House of Lords - European Union - Twenty-Fourth Report

Select Committee on European Union Twenty-Fourth Report

CHAPTER 2: Background

12. OLAF is an independent investigatory body situated within the European Commission. Its main task is to protect the European Union's financial interests and to fight fraud, corruption and any other illegal activity affecting the Union's finances. OLAF does this by conducting internal (within the Commission and/or other Union Institution) and external (in Member States) investigations. It presents its findings to the appropriate authority. This may be the relevant institution within the Union where disciplinary or other internal action is necessary. Where OLAF's enquiries lead it to conclude that a criminal offence may have been committed, OLAF will pass its file to the prosecuting authority in the relevant Member State or States. Its work ends when it produces its final case report. OLAF does not itself bring the prosecution in the national criminal court. When it came into existence in 1999, replacing UCLAF, OLAF inherited many of the UCLAF staff as well as a substantial backlog of cases. The backlog has now been largely eliminated.[9]

13. OLAF also has responsibilities for the development of anti-fraud policies and as part of this "legislative" work undertakes so-called fraud-proofing of EC legislation, ie checking proposed legislation at an early stage to identify and try to avoid any specific risks of increased fraud.

Fraud on the Union's finances

14. Fraud on the Union's finances may take many forms but, broadly, can be divided into (a) income or receipts fraud and (b) expenditure fraud. The income of the Union comprises four main elements: agricultural levies; customs duties collected on imports to the Community; a percentage of VAT; and, after all other sources of revenue have been taken into account, a budgetary resource based on each Member State's Gross National Product (GNP).

15. As regards customs duties and CAP exports, the types of fraud typically involve deliberate misstatements on customs declarations (for example, as to value, tariff classification, origin and destination of the goods) made for the purpose of minimising duties payable to or maximising refunds from the Union. The main types of VAT fraud are failure to register for VAT, late or bogus registration, disappearance without remitting tax charged, failure to render returns, contrived liquidations, false export cases, misdescription of goods, fraudulent inflation of deductible input tax, and suppression of sales to reduce the true tax liability. In relation to VAT fraud, the loss to the national budgets will be far greater than that to the Union.

16. Expenditure frauds may involve, for example, the embezzlement of money from the European Social Fund or of other structural fund moneys. Or it may involve claiming agricultural aid on a fictitious or false budget or the misappropriation of payments under a contract to provide goods or services to a Union institution or body.[10]

Relationship between internal/external cases

17. The vast majority of the cases investigated by OLAF are 'external', ie involving alleged fraud or irregularities in Member States. According to OLAF, out of the 500 to 600 cases that are currently open, only 50 are internal (about 10 per cent) (QQ 111, 112). Internal investigations, however, are a priority for OLAF. OLAF has a "zero tolerance" policy, investigating all allegations of corruption within the Union's institutions. About half of the allegations of corruption concern irregularities in tenders and grant procedures and in awarding and carrying out contracts. The irregularities include alleged conflicts of interest.[11]

Case Study

Following an in-depth investigation by OLAF, Ms K, an official of the European Commission, was convicted in the Court of First Instance in Brussels of forgery, fraud and deception. It was alleged that she had created false documents in support of travel indemnity claims for participants at meetings which were never held. The Court imposed a sentence of 40 months imprisonment and a financial penalty of approximately €15 000. In addition she was ordered to reimburse the Commission approximately €670 000.

Source: OLAF—Fourth Activity Report for the year ending June 2003

18. The Commission Annual Fraud Report for 2002 states that in 2001, 33 out of the 381 cases investigated by OLAF were internal. From the new cases in 2002, 50 out of 415 cases were internal. The difference is even more marked in terms of the sums involved: in 2001 the internal cases amounted to €20.8 million out of a total of €564.6 million, while in 2002 the internal cases amounted to €13.72 million out of a total of €937.22 million.[12]

Case Study

In May 2003, a multi-national cigarette operation co-ordinated by OLAF culminated in the arrests of 10 people and in the seizure of several tonnes of smuggled cigarettes. In August 2001 the seizure of 25 million British-brand cigarettes from Lithuania and Latvia in the port of Antwerp led Belgian Customs to request OLAF to co-ordinate a cigarette anti-smuggling operation.

