House of Lords - The Fight Against Fraud on the EU's Finances

The Fight Against Fraud on the EU's Finances - European Union Committee Contents

CHAPTER 2: THE EU DIMENSION I-LEVELS OF FRAUD ON THE EU'S BUDGET

9. If the EU and the Member States are going to protect the EU's financial interest effectively they need to know how much fraud is committed against the EU's budget. In this chapter we consider the accuracy of the Commission official figure for 2011 of €404 million and compare it with the estimates for fraud in the UK.

The EU's budget

10. EU funds are overwhelmingly provided by drawing on three revenue streams:[10]

Traditional own resources (TOR), that is revenue from customs duties collected on imports and levies on sugar production (€16.7 billion);[11]
Own resources which are calculated on the basis of value added tax (VAT) collected by the individual Member States (€13.7 billion); and,
Own resources derived from the individual Member States' gross national income (GNI)(€94.5 billion).

11. In 2011 the EU's budgeted expenditure was €141.9 billion.[12]

Responsibility for the EU's budget

12. The EU Treaties place responsibility for the implementation of the EU budget on the Commission. But responsibility for avoiding fraud does not rest solely with the Commission. The Treaty requires both the EU Institutions and the Member States to counter fraud affecting the financial interests of the EU.[13] Since 2011 the Commission has produced a number of legislative proposals designed to improve the protection of the EU's financial interest from fraud (see Box 1) but, in practice, the effort to combat crime against the EU's finances falls largely to national authorities.[14] As the Government made clear to us: "[U]nder EU law, Member States have primary responsibility for preventing, detecting and following up on … fraud. They are responsible for collecting EU budget revenue … and for managing … almost 80% of EU expenditure".[15] The recovery of unduly paid funds is also the responsibility of the Member States.

BOX 1

Recent Commission Legislation

In 2011 the Commission brought forward several proposals designed to address and improve the fight against fraud against the EU's financial interests:[16]

A Communication setting out the Commission's anti-fraud strategy.[17]
A Communication on the protection of the financial interests of the European Union by criminal law and administrative investigations.[18]
A Communication on fighting corruption in the EU.[19]
A package of proposals designed to modernise of the EU's public procurement rules.[20]
A Communication on the future of VAT.[21]

Since 2011 further EU measures have been proposed addressing the fight against fraud including, in July 2012, a proposed Directive on the protection of the financial interests of the European Union by criminal law[22] (see Chapter 4) and, in September, a proposed Directive amending the existing legislation governing the Quick Reaction Mechanism[23] against VAT fraud.[24] Commissioner emeta said that it was "very important" that the Member States implement the Commission's Communication on its anti-fraud strategy.[25]

Finally, the Multi-Annual Financial Framework agreed by the European Council on 8 February 2013 also includes anti-fraud requirements.[26] For example, all future EU legislative proposals must address any related fraud issues and all Commission Director-Generals will have to adopt specific anti-fraud strategies.[27]

The Commission's annual report 2011

13. Every year the Commission publishes a report looking at the protection of the EU's financial interests. The most recent report considers 2011 and was published in July 2012.[28] The report, which is produced in cooperation with the Member States, offers an overview with statistical analysis of the extent to which the EU's funds were misused because of fraudulent or non-fraudulent irregularities (see Box 2).

BOX 2

Fraud and irregularity

The Commission separate irregularities into two broad categories:

(i) Irregularities reported as fraudulent. These are irregularities found to be or suspected to be fraudulent, a deliberately committed irregularity constituting a criminal offence. These are criminal frauds.

(ii) Irregularities not reported as fraudulent. These are irregularities arising as the result of genuine errors or mistakes such as not filling out a form correctly. These are not criminal offences.

When reporting irregularities to the Commission, the Member States are under an obligation to specify whether the particular instance gives rise to a suspicion of fraud or whether a fraud has been established. If judicial or administrative proceedings have also been initiated the Member State is obliged to update the Commission as the proceedings progress.

14. The Commission's report said that in 2011 1230 irregularities were reported as fraudulent, a figure which represents a decrease of 35 per cent from 2010. According to the Commission, the total financial impact of these fraudulent irregularities was €404 million, a figure which represents a decrease of 37 per cent from 2010.[29] €404 million, a total based on figures supplied to the Commission by the Member States, is 0.28 per cent of the EU's 2011 budget. This is the figure that the Commission knows has been lost to fraud.

