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 5: The EU Dimension III-OLAF

58. In this final chapter, we consider the role and work of the EU's anti-fraud body OLAF. Whilst some witnesses praised the work of OLAF[117] the evidence has raised questions about the quality of the relationship between OLAF and the national authorities; including in the UK, and also exposed a breakdown in the working relationship of OLAF with its Supervisory Committee. We also consider OLAF's interaction with the other EU crime fighting agencies Europol and Eurojust and finally, we briefly discuss the creation of a European Public Prosecutor's Office (EPPO).

OLAF's role

59. OLAF is the EU's anti-fraud body and its task is to protect the EU's financial interest.[118] OLAF fulfils this role by conducting administrative[119] investigations into the abuse of EU funds both internally,[120] against EU officials, and externally,[121] in the individual Member States. OLAF also assists the relevant authorities in the conduct of criminal investigations in the individual Member States (in the literature these are called coordination cases).[122] Where OLAF finds evidence of misconduct it passes its findings in the form of a report to the relevant authority; this may be to the relevant EU institution where disciplinary action may follow or, where OLAF concludes that criminal behaviour is involved, it will pass its investigation file to the relevant prosecuting authority in the individual Member State.[123] (See Table 1 on page 29.)

60. Since its creation in 1999 OLAF's role has been the subject of ongoing discussion.[124] In 2004 and 2006 the Commission made proposals for strengthening OLAF, but negotiations on these proposals did not reach a conclusion.[125] Following these failed attempts, in 2011 the Commission tried again and proposed a Regulation for the reform of OLAF,[126] which is expected to be agreed shortly;[127] though the Commissioner stated that the proposed regulation is limited because it has been proposed within OLAF's current legal basis.[128] In the last decade the ECA has produced a number of Special Reports addressing OLAF's role[129] and during 2011 OLAF itself also completed a "major reorganisation"[130] of its internal structure.[131]

BOX 5

OLAF case example two: fraudulent behaviour by an EU official[132]

OLAF received allegations that an EU official had committed irregularities, in the form of demanding bribes. The EU official in question was employed as a project manager in a European Commission delegation. This entailed the selection of contractors and the implementation of the project.

OLAF's findings

OLAF investigators obtained immediate access to the relevant information. OLAF analysts scrutinised the relevant computer data obtained by its investigators. This information was subsequently referred to the competent judicial authorities. The same authorities drew on OLAF's expertise when conducting searches and evaluating the findings within the framework of a criminal investigation. OLAF's findings showed that the EU official allegedly established improper links with participants in the projects and allowed participants to engage in improper contacts during the selection procedure. Over the years, the person concerned had supposedly demanded and obtained bribes. As a result, some participants were given favourable treatment.

OLAF's recommendations

A criminal investigation of the EU official and the project participants was opened as a result of OLAF's findings. In parallel, OLAF recommended that the official be removed from his post, as a precautionary measure. OLAF also recommended that the project participants be entered in the Commission's early warning system, to ensure that they cannot take part in any future European projects.

Conclusions and further steps

This case shows that it is important that OLAF's powers include immediate access to relevant premises and information to enable OLAF to examine suspicious elements and to secure data for use as admissible evidence in court by judicial authorities. OLAF has been able to continue assisting the judicial authorities after the criminal investigation was opened. The information also led to a second criminal case being opened in another jurisdiction.

OLAF's annual report 2011

61. OLAF's annual report for the period 1 January to 31 December 2011[133] said that it received 1046 pieces of incoming information. This information led to the opening of 144 administrative investigations. At the end of 2011 OLAF had 463 ongoing investigations and that "175 recommendations had been sent to [national] authorities".[134] OLAF's annual report also stated that in 2011 its conclusions and recommendations led to court cases in the Member States which "resulted in 511 (cumulative) years of prison sentences".[135]

OLAF's Budget

62. In 2011 OLAF had access to a budget of €23.5 million and its investigations led to the recovery of €691.4 million.[136] Professor Spencer was sure that OLAF does the best it can with the staff and the money it has at its disposal, but he suggested that OLAF has to be selective about which cases it pursues.[137] The Director-General of OLAF confirmed the Professor's view, and explained the pressure on resources that he has to consider when deciding whether to open an investigation; "[W]e cannot open more investigations than we are able to follow, and we do not open an investigation when the case is purely national".[138]

63. We regret that budgetary restrictions force OLAF to be selective about the cases of EU fraud that it pursues. While OLAF cannot be given a blank cheque, the current restraints place a significant limitation on its effectiveness.

