Tougher rules to protect taxpayers' money from fraud - guide

26 May 2011
by eub2 -- last modified 26 May 2011

In a policy paper adopted today, the European Commission set out a series of measures enabling prosecutors and judges across the EU to fight fraud against the European Union’s financial interests more effectively. The Commission plans to strengthen substantive criminal law by clarifying definitions of crime such as embezzlement or abuse of power and reinforce the capacities of the European Anti-Fraud Office (OLAF) and Eurojust (the EU's judicial cooperation body). The EU will also consider how a specialised European Public Prosecutor's Office could apply common rules on fraud and other offenses involving EU funds. The Lisbon Treaty, which reinforced the EU's capacity to combat fraud by giving it the competence to legislate in the area of criminal law, will make these measures possible. Protecting taxpayers’ money is a priority for the Commission. Taxpayers must have the confidence and trust that European Union funds are only used for carrying out policies approved by EU lawmakers. Currently, the tools available for detecting and preventing the misuse of EU funds are sometimes inadequate and insufficient. Member State authorities still face many obstacles that hamper the effective protection of EU money against crime. This happens because there are different rules covering procedures, criminal acts and penalties, harming cross-border anti-fraud investigations and prosecutions.

What is the purpose of the Communication on the protection of the financial interests of the EU?

Protecting taxpayers from fraud and other crimes against the EU budget is a top priority for the Commission. This is particularly important in times of budgetary austerity. Today's Communication sets out an approach that will guide the Commission, other EU institutions and Member States' authorities on how to improve measures to protect the EU's financial interests.

Under the EU Treaty, EU Member States are obliged to take action against illegal activities that harm the EU budget. Fraud and corruption involving EU money are serious crimes and they will not go unpunished. All serious crimes need to be investigated and prosecuted swiftly across the EU.

By ensuring that legal action is effective and the same throughout the EU, the Commission is demonstrating its commitment to making the protection of EU funds a priority for national authorities. By helping speed up procedures and ensuring that sanctions are appropriate, today's Communication will strengthen criminal law and improve administrative investigations.

Why is there a need to act?

All citizens, as taxpayers, are victims of misspent EU funds. In 2009 alone, Member States reported €279.8 million worth of suspected fraud against the EU budget. The European Parliament, the Council and the Commission have all expressed the need for stronger protection against the fraudulent use of EU funds. However, the EU's wide variety of legal systems makes protecting the EU's financial interests by criminal law particularly challenging. If they do so at all, police, prosecutors and judges in the EU Member States decide on how to intervene to protect EU finances based on their own criminal law. This means that levels of protection vary considerably from one Member State to another and judicial follow-up of criminal cases ranges from 14% to 80% (the average being 41%). To tackle these challenges, the Commission is thus convinced that new legal tools are needed.

What are the criminal policy challenges?

The Protection of Financial Interests Convention was adopted in 1995 but has only been fully implemented fully by five Member States. Fifteen years on and loopholes in criminal and procedural laws still significantly hamper effective action to punish those responsible for financial crime against the EU budget.

In addition, many of these cases have a cross-border dimension involving several suspects in different jurisdictions and sometimes even outside the EU. Because of the complexity and lengthy procedures associated with such cases, Member States may be reluctant to ask for mutual legal assistance. Complex cases such as these cannot be solved through a national approach alone. At the moment, there is no level-playing field in criminal law. Some of the problems are:

    Across the EU, penalties against financial criminals targeting the EU's financial interests vary from small fines to long prison sentences. Such a variety of sanctions does not serve as a deterrent to criminals who may choose to move to Member States with the most lenient sentences.

    There is wide variation across the Union in definitions of relevant criminal offences, such as embezzlement, abuse of power or conflict of interest.

    In some Member States public officials benefit from immunity from anti-corruption rules. In others, they would be punished and removed from office for the same offence.

    In some Member States, it is not illegal for the beneficiary of a public procurement contract to participate in the design of a public tender.

Is there sufficient legal action?

The EU tackles fraud and corruption through the European Anti-Fraud Office (OLAF). Since the year 2000, 93 out of a total of 647 OLAF cases have been dismissed by national prosecution services for no specific reason. 178 of these were dismissed due to discretionary reasons (i.e. the prosecutors are free to follow-up a case or not according to certain criteria). Cross-border EU fraud cases are very complex and are sometimes not given the priority they deserve. Some national authorities only prosecute cases when the crime took place exclusively on their territory. Sometimes the national authorities do not have the power to investigate cases of fraud that involve events, suspects or victims that fall beyond the domestic remit.

Is there enough cooperation between authorities?

No. The EU still faces serious deficiencies in the way national authorities cooperate and the situation should be improved. There are many cases for which national authorities may need help from counterparts in other Member States, such as for recovering assets, but they do not ask because they are concerned about overly complex and lengthy procedures. Evidence collected by OLAF during administrative investigations is often not used because of national restrictions on using evidence from a foreign jurisdiction. Mutual trust between judicial and administrative authorities could be fostered if equivalent procedural standards applied, including evidence gathering.