15. In the report the Commission calculated that agriculture (€77 million) and cohesion policy[30] (€204 million) were the two main areas which suffered the highest levels of fraud[31] and our evidence confirmed the Commission's view.[32] It also highlighted high levels of VAT fraud which is discussed in Chapter 4.[33]

BOX 3

OLAF case example one: fraudulent use of EU funding in a
Member State[34]

The Directorate-General for Regional Policy (DG REGIO) of the European Commission passed to OLAF information received about possible irregularities in the tender procedure for an EU-funded (Cohesion Fund) project for the construction of a plant in Bulgaria. The EU funding allocated for the project was €34 million. The European Bank for Reconstruction and Development (EBRD) had also provided a loan of €25 million for this project. The central allegations in the case were that the consortium that had won the tender had misrepresented its qualifications and eligible experience in the specialised sector concerned. Of the EU funding involved, an advance payment of over €7 million had already been made for the project.

OLAF's findings

OLAF's investigation in the matter necessitated enquiries in several Member States. The investigation found that the successful bid had been prepared and submitted by the winning consortium in a manner which gave an incorrect and misleading account of its experience and qualifications.

OLAF's recommendations

Consequently, OLAF recommended to the Regional Policy DG that the EU funding of €34 million allocated for the project should be cancelled and that the €7 million already paid out should be recovered. The Directorate-General is acting on these recommendations. OLAF also passed the file to the Bulgarian judicial authorities, which have opened a criminal investigation.

Conclusions and further steps

In EU-funded projects of a high value, Member States need to be rigorous in their examination and understanding of supporting documentation whose purpose is to demonstrate a proven and eligible record in a particular sector. Only then can it be expected that the best quality will be obtained for EU taxpayers' money. This is especially so when such supporting documentation is obtained from non-EU countries and refers to specialised sectors.

Comparison with UK figures

16. The National Fraud Authority (NFA), an executive agency of the Home Office which is tasked with leading and coordinating anti-fraud action in the UK, estimated that the current level of fraud suffered by the UK public sector amounts to approximately £20.3 billion per annum.[35] In 2011 the total Government revenue in the UK was £589 billion and the NFA's estimate suggests that 3.4 per cent of the UK's total budget was lost to fraud. The NFA warned that its figures should be approached with caution and emphasised that their conclusions are not statistics.[36]

Accuracy of the Commission's figures

17. As the NFA's caveat implies, given its nature, estimating levels of fraud with any degree of accuracy is difficult; a view shared by the Commissioner.[37] Professor Spencer of the Law Faculty of Cambridge University said that because fraud is "usually … a victimless offence", in the sense that there is no individual aware that they have been the victim of a crime, statisticians and the relevant authorities "do not even have the counter-check that you have with the British Crime Survey" as "there is no immediate person who has lost out". This "makes it hard to know what the dark figure is".[38]

18. Most of the evidence we received reflected this difficulty and suggested that the Commission's statistics are an underestimate of the level of fraud perpetrated against the EU's budget.[39] Rosalind Wright QC, former director of the Serious Fraud Office in the UK, and former member and Chair of the OLAF Supervisory Committee, compared the problem to the tip of an iceberg; "You can only see the very tip, and we really do not have any idea how much [fraud] there is".[40] She did put forward an estimate for EU fraud of €2 billion a year but thought that even this figure represented a "substantial underestimate".[41]

19. Commissioner Šemeta rejected the iceberg analogy.[42] He said that the Commission's annual report was clear that the actual level of fraud is higher than that of detected fraud, but he did not believe that EU funds were "more prone to fraud than national budgets".[43] Giovanni Kessler, the Director-General of OLAF, shared the Commissioner's view.[44] The Government on the other hand disagreed; they argued that "EU programmes will always be vulnerable to fraud" and that in some Member States "the management and control culture … increases [their] vulnerability to fraud".[45]

20. If we accept the Commissioner's analysis and apply it to the EU's budget, using as a benchmark the NFA's estimate of fraud in the UK of 3.4 per cent, we arrive at a total for fraud on the EU's budget, based on 2011 figures, of €4.82 billion. This figure is over ten times more than the figure of €404 million unearthed by the Commission in its annual report; it is almost more than two and a half times greater than Rosalind Wright's estimate of €2 billion which she qualified as a "substantial underestimate".[46]

21. Based on this analysis, the figures cited by the Commission in its annual report only offer a glimpse of the level of fraud perpetrated against the EU's finances. Commissioner Šemeta argued that the EU budget is no more or less vulnerable to fraud than national budgets whilst the Government argued that EU programmes will always be vulnerable to fraud and, in some Member States are increasingly so. If the Government are right then the final figure will be even greater than €5 billion.