OLAF's independence and its Supervisory Committee

64. OLAF is formally part of the European Commission but it is independent when investigating fraud.[139] Commissioner Šemeta explained that as Commissioner for anti-fraud he was responsible for coordinating the policy side of OLAF's work, for example, the legislative framework underpinning the EU's anti-fraud fight, whilst the investigative side is "completely independent".[140] He argued that "[I]t is very important to maintain a strong, thick wall between the policy side … and the investigative side … it would be very dangerous if politicians were to start to influence OLAF's day-to-day investigative activity".[141] Aside from Marta Andreasen MEP who described OLAF as the "instrument of the European Commission"[142] and called for its complete independence, and Rosalind Wright QC who pointed to concerns expressed during her membership of the OLAF Supervisory Committee[143], most of the other witnesses either accepted the status quo[144] or argued that the new Regulation will enhance OLAF's independence.[145]

65. Aside from the breakdown in relations between OLAF and its Supervisory Committee (discussed below), we have not received convincing evidence that the current arrangement on OLAF's independence within the Commission needs to be changed.

OLAF's Supervisory Committee

66. OLAF's independence is underwritten by the OLAF Supervisory Committee (SC) which is tasked with policing the wall between the Commission and OLAF referred to by Commissioner Šemeta in his evidence.[146] The SC is composed of five independent experts who are appointed by the common agreement of the Council, Commission and the European Parliament. The SC fulfils its role by issuing an annual report[147] on its work to the EU's institutions and it also issues opinions to the Director-General of OLAF either at his request or of its own volition.[148] The legislation says that in fulfilling this role the SC must not interfere with "the conduct of investigations in progress".[149] The new OLAF Regulation seeks to clarify the SC's role.[150]

67. The evidence we gathered has pointed to a significant breakdown in the relationship between OLAF and the SC, in particular regarding the scope of the SC's role.[151] Mrs Rita Schembri of the SC[152] explained the context: "[G]iven the significant powers that OLAF has to conduct administrative investigations, the exercise of [its] powers is subject to respect for human rights and fundamental freedoms under the control of the Supervisory Committee".[153] The SC fulfils this role, she said, by selecting on predetermined criteria a range of cases from OLAF's files which the SC members then discuss with OLAF's investigators. In this way, the Committee aims to identify any undue pressure on OLAF that might compromise its independence.[154] However, since March 2012 the SC's access to OLAF files has, according to Mrs Schembri, been "abruptly limited".[155] Mr Denolf, Chair of the SC, repeatedly suggested to us that the supervisor was in danger of becoming the supervised.[156] Mr Herbert Bsch of the SC warned that "[I]f there is no Supervisory Committee, OLAF is an unguided missile … [if the system] does not work, you can forget the independence of OLAF".[157]

68. The Director-General of OLAF painted a different picture. He argued that the SC was asking for full access to all OLAF investigations, "to everything" including, in instances where individuals have complained directly to the SC, "full access to the case".[158] It was Giovanni Kessler's view that the SC was transforming itself into a court and was acting beyond its role of protecting OLAF's independence.[159]

