Select Committee on Public Accounts Eighteenth Report

2 Irregularities, including fraud, and the work of the European anti­fraud office

15. The Office Européen de Lutte Anti­Fraude (OLAF), the European anti­fraud office, was established in June 1999. While the focus of the Court's work is on formal errors and ambiguous rules, OLAF deals largely with criminal acts. Its role is to protect the European Union's financial interests, to fight fraud, corruption and other irregular activity within European Institutions and Member States. OLAF is part of the Commission, under the authority of the Vice­President for Administrative Affairs, Audit and Anti­Fraud. It has budgetary and administrative autonomy and is operationally independent from other aspects of the Commission's work. OLAF's work is overseen by a Supervisory Committee, which is composed of five independent persons appointed from outside the European Institutions.

16. OLAF fulfils its mission by conducting internal (within the Commission and/or other Member States) and external (in Member States) investigations. With the majority of the European funds spent in Member States, it is not surprising that the majority of OLAF's investigations - around 90% of cases currently under investigation by OLAF - were external. OLAF was concerned that its work should focus on those areas of the budget most at threat from irregularities and fraud (such as the main spending programmes, external aid, and customs duties). Examples of OLAF's work are shown in Figure 2. Figure 2: Examples of OLAF's work

Alleged financing of terrorism

In February 2003, following allegations that European funds were used to finance terrorism or other illegal activity, OLAF opened an external investigation into alleged irregularities relating to the financial assistance provided by the European Commission to the Palestinian Authority since the end of 2000.

OLAF's investigators visited the region in October 2003, January 2004 and October 2004, and held information gathering meetings with representatives from a range of national and international bodies (such as the IMF, the World Bank, Middle Eastern countries, the private sector and Member States). Despite improvements to the financial control systems within the Palestinian Authority following the OLAF investigation, OLAF concluded that the systems were not yet sufficiently consolidated to exclude all risk of misuse.

Sugar imports from the Balkans

In April 2002, OLAF requested that Member States reinforced control measures on imports of sugar declared at customs clearance in the European Union originating in the western Balkans. The Greek customs authorities sampled sugar consignments imported into Greece in order to establish whether these consisted of cane or beet sugar. Their analysis indicated that most imports declared as of Croatian origin in fact consisted of a mixture of cane and beet sugar (cane sugar is not produced in Croatia). The Greek judicial authorities opened a criminal investigation and requested assistance from OLAF investigators.

The Greek judicial authorities performed an international commission in Croatia in June 2003 in which OLAF officials participated as experts. The Commission established that some 24,000 tons of sugar had been mis-described as being of Croatian origin (confirmed by the Croatian authorities) and leading the cancellation of 1,000 certificates of origin. Recovery procedures have begun in the Member States in relation to customs duties estimated at about €10 million. In addition, the Italian judicial authorities began a criminal investigation against an Italian trading company involved in the operations following the transmission of information by OLAF.

17. OLAF's work benefits from the expertise brought to it by a programme of inward secondments from the Member States in areas such as investigating, languages, and information technology. For example, OLAF receives valuable support from secondees from HM Customs and Excise. Currently, however, it does not have any police officers from the United Kingdom on secondment. Given the contribution made by police officers from other Member States, OLAF believed it would benefit from such an addition to its work force.

The level of irregularity, including alleged fraud, reported by Member States

18. Member States are obliged to report fraud and irregularity valued over a certain amount, for revenue and for expenditure under the Common Agricultural Policy and Structural Measures. The Commission defines an irregularity as a failure to comply with the Commission's regulations; and it defines fraud as a deliberate criminal act with the intent to achieve financial advantage. OLAF produces an annual report summarising the information received from Member States.

19. During 2003, a total of 8,177 cases of irregularities, including suspected fraud, were reported to OLAF by Member States. The total value of these cases was €922 million. Both the number and value of cases were around 20% less than in 2002. The main reason for the improvement was an almost 50% reduction in the number of cases reported under Structural Measures expenditure. This arose because the closure in 2002 of the structural programmes had identified more irregularities than usual. This reduction more than compensated for the 5% increase in the number of cases reported under revenue headings. All three types of irregularities showed a decrease in the value of cases reported between 2002 and 2003.

20. The number and value of cases of irregularity, including alleged fraud, notified to OLAF varies between Member States. Figure 3 shows, by Member State, the value of irregularities, including alleged fraud, reported to the OLAF for the 2003 financial year. For 2003, the United Kingdom notified OLAF of 922 cases of irregularities, including alleged fraud, with a value of €55 million.

21. OLAF's work on revenue irregularities and fraud — such as customs frauds and illegal dumping of goods — is important because, in quantitative terms, it can have a harmful impact on the interests of both the Community and Member States. If customs duties are evaded because of fraud, taxpayers in Member States have to pay increased contributions to the European Union budget. OLAF's activities in relation to revenue irregularities are intended to assist Member States in recovering the duties that have been evaded.

Assessing the precise level of fraud

22. Despite the collection of data on irregularities, including alleged fraud, for over five years, the precise levels involved, in terms of the number of cases and their value, remains unclear. Making an assessment as to whether the levels of irregularity and fraud have increased or decreased is therefore difficult, for a number of reasons.

• Data relate only to reported cases.
• An increase in the number of reported cases could be due to improved detecting and reporting on the part of Member States or by specific events such as audits at the end of Structural Funds programmes.
• Member States do not report fraud, and other irregularities, on a consistent basis. Some Member States, for example, consider that fraud can only be recognised once a conviction has been obtained through the national legal system.
• Distinguishing between irregularity and fraud is complex. Cases are identified unevenly within expenditure programmes and reported levels can fluctuate year on year (OLAF will make adjustments to data year on year based on new information received from Member States and the application of its own quality assurance procedures). Numbers reported can also fluctuate due to the inclusion of figures following the resolution of long­running cases which straddle years.

23. OLAF is currently looking to improve the quality and integrity of information on irregularity and fraud and to overcome some of the barriers to accurate reporting highlighted in the previous paragraph. For example, it is developing a methodology which will distinguish between fraud and irregularity, and it is taking steps to estimate the levels of fraud that exist within individual sectors of the budget.

24. Regulation (EC) 1681/94 provides a framework for the communication and follow­up of irregularities detected by Member States. In a Special Report in 2001 the Court noted some failures in the implementation of the Regulation in the six Member States, including the United Kingdom, in which it carried out its work. The Commission noted that this was due to problems faced by Member States in interpreting the Regulation. Subsequent follow­up work by the Commission identified that some progress had been made. It also found, however, that some Member States, once again including the United Kingdom, did not communicate the irregularities it had identified in a timely manner. The Commission noted that this was due to problems faced by Member States interpreting the regulation and made specific recommendations for Member States to implement.

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Prepared 4 April 2005