22. These figures suggest that the vast bulk of fraud against the EU's budget is never brought to the Commission's attention, and probably never sees the light of day.

Member States' responsibility to report fraud

23. In the context of administering 80 per cent of the EU's budget, the Member States are under a duty to report fraud to the Commission.[47] Professor Spencer, who also argued that the Commission's statistics offer an underestimate of the problem, qualified his remarks by pointing out that they result from the Member States carrying out their duty under the Treaty to report fraud to the Commission and, that different Member States had different levels of enthusiasm and different practices about reporting.[48] He also suggested that the different rates of reported fraud stem from the "level of inactivity in looking for fraud in those Member States".[49] Mr Jens Geier MEP, a Member of the European Parliament's Budgetary Control Committee (CONT), agreed and argued that "[W]hat the Member States define specifically as fraud varies, and it is therefore difficult to get an overall picture".[50] His Colleague on the CONT Committee Mr Derek Vaughan MEP shared this view.[51]

24. Many other witnesses including the Commissioner and the Government also raised this problem.[52] Their views echoed the Commission's conclusion in its annual report that "there are still significant differences in the approaches adopted by the Member States to report fraudulent … irregularities" to the Commission.[53] We consider a potential solution to this problem, the recently proposed Directive on protecting the EU financial interest by the criminal law, in Chapter 4.

25. The lack of enthusiasm displayed by the Member States in reporting fraud to the Commission, coupled with a lack of uniformity throughout the Member States in the definition of fraud, clearly undermines the Commission's efforts to grasp the full extent of this problem.

26. Fraud is, by its nature, opaque but the Member States and the Commission have no reliable estimate of the extent of fraud committed against the EU's budget. We are unable therefore to see how their claims to protect the EU's financial interests effectively can be justified.

10 Council Decision 2007/436/EC, Euratom 7 June 2007 on the system of the European Communities own resources and Council Regulation 1150/2000 implementing Decision 2007/436/EC, Euratom on the system of the European Communities' own resources, as last amended by Regulation 105/2009. Back

11 The Member States retain 25 per cent of the total to cover the cost of collection. Back

12 See: http://ec.europa.eu/budget/figures/2011/2011_en.cfm Back

13 Article 325 TFEU Back

14 The Member States' authorities operate in the context of EU legislation in the field of criminal law which aims to combat crime. For example, improved procedures for investigations and prosecutions, including (i) the European Arrest Warrant and the Framework Decision on confiscation of proceeds of crime; (ii) common rules on offences and penalties-in particular, an EU Convention on the Protection of EC Financial Interests adopted in 1995; (iii) measures against corruption and money laundering; and (iv) institutions and networks at EU level. For example, OLAF and Eurojust. Back

15 HM Treasury para 17. See also, Lord Williamson of Horton para 2(e); Q 85 (Timothy Kirkhope MEP). Back

16 All these proposals have been considered by one or other of our Sub-Committees as part of our scrutiny responsibilities. Back

17 24 April 2011, COM (2011) 376 final Back

18 26 May 2011, COM (2011) 293 final Back

19 6 June 2011, COM (2011) 308 final Back

20 Including a proposed Directive on the award of concession contracts, COM (2011) 897 final; a proposed Directive on procurement by entities operating in the water, energy, transport and postal services sectors, replacing Directive 2004/17, COM (2011) 895 final; and a proposed Directive on public procurement, replacing Directive 2004/18, COM (2011) 896 final. All were published on 20 December 2011. Back

21 Published 6 December 2011, COM (2011) 851 final. Entitled: Towards a simpler, more robust and efficient VAT system tailored to the single market. Back