69. Many of the MEPs also referred to the breakdown in the relationship. Michael Theurer MEP of the CONT Committee said that "[M]onitoring is worthwhile only if the Supervisory Committee is completely free in deciding which reports it wants to look at, and the Director-General apparently takes a different view on that".[160] He argued that their respective roles needed urgent clarification.[161] His colleague on the CONT Committee, Dr Ingeborg Gräßle, saw the breakdown as very regrettable and said that if the SC is telling the European Parliament that they are being prevented from doing their work effectively then "we have to make it clear to the Director-General that he is not the only one who has a say".[162]

70. Rosalind Wright QC confirmed the breakdown in relations and suggested that the current Director-General does not see the value of the SC.[163] Commissioner Šemeta on the other hand argued that there had been problems at the beginning of the current SC's tenure but that since September 2011 the situation had improved.[164] He recognised the importance of the SC's role but suggested that it should not be interfering "in the daily work of OLAF".[165] The Exchequer Secretary said the Government were not aware of the problem.[166]

71. The Commissioner suggested that the evident difficulties were the product of early teething problems. When, however, we saw the current Supervisory Committee, which has been in place for over one year, the situation had progressed beyond that to a point where the relationship has broken down into open hostility. The source of this problem seems to be the lack of agreement between those concerned about the precise nature of the Supervisory Committee's role, in particular concerning the Supervisory Committee's access to OLAF investigations in progress. We note that the new OLAF Regulation maintains this limitation on the Supervisory Committee's role. We are very concerned by the breakdown in the relationship between OLAF and the Supervisory Committee.

72. We hope that the CONT Committee of the EP will continue to monitor closely the ongoing relationship between OLAF and its Supervisory Committee. The Supervisory Committee's role is to ensure OLAF's independence and we urge all those involved to find a solution to this situation.

OLAF's relationship with the national authorities

73. Marta Andreasen MEP told us that she believed that the responsibility for investigating fraud on the EU's budget often "falls into the cracks between the Member States and the EU".[167]

74. In its annual report OLAF included a table illustrating for the period 2006-2011 the outcomes of its referrals to the individual Member States.[168] Aspects of the table are reproduced here illustrating the figures for the five Member States which received the highest number of OLAF referrals. Also included are the figures for the UK and the relevant totals for all 27 Member States.

TABLE 1

OLAF Referrals to Member States

Member State	Referrals	Pending[169]	Dismissed[170]	Acquittals	Convictions
Romania	225	97	94	4	30
Germany	168	54	37	12	65
Italy	112	75	21	2	14
Poland	90	73	9	2	6
Greece	86	60	14	7	5
UK	19	6	9	1	3
All 27 Member States	1030	559	241	31	199

Source: OLAF annual report 2011

75. Between 2006-2011 OLAF's investigations led to convictions for fraud in 19 per cent of its referrals; 23 per cent of referrals are dismissed by the Member State authorities before they get to trial. Finland has the best referral/conviction rate of 91 per cent, whilst Greece is at the other end of the scale, with a referral/conviction rate of 6 per cent. Some Member States have no convictions following OLAF referrals of which Spain, with 54 OLAF referrals, is the worst performer.

76. The Director-General of OLAF did not believe that the divergent referral to conviction rates were a reflection of poor work by OLAF. He argued that if the figure was low in all Member States that would suggest that there was something wrong with the quality of OLAF's work.[171] But, instead, he believed that the protection of the EU's financial interest "is left to the ability and willingness of national authorities, and that varies very much".[172]

77. Our evidence suggests that there is truth in the Director-General's suggestion.[173] Rosalind Wright QC characterised the problem as: OLAF send a case over to "national judicial authorities saying 'investigate Mr So-and-so, who is a national of your country, who is alleged to have committed a large fraud on the European budget'. It is impossible to say if this is true, but your instinct tells you that in some cases they are reluctant to investigate their own nationals for a fraud on a subsidy that is being paid centrally from Brussels".[174]