Requests for mutual assistance were sent to the countries concerned including Lithuania, Latvia, Estonia, the United Kingdom, the USA and the Netherlands. A co-ordination meeting was held in June 2002 with representatives of the investigation services of Lithuania, Estonia, Belgium, the United Kingdom and France. OLAF held a second meeting in October 2002, which was attended by investigators from the Netherlands, Germany and Belgium. The investigations had by then identified the route taken by the cigarettes. An important suspect was identified by Customs in Estonia. In Lithuania, an organisation involved in the smuggling was also identified.

On the basis of information gathered by OLAF, FIOD (the Dutch Fiscal Intelligence and Investigation Department) opened a new enquiry into cigarette smuggling from the Baltic States. The smuggling organisation, while using the same consignee as in the Belgian seizure, was using trucks and cover loads instead of ships. The subsequent joint action led to the arrests of seven people in the Netherlands, the seizure of 10.35 million cigarettes and the arrest of three Latvians in Germany, as well as the discovery of some 4 million cigarettes in a warehouse in Belgium. Belgian Customs also found some 35 tonnes of illicit hand-rolling tobacco in another warehouse. A complete tobacco production plant was discovered, used by the criminal organisation to manufacture and package counterfeit British-brand cigarettes. OLAF continues to provide assistance to ongoing investigations and judicial proceedings in the various countries.

Source: OLAF—Fourth Activity Report for the year ending June 2003

OLAF staff

19. OLAF has grown in size and now has some 340 staff who work in three directorates. Directorate A deals with Policy, Legislation and Legal Affairs. This Directorate has responsibility for general anti-fraud strategy and also undertakes the fraud-proofing of Union legislation. Directorate B has responsibility for Investigations and Operations. This Directorate includes OLAF's investigators, most of whom come from national investigation services related to economic and financial crime. Directorate C, entitled Intelligence, Operational Strategy and Information Services, is a recently created support facility for OLAF and national competent authorities. It gathers and analyses strategic and operational information and monitors fraud and corruption on a Union-wide basis.

The Supervisory Committee

20. The Supervisory Committee was established following the creation of OLAF in order to monitor the activities of OLAF. The Supervisory Committee is composed of five independent persons from outside the Union's institutions. They are appointed by common accord of the European Parliament, the Council and the Commission. The Committee meets regularly[13] (each month except July and August). The current Chairman is Mr Raymond Kendall.[14] The Committee has a small secretariat drawn from OLAF staff.

21. The role of the Committee is to ensure the independence of OLAF "by regular monitoring of the implementation" of OLAF's investigative function. The Director-General is required to keep the Committee informed of OLAF's activities, its investigations, the results thereof and the action taken on them.The Committee is also informed of cases where the institution or body concerned has failed to act on OLAF's recommendations and of cases which have been referred to national judicial authorities for action.[15]

22. But, as Mr Kendall explained, the Supervisory Committee's role has developed so that it has become also "a kind of management committee". It has been concerned with the administrative structures within OLAF and with such matters as the rights of those being investigated. The Committee also comments on OLAF's draft budget (QQ 216, 218)). The Supervisory Committee, it should be noted, is not a Commission (or a comitology)[16] committee but is independent and reports to all the institutions.[17] It is, however, dependent on the Commission for its budget.

9 OLAF will shortly be addressing a report to the Supervisory Committee describing how the backlog has been dealt with (Q 109). Back

10 For a fuller account of the sources of the Union's finances and of the types and scale of fraud, see our earlier Report, Prosecuting Fraud on the Communities' Finances-the Corpus Juris (9th Report 1998-99 HL 62, paras 5-9). Back

11 OLAF: Fourth Activity Report for the year ending June 2003, p 6. Back

12 COM(2003)445 final, pp 51, 52. Back

13 The Regulation requires there to be at least 10 meetings per year (Article 11(6)). Back

14 The other members are Edmondo Bruti-Liberati, Deputy Public Prosecutor, Court of Appeal, Milan, Mireille Delmas-Marty, Professor, Université Panthéon-Sorbonne (Paris I), Harald Noack, State Secretary at the Ministry of Finance, North Rhine-Westphalia, and Alfredo José de Sousa, President of the Portuguese Court of Auditors. Back

15 Article 11(1) and (7). Regulation 1073/99. Back

16 The process in which the Commission, when implementing Community law, has to consult special Committees made up of experts from the Member States. For a fuller explanation see our Report Reforming Comitology (31st Report 2002-03, HL 135). Back

17 Article 11(8). Supervisory Committee: Opinion 2/03, at para IV.5. Back