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Fraud and Accounting in the EU


Allegations of fraud in the institutions of the European Union, especially in the Commission, have been extensively reported in recent years.  While there is certainly a real problem, these allegations exaggerate its scale, imply that it is in the Commission and not in the Member States and ignore the extensive efforts made to counter fraud.  Most fraud occurs in the Member States (where 80 per cent of the budget is spent), not in the Commission and the fact that the accounts are criticised by the Court of Auditors of the EU does not mean that the budget has been improperly spent.  Improperly accounted for expenditure, which includes fraud, is higher in the UK’s national accounts, although that point is rarely made clear in UK press coverage of the EU’s accounts.  It is also true that the EU sets higher standards for its accounts than those required by Parliament in the UK.

The Auditing of EU Accounts

The EU budget in 2012 is €129.1 billion and amounts to 1.12 per cent of EU gross national income.  The administrative costs of the EU are under six per cent of its budget.  

The European Commission is responsible for the implementation of the budget of the European Union and for ensuring that EU funds are spent properly and in conformity with the relevant rules and regulations. For the major proportion of EU expenditure, represented by agriculture and the structural funds, the management and control of funds is undertaken in co-operation with Member States.  As a result, European Union expenditure is subject to many levels of control within the Commission and by Member State administrations.  The Commission also has an internal audit function that helps to ensure that adequate control systems are established and operate effectively. 

The European Court of Auditors is the external auditor for all European Union institutions.  It was established in 1975 on a British initiative, it is independent of the Commission and it is there to assess the financial integrity of the EU budget as a whole.  Despite its name, the Court of Auditors is not a judicial body.  

A significant problem with tackling fraudulent claims on the EU budget is that around 80 per cent of the budget is spent through Member State governments and regional and sub-regional bodies.  This means that the EU has to rely on Member States to ensure that money is spent in accordance with the rules.  

Much attention has been focused on the fact that the European Court of Auditors has for a number of years failed to give a positive opinion on parts of the EU budget.  There is a great deal of confusion about what this means.  In their 2010 report the Court of Auditors said,

“In the Court’s opinion, the annual accounts of the European Union present fairly, in all material respects, the financial position of the Union as of 31 December 2010, and the results of their operations and cash flows for the year ended.” 

The major difficulty is that since 1994 the Court of Auditors is required to approve the accounts as a whole or qualify them as a whole.  This single verdict is often misunderstood as meaning that all EU expenditure is subject to fraud or error.  What concerns the Court is the error rate in payments – it estimated this rate to be 3.7 per cent in 2010.  But this is an error rate; the Court is not saying that 3.7 per cent of payments were in some way fraudulent, most of the errors will have been the result of mistakes.

The UK’s chief auditor (the Comptroller and Auditor-General) confirmed in June 2006 that if the UK had the same system as the EU, he would have to qualify all 500 UK expenditure accounts rather than just those where he thought there was a problem (13 in 2005).  

It is worth noting that the accounts of Britain’s Department of Work & Pensions, which is responsible for distributing pension and other social security benefits, have been qualified by the National Audit Office every year for 20 years.  Fraud and error in the payment of UK benefits amount to an estimated £3.3 billion in 2010-11. [1] 

The Scale of Fraud

There are different types of fraud involved in the EU.  Some obvious examples are: subsidies for products grown on farms which do not exist; claiming subsidy for a larger area of land being cultivated for a particular product than is actually the case; and staff making false claims for salaries and expenses.  

By its very nature, fraud is hard to quantify. It has been estimated that the EU has a shortfall in revenue from agricultural levies, customs duties and value-added tax of several hundred million euro each year (all of which are collected by the Member States). The Commission estimates that roughly 0.34 per cent of the EU’s budget is taken fraudulently. [2] However, not all the money is lost forever, some may be recovered as a result of investigations or legal proceedings (see below).  It is important to emphasise that it is the Member States that supervise the largest part of EU revenue and expenditure and they are therefore responsible for ensuring that it is properly accounted for.

The administrative expenditure of the EU, which covers the work of the Commission, has not been qualified for many years now.  The budget areas with the greatest problems are agriculture and fisheries and the cohesion funds.  

The European Anti-Fraud Office (OLAF)

The European Anti-Fraud Office has 500 officials looking after the financial interests of the European Union and its taxpayers.  Although a part of the European Commission, OLAF has a special status to ensure its independence.  The Director-General is specifically prohibited from seeking or accepting instructions from any government or institution, including the Commission itself, and can bring an action in the European Court of Justice if this independence appears to be at risk.

OLAF investigates several hundred cases each year where it is believed that the EU is being cheated out of revenue or its funds have been misused. Past examples of fraud OLAF cites include:

  • cheating on the value-added tax payable on used cars;
  • mixing illegal imports of cane sugar with legitimate imports of beet sugar; 
  • claiming money to develop tourist facilities in a region so remote no tourist is ever likely to visit it;
  • and claiming money for the same aid project, once from the European Commission and then again from Member States.

OLAF has extensive powers of investigation and can carry out on-the-spot checks on business premises in Member States and in some other countries as well.  OLAF officials work closely alongside the authorities of Member States and in criminal investigations Member State officials must take the lead.  

In 2010, OLAF recovered €68 million and a further €770 million is in the process of being recovered.  Thirty individuals were sentenced to a total of 70 years’ imprisonment in cases of EU fraud.  Larger amounts were recovered by Member States in their anti-fraud investigations involving EU funds.  Overall, since it was created in 1999, OLAF has recovered €1.1 billion, an average of €100 million a year.

OLAF cannot bring cases to court in the Member States. When an investigation suggests that prosecution is justified, OLAF sends the file to the relevant national authority for action.  For example, in September 2010 a UK company director received 18 months in prison for the theft of €174,500 from an EU-funded research project.  The conviction was the result of co-operation between the Department of Business, Innovation & Skills, which suspected the fraud, and OLAF, which provided information about the research project and identified EU officials who could appear as witnesses in court.

December 2006; revised June 2012

 [1] Figures from Department for Work & Pensions Annual Report & Accounts 2010-11, HC1010, page 109.

[2] OLAF website, 


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