78. Furthermore, having made a referral to the Member States, OLAF's powers are limited. When it concludes an investigation it cannot compel the national authorities to act and it does not enjoy the same coercive powers as a criminal investigative body.[175] It can only send the information it obtains in its investigation to the relevant prosecuting authorities in the individual Member States. Professor Spencer, Tadeusz Zwiefka MEP and Rosalind Wright QC all highlighted the significance of this limitation.[176] Professor Spencer argued that "[T]he basic flaw with OLAF is that it does not have any powers to do any more than investigate and then send a file to a Member State".[177] He argued that in this sense OLAF is toothless but "it is toothless because the Member States have chosen not to give it any teeth".[178]

79. The Exchequer Secretary was reluctant to impose any obligation on the Member States to act following a referral from OLAF.[179] He argued that such a power would cut across the Member States legal systems.[180] He argued that the Member States have national judiciaries and criminal frameworks and he was "not particularly attracted to permitting OLAF to direct UK institutions to perform in a particular way".[181] Ultimately, in his view, any decision to prosecute must remain "a domestic matter".[182]

Lack of follow-up

80. Dr Ingeborg Gräßle MEP drew our attention to what she saw as "the lack of cooperation between the Member States' judicial authorities" and OLAF,[183] in particular, the lack of feedback from the national authorities on the outcome of cases.[184] OLAF's Supervisory Committee told us that OLAF's own follow-up unit had been abolished following the recent internal review and they questioned the value of OLAF investigations in an environment where they are not routinely followed up.[185]

81. The Exchequer Secretary said that as a matter of practice national authorities ought to inform OLAF of the outcome of cases, but he seemed reluctant to commit the UK to any specific obligations.[186] He was aware that HMRC provided feedback to OLAF on customs cases but, in the case of VAT, the UK used a "different process" of information sharing.[187] He said that feedback should be provided to OLAF "[W]here it is appropriate" and he concluded that he would be "happy to take [this issue] away".[188]

82. We are of the view that the decision to prosecute must remain a national matter. The Member States must also recognise that if OLAF were to be seen as a body whose recommendations are never followed up, it will remain hamstrung in its ability to protect the EU's financial interests. This is another limitation on OLAF's effectiveness.

83. A solution to this problem would be a requirement that the Member State authorities provide OLAF with direct responses to the cases referred to them and the actions taken to tackle them.

OLAF's Interaction with UK authorities

84. We have seen that for 2006-2011 OLAF referred 19 cases to the UK which resulted in one acquittal and 3 convictions, with 13 cases (70 per cent) remaining pending.[189]

85. Unlike the 12 Member States that have joined the EU since 2004[190] the UK does not have a single point of contact for OLAF (often referred to as an "anti-fraud coordination service" or AFCOS); though the establishment of an AFCOS will be a requirement of the new OLAF Regulation.[191] Professor Spencer said that in the EU context the UK was unusual because it divided the prosecuting function between various different bodies.[192] Rosalind Wright QC agreed and suggested that there was confusion in OLAF about where in the UK it should refer cases, and who it should turn to when conducting investigations here.[193] Commissioner Leppard's evidence also illustrated this problem.[194] OLAF described the UK as "more difficult than others" because of the three judicial systems, the many police forces and the lack of a single prosecuting authority.[195]

86. The Attorney General for Northern Ireland told us that his department had had difficulties when conducting enquiries with OLAF and he said that "OLAF has not been found by us to be particularly accessible".[196] In contrast, Commissioner Leppard said the City of London Police had not had any problems.[197] Looking to the future, the Commissioner also said that in relation to OLAF and EU fraud he would like to build "a national capability similar to our response to counterterrorism", and to that end he is currently in discussion with the Home Office with a view to establishing his force as OLAF's first/single point of contact.[198] He said the Home Office is currently considering the resource ramifications of this policy.[199]

87. We note that the creation of a single point of contact between OLAF and the UK authorities is a requirement of the new OLAF Regulation. With that in mind we welcome the discussion between the Home Office and the City of London Police; this discussion should include the devolved administrations. We expect to see a successful outcome to this discussion.

88. We hope that the creation of a single point of contact in the UK will improve the relationship between OLAF and the UK national authorities.

