EU Budget Fraud

What is EU Budget Fraud?

EU budget fraud has historically taken a wide range of forms, from Croatian farmers seeking payments for climatically impossible sugar cane cultivation to the channelling of funds for immigration projects to what some have labelled Palestinian terrorist groups.

All types of EU budget fraud stem from inadequate budgetary control measures. This partly comes from factors inherent in the EU's structure, such as the 'Own Resources' system for funding the EU, which was introduced in 1970 and puts the bulk of the responsibility for collecting and distributing EU funds on the member states.

Despite much anti-fraud work within the EU, successive scandals have surfaced that have led to an impression among the public that there is an unwillingness or inability to take action against malpractice, which undermines public support for the EU.


Background

1999 was a critical year in the history of the EU for fraud. It saw the mass resignation of the Santer Commission, following a series of scandals (culminating in a nepotism row involving the former French prime minister and then EU Commissioner, Edith Cresson). Fraud only played a part in this, but an investigation by 'five wise men' from the European Parliament condemned the Commission collectively for 'loss of control' over the budget.

Romano Prodi succeeded Jacques Santer as European Commission President and immediately promised a 'zero tolerance' approach to fraud. Under intense pressure from the European Parliament - led by Budgetary Control Committee Chair Diemut Theato - the new Commission acted quickly to set up OLAF, a new independent European Anti-Fraud Office, succeeding the Unit for the Co-ordination of Fraud Protection (UCLAF) set up in 1988. A Santer Commission survivor, Neil Kinnock, was appointed as Vice President, in charge of institutional reform.

OLAF was invested with a broad remit covering investigation, facilitating co-operation between states, providing technical assistance, preparing progress reports to the Commission, and suggesting proposals for new measures to tackle fraud. A key feature of the regime administered by OLAF is that its powers of investigation are formally autonomous and free from EU dictation.

In recent years the Commission has made greater efforts to tackle the problem of budget fraud, recognising the negative impact it has on the confidence of member states in the EU and the potential it has to undermine the process of enlargement.

For example, the Commission has taken measures to prevent counterfeiting of Euro notes, has called for, and presented, a green paper on the establishment of a European Prosecutor, and has prepared annual reports on the protection measures it has taken that year.

A report by the Commission produced in 2000 presented the EU's overall strategic approach to the fight against fraud, and identified the major challenges to be tackled up to 2005. The report highlighted the importance of strengthening operational cooperation between all competent authorities; cooperating at inter-institutional level to prevent and combat fraud and corruption; strengthening the criminal judicial dimension and developing an overall anti-fraud policy.


Controversies

In spite of all the attention paid to fraud throughout the EU's existence, there is still an impression of malpractice that undermines public support for the EU. However, the EU itself cannot bear all of the blame for corruption as 90 per cent of the EU budget is spent and policed by the member states.

Member states have widely variable levels of commitment and capacity for combating fraud - southern European member states have traditionally been said to be particularly vulnerable.

There is widespread concern that fraud will worsen dramatically after EU enlargement in 2004, particularly with the accession of eight former Soviet bloc states and their experiences of closed government and corruption under Communism and rising gangsterism since the collapse of the USSR.

In 2002, the EU was rocked by allegations from its own chief accountant, Martha Andreasen, who publicly declared that the Commission's own accounts were faulty and open to fraud and abuse. The Commission's response was to suspend the whistleblower. Ms Andreasen has since said that the Commission has worse protection against fraud than Enron, and accused Mr Kinnock of dragging out disciplinary proceedings against her until after he retires.

It is noteworthy that the revelations of another whistleblower, auditor Paul van Buitenen, set in chain the events of the 1999 scandals.

Since then, despite all the efforts that have been made to tackle the issue of budget fraud within the EU, a report by the EU internal audit service in 2003 revealed serious impropriety at Eurostat, the EU statistics agency, where large sums of money had been diverted by officials for more than a decade.

At the centre of the Eurostat scandal is the company Planistat, a contractor for Eurostat which sells Eurostat information to companies and other private buyers. It was discovered that that only 40 per cent of the revenue from sales went to the EU budget, and 10 per cent to Planistat for its own administrative costs: the remaining 50 per cent - which could be as much as nine million euros - was reportedly put into secret bank accounts. OLAF's report on the subject has been continually delayed. It has been alleged by some that three Commissioners, Mr Kinnock, Michaele Schreyer and Pedro Solbes Mira, should have had knowledge of the fraud

OLAF, although nominally independent, has been accused of being too close to the Commission. Its inaction in the Eurostat case is thought to have compromised its reputation.


Statistics

2002 saw the following number and type of cases reported to OLAF: Agriculture - 306; Alcohol - 75; 'Anti-Corruption' - 151; Tobacco - 135; Customs - 384; Direct Expenditure - 290; External Assistance - 404; Precursors - 172; Structural Funds - 535; Trade - 486; and VAT - 68

Fraud in 2003 cost the EU more than £0.5 billion

Statistic 1: (Source: OLAF, 2004); Statistic 2: (Source: The Times, November 2003)


Quotes

"It is both saddening and disheartening to encounter irregular practices which we believed had already been eliminated."

Romano Prodi, European Commission President, on the Eurostat scandal, 2003

"The Committee was quickly united across party lines in its criticism of the complacency, arrogance, self-interest, lack of even the most rudimentary management discipline, absence of financial controls and failure to tackle fraud that was clearly evident wherever we went."

Charles Wardle MP, following a visit of the Public Accounts Committee to Brussels, Hansard, May 1999