Fraud and Accounting in the EU
Fraud & Accounting in the European Union
Summary
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, 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, let alone fraud, is vastly higher in the UK’s national accounts, although that point is rarely made clear in UK press coverage of the EU’s accounts.
The Auditing of EU Accounts
The EU budget in 2008-09 is €129.1 billion and amounts to 1.03 per cent of EU gross national income. The administrative costs of the EU are about 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 wisely 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, the 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 85 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 each of the last 14 years failed to give a positive opinion on part of the EU budget. There is a great deal of confusion about what this means. In their 2008 report the Court of Auditors said,
"…the Annual Accounts of the European Communities present fairly, in all
material aspects the financial position of the Communities as of 31 December
2007, and the results of their operations and cash flows for the year ended."
Indeed, in its 2008 report the Court of Auditors said that some of the qualifications that it made on the accounts in 2007 were no longer necessary due to improvements in financial management. It also said that expenditure under the headings of "administrative and other expenditure" and "economic and financial affairs" were "free from material error" and the control systems in place were adequate to manage the risk of illegality and irregularity.
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. 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 for each of the last 18 years. Fraud and error in the payment of UK benefits amounts to an estimated £2.5 billion a year – that is substantially more than the £224 million that is thought to be fraudulently taken from the EU.
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 0.3 per cent of the EU’s budget is taken fraudulently. However, not all the money is lost forever, some may be recovered as a result of investigations or legal proceedings. 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 European Anti-Fraud Office (OLAF)
The European Anti-Fraud Office has more than 350 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. €203 million were recovered by OLAF in 2007 and even larger amounts were recovered by Member States in their anti-fraud investigations involving EU funds.
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. In 2007, 38 per cent of cases completed by OLAF were dealt with through Member States’ judicial systems.
December 2006; revised January 2009