Interaction with Europol and Eurojust

89. Europol and Eurojust can broadly be described as the EU's other crime fighting agencies. Europol is the EU agency responsible for gathering police intelligence and Eurojust is the EU's judicial cooperation unit.[200]

90. Europol told us that the various working groups within the agency "enjoy differing relations with OLAF" and described the relationship between OLAF and the group within Europol which deals with the illegal smuggling of cigarettes as "strained".[201] The Director said cooperation between Europol and Eurojust was much more straightforward. The President of Eurojust referred to the signing of a cooperation agreement with OLAF in 2008 and she cited many years of cooperation between her agency and OLAF.[202] Between 2004-2009 she said that Eurojust had worked with OLAF on five cases but in 2011 alone the figure had risen to eight.[203] She felt the relationship of Eurojust with Europol was good but could be extended.[204]

91. Most of the MEPs felt the system between the three agencies was cumbersome and overly bureaucratic[205] and that the level of coordination between them was inadequate.[206] Dr Theodoros Skylakakis MEP described the system as "defensive" and "weak".[207] He argued that there is "no one to actively pursue people who commit fraud—not even the big-time cases".[208] Timothy Kirkhope MEP said the system was not perfect but he felt that there were signs of greater cooperation between the three agencies.[209] The EU Commission Secretariat-General said there were gaps in the system which the imminent proposal on the European Public Prosecutor's Office (EPPO) will fill.[210] (See paragraphs 95-101.)

92. The Commissioner said he was content with the current structure but he looked forward to the impact that the proposed EPPO would have in this area alongside the new OLAF Regulation.[211] In acknowledging the Commission's desire to address the EU agencies generally, the Exchequer Secretary said that "there is clearly a concern about the somewhat tangled web here".[212] He promised that the Government would be supportive of EU efforts to "simplify and streamline EU institutions to deliver a more efficient and effective EU".[213] When it was suggested to him that an anti-fraud tsar was necessary he said there was an argument for one, but the Government would want to look carefully at any proposals.[214]

93. The tangled web described by the Exchequer Secretary between the three EU crime agencies of Europol, Eurojust and OLAF contributes to the lack of a coordinated response to fraud on the EU's budget which is a further limitation on OLAF's effectiveness. We are particularly concerned that this lack of cooperation could be hampering the effort to get to grips with the massive amount of cigarette smuggling which is both a fraud on the EU's budget and a major manifestation of international crime. We look forward to considering legislative proposals designed to clarify the respective roles of the EU's crime fighting agencies.

94. The evidence suggests that a possible solution lies in the European Public Prosecutor's Office, to which we now turn.

European Public Prosecutor's Office

95. The Treaty on the Functioning of the European Union foresees the creation of a European Public Prosecutor's Office (EPPO) "from Eurojust" in order to combat crimes affecting the EU's financial interests.[215] A proposal is yet to emerge from the Commission but one is expected in June.[216] This Report does not consider the merits for or against the creation of an EPPO but we address it here because of its link to this Report and the frequency with which it arose during this inquiry.

96. Since its inclusion as part of the Corpus Juris project in April 1997 the idea of a European Public Prosecutor in whatever form has proved a controversial subject matter for successive UK Governments.[217] The coalition agreement says that "Britain will not participate in the establishment of any European Public Prosecutor"[218] and the European Union Act 2011 has made its creation subject to a referendum and an Act of Parliament.[219]

97. The Director-General of OLAF gave us a vivid account "in the most simplest of cases" of the multi-jurisdictional problems confronting OLAF on a routine basis.[220] He argued that such multi-jurisdictional crimes against the EU's budget are "European by nature, because you cannot say it is specific to this nation or that one".[221] He was clear that the solution to this problem is an EPPO.[222] Most of the witnesses agreed[223] with this argument but Francesco Speroni MEP however was totally against the idea.[224]

