Questions and Answers: The protection of EU financial interests and the fight against fraud
European Commission - MEMO/14/487 17/07/2014
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Brussels, 17 July 2014
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 have to adopt all necessary measures to protect the EU budget, and to counter fraud and any other illegal activities affecting the financial interests of the EU. They are obliged to report all irregularities – both fraudulent and non-fraudulent – to the Commission which then compiles the information in this annual report, which is provided for in the Treaty (Article 325 TFEU).
The report is presented to the European Parliament and the Council to inform them of measures adopted, as well as the results achieved, at EU and national level to combat activities negatively impacting the financial interests of the EU.
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 on the frontline of managing and controlling 80% of EU expenditure. The remainder of the information is 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 the EU financial interest.
For 2013, the report provides a state-of-play with respect to the new requirement for Member States to set up an Anti-Fraud Coordination Service (AFCOS). The aim of such Services is to contribute to the fight against fraud in Europe by actively cooperating and exchanging information with OLAF. The report provides details on the Member States that have already designated an AFCOS and calls on the remaining four Member States to do so by end of the year.
What are the EU financial interests?
EU financial interests include revenues, expenditures and assets covered by the budget of the European Union and those covered by the budgets of the institutions, bodies, offices and agencies and the budgets managed and monitored by them.
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 2013, the EU budget (payment appropriations) amounted to EUR 132.8 billion, 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: 44.5% to support sustainable growth (research and innovation, employment and regional development programmes); 43.3% to the preservation and management of natural resources (agricultural expenditure and direct aids to farmers, rural development, fisheries and environment); 1.2% to citizenship, freedom, security and justice (strengthening of active citizenship, immigration, fighting of terrorism and crime, …); 4.8% to the EU as a Global player in this domain (Common foreign and security policy; EU neighbourhood policy; pre-accession assistance, humanitarian aid and development cooperation); 6.3% to administrative expenditure (running costs for the EU institutions).
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 an 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 tendering 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 is referred to as "irregularities reported as fraudulent".
How did fraud affecting the EU budget in 2013 change in comparison with the previous year?
Fraud detected by national authorities affecting the EU budget decreased slightly in 2013 compared to 2012. On the expenditure side, in total, €248 million in EU funds were affected by fraud, or 0.19% of the expenditure budget. This compares to €315 million the previous year, signaling a drop of about 21%. On the revenue side of the budget, suspected or confirmed fraud amounted to €61 million, representing 0.29% of the total traditional own resources collected for 2013. This compares to €77.6 million the previous year, marking a drop of 21%.
While the overall financial impact of fraud affecting EU funds decreased last year, the number of cases reported on the expenditure side increased. This may be the result of stronger measures to detect fraud at an earlier stage, thereby reducing the overall amount of funds affected, as well as better reporting of fraud by some Member States.
What was the impact of non-fraudulent irregularities (i.e. errors) to the EU budget in 2013?
With regard to the number of non-fraudulent irregularities reported, all sectors increased with the exception of Pre-accession. On the other hand, the overall related financial impact decreased to about EUR 1.84 billion (-38% when compared with 2012).
Does the number of reported fraud cases correspond to the level of fraud in a particular Member State?
No. The rate of fraud indicated per Member State corresponds to the amount of detected cases of suspected and established fraud reported by the national authorities. Therefore, a higher level of reported fraud is an indication that the anti-fraud systems in a particular Member State are working, and that reporting obligations are being met. Conversely, the Commission has asked for more information from Member States that report a low number of fraud cases, 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 expenditure (centralised 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 or re-used to finance other regular projects.
What mechanisms are in place to guarantee that EU resources are managed in a sound way and that irregular amounts are duly recovered?
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 customs 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 correction. 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 whether 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 preventive and corrective measures have been adopted by the Commission in 2013?
In 2013, the Commission took 217 decisions to interrupt payments (involving almost EUR 5 billion in line with the previous year) in the Cohesion Policy area. The number of interruption cases handled in 2013 shows the significant prevention activity undertaken, particularly in relation to the ERDF/Cohesion Fund, which represents more than 72 % of cases and about 87 % of the total amounts concerned.
Concerning financial corrections and recoveries in 2013, corrective measures decided by the Commission vis-à-vis Member States and beneficiaries of the funds increased in comparison to the previous year (+20 %), while those implemented decreased (-24%), mainly in the Cohesion Policy area and in particular in relation to the ERDF (-40%).
On the revenue side, about 98 % of all established amounts of TOR (Traditional Own Resources) are collected without any particular problem. The remaining 2 % relates to cases of fraud and irregularities, where Member States are obliged to recover the unpaid amounts of TOR. For 2013, the amount to be recovered following fraud and irregularities was EUR 380 million, the 62% percent of which (EUR 234 million) has already been recovered by Member States, leading to the best recovery result reported in the last decade.
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.
Efforts are still needed in every budgetary sector in order to continue to 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 proposed in 2012 to reinforce 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). 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.
The new OLAF Regulation entered into force on 1 October 2013. The Regulation reinforces the effectiveness of OLAF's investigative activities, as it sets the basis for a better exchange of information between OLAF and its partners. These developments will allow OLAF to operate more efficiently and to step up the fight against fraud, corruption or any illegal activity affecting the financial interests of the EU. (for more details see MEMO/13/651).
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 2013
Total expenditure: The estimated financial impact of irregularities reported as fraudulent decreased, from EUR 315million in 2012, to EUR 248 million.
Natural resources (Agriculture and Fisheries): The estimated financial impact of irregularities reported as fraudulent increased, from EUR 69 million in 2012, to EUR 76 million.
Cohesion policy: The estimated financial impact of irregularities reported as fraudulent decreased, from EUR 200 million in 2012, to EUR 156 million.
Pre-accession funds: The estimated financial impact of irregularities reported as fraudulent decreased, from EUR 45million in 2012, to EUR 16 million.
Direct expenditure: The estimated financial impact of irregularities reported as fraudulent decreased, from EUR 2 million in 2012, to EUR 1.2 million.
Traditional own resources: The estimated financial impact of irregularities reported as fraudulent decreased, from EUR 77.6 million in 2012, to EUR 61 million.
Other irregularities (not fraudulent)
Total expenditure: The estimated financial impact of irregularities not reported as fraudulent decreased, from EUR 2 589 million in 2012, to EUR 1 507.6 million.
Traditional own resources: The estimated financial impact of irregularities not reported as fraudulent decreased, from EUR 370 million in 2012, to EUR 327 million.