that money is lost or wasted?
No. When an irregularity is detected, the undue payments are taken back from the project or country at fault. In the area of shared management (cohesion, agriculture, pre-accession etc), the competent authorities in Member States are responsible for recovering the funds from the beneficiary and initiating any administrative or judicial follow up. In direct management (e.g. research) the Commission services take the administrative and financial follow-up action. The money recovered can therefore be returned to the EU budget and re-used to finance other projects.
How much money affected by irregularities or suspected fraud has been recovered?
Traditional Own Resources: The amount to be recovered following irregularities detected in 2011 is €321 million. €166 million has already been recovered by the Member States for cases detected in 2011, giving a recovery rate for 2011 of 52 %, compared with 46% in 2010. In general, at the end of all recovery procedures about 98% of these amounts are recovered without any particular problems.
Agriculture: The Commission implemented 77% of the decided financial corrections in relation to Member States to a total of €822 million. National authorities recovered €173 million from beneficiaries in 2011. A clearance mechanism (50/50 rule) at EU level provides a strong incentive for Member States to recover, as quickly as possible, undue payments from beneficiaries.
Cohesion policy: In 2011, the Commission implemented financial corrections to a total of €624 million (i.e. 93% of those decided). Cohesion policy is based on multi-annual programmes, which means that some recovery procedures are delayed until the end of the programming period.
Pre-accession funds: In relation to the cases reported in 2011, the recovery rate has improved significantly compared with previous years, with a total of almost €26 million recovered.
Expenditure managed by the Commission: Confirmed recovery orders related to the part of the budget not executed under shared management concern €377 million. Of these, €346 million (i.e. 92%) has been recovered so far.
What is the procedure for recovering irregular amounts and for follow-up on irregularities?
The procedure for financial correction varies depending on the type of funds concerned. In the area of shared management (agriculture, fisheries, cohesion policy etc) or in the sector of Traditional Own Resources, the recovery of unduly paid sums or evaded custom duties is the responsibility of Member State authorities. The Commission monitors to ensure that the undue amounts are effectively recovered.
Each sector, however, has specific rules concerning the financial mechanisms (corrections) through which the Commission ensures that EU financial interests are adequately safeguarded.
With regard to direct expenditure, the Commission has the exclusive responsibility to ensure the recovery of irregular amounts.
For shared management, the following procedures apply:
Agriculture: Member States are responsible for the prevention and correction of irregularities and the recovery of unduly paid amounts. The control chain, however, would not be complete without a mechanism ensuring that Member States duly carry out their work or, if they fail to do so, pay the necessary financial consequences. This mechanism consists of the clearance of accounts procedures operated by the Commission. In accordance with their national rules and procedures, Member States are obliged to recover sums lost as a result of irregularities. If they succeed in getting the money back from the beneficiaries, they have to credit the recovered sums to the funds. However, if the Member State takes more than four years for recovery, or eight years in the 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. In all cases, the Commission monitors the Member States’ recovery actions. If a Member State does not pursue recovery or is not diligent in its actions, the Commission may impose a financial correction (of up to 100%) on the Member State concerned.
Cohesion policy: At the beginning of the programming period, the Commission provides an advance payment to the Member States from which they can start financing specific programs. The Commission makes further bi-annual payments to 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. This means that the irregular expenditure is removed from the statement of expenditure, unduly paid EU contributions are thereby repaid to the Commission and the undue payment is recovered from the beneficiary. This recovery of undue payments is governed by national administrative and judicial 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. 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 EU budget revenue (e.g. Traditional Own Resources) and for managing almost 80% of EU expenditure. To further protect against irregularities and fraudulent activities, the 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 if they comply with EU requirements. In addition, the Commission may carry out on-the-spot checks and inspections to verify Member States' adherence to the rules.
In the cohesion policy sector, the Commission has the possibility to interrupt payments for a maximum period of 6 months if there is evidence to suggest a significant deficiency in the functioning of the management and control systems of the Member State concerned or if the Commission services have to carry out additional verifications following information that a serious irregularity has not been duly corrected. The Commission may also suspend all or part of an interim payment if the Member State concerned has not taken necessary corrective measures in relation to serious deficiencies; if serious irregularities have not been duly corrected; or in case of serious breach by a Member State of its management and control obligations. In 2011, 105 decisions of interruptions were taken involving an overall amount of €2.7 billion.
Efforts are still needed in every budgetary sector in order to continue progress and address the potential adverse effects that the current financial crisis might have in terms of increasing the risk of fraudulent activities. The Commission recently reinforced the legal framework to protect the EU’s financial interests by establishing minimum sanctions and common definitions in the Member States for crimes against the EU budget (see IP/12/767), in addition to a number of proposals that were made in 2011 to improve the protection of EU financial interests (see IP/11/644). Additionally, the Commission recommends that all Member States put in place adequate anti-fraud measures aimed at both prevention and detection, especially where results seem to be missing or insufficient.
What role does Europe's anti-fraud office, OLAF, play in protecting EU funds against fraud?
OLAF’s mission is to protect the EU budget, and thereby taxpayers' money, against fraud. It has three main tasks: firstly, OLAF protects the financial interests of the EU by investigating and combating fraud, corruption and any other illegal activities. OLAF works closely with its counterparts in Member States in this regard. Secondly, OLAF investigates serious matters relating to the discharge of professional duties by staff members of the EU institutions that could result in disciplinary or criminal proceedings. In terms of its investigative scope, OLAF is independent from the Commission. Thirdly, OLAF supports the Commission in the development and implementation of fraud prevention and detection policies.
How many cases did OLAF open in 2011?
OLAF opened 178 cases in 2011 (compared to 225 cases the year before).
Is the Annual Report on the Protection of the EU's financial interests related to the Court of Auditor's Annual Report?
No. The report on the Protection of the EU's financial interests is based on reported irregularities and suspected fraud detected by the Member States.
The Court of Auditors conducts its own specific audits on the basis of its mandate, and the annual report highlights its activities, findings and opinions for a given year.
However, both reports are useful to identify the main areas at risk and where further improvements can be made.
Irregularities reported as fraudulent per sector in 2011
Total expenditure: The estimated financial impact of irregularities reported as fraudulent decreased, from €478 million in 2010, to €295 million.
Agriculture: The estimated financial impact of irregularities reported as fraudulent increased, from €69 million in 2010, to €77 million (due to the late reporting of some cases with a high financial impact). In 2011, 77% of the amounts of financial corrections decided by the Commission (recovery rate) was implemented, down from 85%.
Cohesion policy: The estimated financial impact of irregularities reported as fraudulent decreased, from €364 million in 2010, to €204 million. In 2011, the recovery rate rose to 93% from 69%.
Pre-accession funds: The estimated financial impact of irregularities reported as fraudulent decreased, from €41 million in 2010, to €12 million.
Direct expenditure: The estimated financial impact of irregularities reported as fraudulent decreased, from €3.6 million in 2010, to €1.5 million.
Traditional own resources: The estimated financial impact of irregularities reported as fraudulent decreased, from €165 million in 2010, to €109 million. The recovery rate rose to 52% from 46%.
Other irregularities (not fraudulent)
Total expenditure: The estimated financial impact of irregularities not reported as fraudulent decreased, from €1325.5 million in 2010, to €1215.5 million.
Traditional own resources: The estimated financial impact of irregularities not reported as fraudulent increased, from €253 million in 2010, to €278 million.
See also IP/12/809