98. Rosalind Wright QC offered two reasons in favour of an EPPO; first, the current unwillingness of the Member States to prosecute these crimes (see paragraph 77) and, second, the fact that "most of these very large frauds are committed across national boundaries".[225] Drawing on her time at the Serious Fraud Office, she explained that in such cases it had been hard to bring everyone together under one jurisdiction and that an EPPO would help.[226] Jens Geier MEP feared that the Member States would not accept a second tier of law enforcement at the EU level and would seek to undermine "effective European law enforcement".[227]

99. The Treasury placed the "onus … on the Commission to articulate the specific obstacles to combating fraud against the EU budget and how they see the EPP as helping to resolve those".[228] The City of London Police agreed.[229] The Exchequer Secretary told us that he feared that the EPPO would cut across the UK's common law system[230] and the Government were not convinced that the EPPO is the right solution to tackle fraud against the EU's budget. He concluded that "[W]e have the right tools and powers in place to fight fraud … and [an EPPO] would be a disruptive institutional change".[231]

100. There may be a case for such a body in relation to EU anti-fraud investigations given (i) the flaws in the EU's current anti-fraud system highlighted elsewhere in this Report, and (ii) the multi-jurisdictional problems raised by the Director-General of OLAF.

101. The Commission has not yet formulated a proposal and it is unfortunate that the Government have ruled out participation without first having had the opportunity of considering the details of any proposal and without knowing what form an EPPO would take. Since apparently the Government are not disposed to revisit their decision on the EPPO then they should explain how they propose to tackle the shortcomings in the system for combating fraud against the EU's finances discussed in this Report without participating in any EPPO.

117 HM Treasury para 23; Q 15 (Professor Spencer); Q 87 (Timothy Kirkhope MEP) Back

118 OLAF was established by Commission Decision 1999/352/EC dated 28 April 1999. Its role is defined by Regulation 1073/99 and Regulation 1074/99. The rules governing its power to undertake internal investigations in the EU's institutions are the subject of an Interinstitutional Agreement dated 25 May 1999 which came into force on 1 June 1999. Regulation 1073/99, Article: (i) to protect the EU's financial interests by investigating fraud and corruption; (ii) to detect and investigate serious matters relating to the discharge of professional duties by members and staff of the EU institutions and bodies; and,(iii) to support the European Commission in the development and implementation of fraud prevention and detection policies. See OLAF, page 4-5. Back

119 Regulation 1073/99, Article 2. OLAF Back

120 Regulation 1073/99, Articles 1(3) and 4 Back

121 Regulation 1073/99, Article 3 Back

122 Regulation 1073/99, Article 1(2) Back

123 Regulation 1073/99, Articles 9 and 10 Back

124 It remains governed by the Regulation agreed in May 1999. Back

125 The 2004 proposals were the subject of an inquiry by the Law and Institutions Sub-Committee see Report: 24th Report (2003-04): Strengthening OLAF, the European Anti-Fraud Office (HL Paper 139). Also, in 2006 the Economic, Financial Affairs and International Trade Sub-Committee undertook an inquiry into financial management and fraud in the EU: 50th Report (2005-06): Financial Management and Fraud in the EU: perceptions, facts and proposals (HL Paper 270). The Report contained a chapter on fraud but it mainly focussed on the management and audit of the EU budget. Back

126 17 March 2011, COM (2011) 135 final. Amended Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No 1073/1999 concerning investigations conducted by OLAF. Back

127 Regulation 2006/84. At the time of writing, the Justice, Institutions and Consumer Protection Sub-Committee retains the proposed Regulation under scrutiny. The proposed Regulation does not offer root and branch reform of OLAF, rather, it simply clarifies a number of issues including: the Director-General of OLAF's role, procedural guarantees for those suspected of fraudulent behaviour, cooperation with Europol and Eurojust, and the respective roles of OLAF and its Supervisory Committee. The Regulation also makes it a requirement that all Member States have a single point of contact (or AFCOS) for OLAF. (See paragraph 85.) Back

128 Q 227 Back