Are investigative powers strong enough?

In March, the Commission proposed a reform of OLAF. The objective of the reform is to reinforce OLAF's accountability, efficiency and effectiveness in its daily workings, while safeguarding its independence in carrying out investigations. This reform concerns several aspects, ranging from:

    establishing better procedures for cooperation and information exchange between OLAF, the EU institutions and other relevant bodies, such as Europol (the European Law Enforcement Organisation) and Eurojust (the EU's judicial cooperation body),

    facilitating improved relations between OLAF and Member States' authorities to allow better on-the-ground investigations and greater follow-up on OLAF cases;

    clarifying OLAF's objectives and the role of the Director General, and looking at how OLAF's work can be carried out in a more efficient manner. For example, the reform sets out clear recommendations about the duration of investigations and the use of OLAF resources;

    ensuring that the fundamental rights of individuals under investigation are fully respected and even strengthened.

If OLAF's reform is now well underway, attention must also be paid to Eurojust. Eurojust supports Member States' judicial authorities by providing coordination and advice on serious crime including the fight against fraud. However, Eurojust still faces serious limitations because it cannot start criminal investigations nor prosecute cross-border crime on its own.

Reinforcing OLAF and Eurojust's capacities, both in criminal and administrative law, are crucial to minimising illegal activities that hurt the EU budget.

What tools do we have to protect EU financial interests under the EU Treaties?

The EU Treaties already foresee several ways to protect EU's financial interests, such as:

    Legislation to fight against fraud affecting the financial interests of the EU (Articles 310(6) and 325(4) Treaty on the Functioning of the EU [TFEU])

    Measures on procedural judicial cooperation in criminal matters (Article 82 Treaty on the Functioning of the EU [TFEU])

    Directives setting minimum criminal law rules for cross-border cases (Article 83 TFEU)

    Strengthening the institutional framework by giving Eurojust investigative powers (Article 85 TFEU ) and the possibility of establishing a European Public Prosecutor's Office to better investigate or prosecute in cases of crime at the expense of EU public money (Article 86 TFEU)

How does the Communication suggest improving the situation?

The Commission's Communication foresees several main areas where criminal law could be further improved to protect the EU's financial interests:

    Stronger procedures: the Commission will make it easier for prosecutors and judges across the EU to fight fraudsters by easing information exchanges between different actors, including police, customs, tax authorities, judiciary and other competent authorities. A new proposal on mutual administrative assistance for the protection of EU's financial interest is also planned.

    Strengthening substantive criminal law: the Commission has found that the current definitions of relevant criminal offences such as embezzlement or abuse of power vary widely across the EU. Common definitions of core offences could be envisaged, as well as the approximation of rules on jurisdiction and time limitation to improve criminal investigation results.

    Strengthening the role of bodies at European level: both OLAF, which is currently being reformed, and Eurojust need to be further strengthened to carry out their investigations more effectively.

    The EU will consider how, in the future, a specialised European Public Prosecutor's Office could apply common rules on fraud and other offenses against the EU's financial interests.

Is there a common definition of fraud and corruption?

The 1995 Protection of Financial Interests Convention provides for a definition of fraud and corruption at the expense of the EU and requires Member States to introduce criminal liability in these fields. Under the Convention, Member States must take the necessary measures to ensure that fraud affecting both expenditure and revenue must be punishable by effective, proportionate and dissuasive criminal penalties in all EU countries.

In cases of serious fraud, these penalties must include custodial sentences that can give rise to extradition. For instance, each EU country must ensure that heads of businesses or legal persons can be declared criminally liable ­ in accordance with the principles defined by national law ­ in cases of fraud affecting the EU's financial interests.

However, the Convention does not apply to the entire field of criminal activity relevant for the protection of EU financial interests and suffers from a number of shortcomings. For example, it does not oblige Member States to establish competence for prosecuting crimes unless they are at least partly committed on their own territory. Member States are also not obliged to provide criminal sanctions for legal persons, or to enact certain minimum levels of penalties for crimes affecting the financial interests of the EU.

Moreover, Member States have not entirely implemented the Convention. There are still discrepancies in the implementation of basic criminal law concepts for crimes affecting the financial interests of the EU. Today's Communication is therefore essential to identifying the areas where further work is needed.

What is the difference between "irregularities" and "fraud"?

An irregularity is when a beneficiary is not in compliance with the EU rules and requirements linked to the spending of EU funds, with a potentially negative impact for EU financial interests. Irregularities are often the result of genuine errors. Errors are made for a variety of reasons by beneficiaries claiming funds and by the authorities responsible for making payments. Fraud is a deliberately committed irregularity, which constitutes a criminal offence.

What are typical examples of fraud to the EU budget?

Fraud can be any case of deliberate misappropriation of EU funds. For example, beneficiaries of EU funds could deliberately use them for purposes other than those for which they were intended with no intention of carrying out the work they should. In other cases, it could happen that beneficiaries of EU money include falsified and inflated tender offers and invoices in their project applications. 

Communication on the Protection of the Financial Interests of the EU

Source: European Commission