# EUR-Lex - 52014DC0474 - EN

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# 52014DC0474

**REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Protection of the European Union’s financial interests — Fight against fraud 2013 Annual Report /* COM/2014/0474 final */**

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TABLE OF
CONTENTS

REPORT FROM THE COMMISSION TO THE EUROPEAN
PARLIAMENT AND THE COUNCIL Protection of the European Union’s financial
interests — Fight against fraud 2013 Annual Report............

Executive summary..................................................................................................................... 5

1........... Introduction.................................................................................................................. 8

2........... Fraud and other irregularities........................................................................................ 8

2.1........ Reported irregularities and
overall trends and tendencies, 2009-13............................ 8

2.2........ Irregularities reported as
fraudulent affecting the EU budget................................... 10

2.2.1..... Revenue...................................................................................................................... 12

2.2.2..... Expenditure................................................................................................................ 13

2.2.2.1.. Natural resources (agriculture,
rural development and fisheries)................................ 15

2.2.2.2.. Cohesion policy (in the 2007-13 and
2000-06 programming periods)....................... 16

2.2.2.3.. Pre-accession policy (Pre-accession
assistance (PAA) and the Instrument for Pre-Accession (IPA))         16

2.2.2.4.. Expenditure directly managed by the
Commission.................................................... 17

2.2.3..... Results of the European Anti-Fraud
Office (OLAF)................................................. 17

2.3........ Irregularities not reported as
fraudulent..................................................................... 17

2.3.1..... Revenue...................................................................................................................... 18

2.3.2..... Expenditure................................................................................................................ 19

3........... Recovery and other preventive
and corrective measures............................................ 19

3.1........ Expenditure: preventive
mechanisms......................................................................... 20

3.1.1..... Interruptions in 2013.................................................................................................. 20

3.1.2..... Suspensions................................................................................................................. 21

3.2........ Expenditure: financial
corrections and recoveries in 2013......................................... 21

3.3........ Recovery relating to own
resources revenue.............................................................. 22

4........... Anti-fraud policies at EU level................................................................................... 23

4.1........ Anti-fraud policy initiatives
taken by the Commission in 2013................................. 23

4.1.1..... Regulation No 883/2013 on
investigations conducted by OLAF.............................. 23

4.1.2..... Proposal for a directive on the
fight against fraud to that affects the Union’s financial interests by means of
criminal law................................................................................................................. 23

4.1.3..... Proposal for the establishment of
a European Public Prosecutor's Office (EPPO).... 23

4.1.4..... Fighting corruption in the EU..................................................................................... 24

4.1.5..... Anti-fraud policy in customs...................................................................................... 24

4.1.5.1.. Mutual Administrative Assistance
(MAA) - proposal for an amendment to Regulation 515/97)   24

4.1.5.2.. Joint Customs Operations (JCOs)............................................................................... 24

4.1.5.3.. Undervaluation Initiative............................................................................................ 25

4.1.5.4.. The Anti-Fraud Information System
(AFIS).............................................................. 26

4.1.6..... Fight against VAT fraud............................................................................................ 26

4.1.7..... Anti-fraud provisions in
international agreements...................................................... 26

4.1.8..... Fight against illicit trade in
tobacco products............................................................. 27

4.1.8.1.. Communication on stepping up the
fight against cigarette smuggling and other forms of illicit trade in tobacco
products......................................................................................................... 27

4.1.8.2.. World Health Organisation Framework
Convention on Tobacco Control (FCTC) – Protocol to Eliminate Illicit Trade................................................................................................................. 27

4.1.8.3.. Cooperation Agreements between the
European Union, the Member States and four cigarette manufacturers............................................................................................................. 28

4.1.9..... Public procurement rules............................................................................................. 28

4.1.10... Proposal for a Directive on the
protection of the euro and other currencies against counterfeiting by means of
criminal law............................................................................................................ 28

4.1.11... Commission Anti-fraud Strategy
(CAFS).................................................................. 29

4.1.12... The Hercule and Pericles programmes........................................................................ 29

4.1.12.1........................................... Implementation
of the Hercule II and Pericles programmes     29

4.1.12.2.......................................................... Multiannual
Financial Framework (MFF) 2014-20     30

4.2........ Advisory Committee for
Coordination of Fraud Prevention (COCOLAF).............. 30

4.3........ European Parliament resolution of
3 July 2013 on protecting the EU’s financial interests – the fight against
fraud – Annual Report 2011....................................................................................... 31

5........... Measures taken by Member States
to counter fraud and other illegal activities affecting the EU’s financial
interests....................................................................................................................... 32

5.1........ Measures to combat fraud and other irregularities affecting the EU’s
financial interests   32

5.2........ Implementation of Article 3.4 of
the new OLAF Regulation on designating the anti-fraud coordination service
(AFCOS)........................................................................................................ 33

5.3........ Implementation of the 2012
recommendations.......................................................... 34

6........... Conclusions and recommendations............................................................................ 35

6.1........ An unprecedented set of
anti-fraud measures............................................................ 35

6.1.1..... The beginning of the road: CAFS.............................................................................. 35

6.1.2..... The reform of the European
Anti-Fraud Office......................................................... 36

6.1.3..... Measures to fight fraud and
corruption in public procurement.................................. 36

6.1.4..... Sectoral measures: revenue......................................................................................... 37

6.1.5..... Sectoral mesures: expenditure.................................................................................... 37

6.1.6..... What lies ahead........................................................................................................... 37

6.2........ Operational results: a different
pace........................................................................... 38

6.2.1..... Revenue: Quality of information
and control strategies............................................. 38

6.2.2..... Expenditure: a developing
landscape......................................................................... 39

ANNEX 1 — Irregularities reported as
fraudulent.................................................................. 40

ANNEX 2 — Irregularities not reported as
fraudulent............................................................ 41

ANNEX 3 — 2013 financial corrections
implemented under shared management (EUR million)   42

Executive
summary

This 2013 Annual Report on Protection of the
European Union’s financial interests is presented by the Commission in cooperation
with the Member States under Article 325 of the Treaty on the Functioning of
the European Union (TFEU). It covers Commission and Member State measures in the fight against fraud, and their results. This is the last report under the
current Commission and therefore discusses the achievements made over the last
five years. The conclusions and recommendations included in the report are
based on an analysis of the information available for the past five years and
the problems and risks identified during this time.

Measures to protect the EU’s financial
interests, 2009-13

In 2009-13, the Commission has taken
unprecedented legal and administrative measures to improve the protection of
the EU’s financial interests.

This series of measures started in 2011,
when the Commission adopted its multi-annual Anti-Fraud Strategy (CAFS).
Initially addressed to the Commission services, the Strategy was pivotal in
raising awareness of fraud among the national authorities responsible.
Moreover, based on the Strategy, specific anti‑fraud provisions were
introduced into the new spending programmes for 2014-20.

A second milestone in stepping up the fight
against fraud was marked by the adoption of the new OLAF Regulation[1] in 2013. This Regulation has streamlined OLAF's procedures and
increased its effectiveness. It also reinforced the procedural guarantees for
the persons concerned by an OLAF investigation.

In 2012 and 2013, the Commission addressed
the criminal law aspect of the protection of the EU's financial interests by
adopting proposals for:

· 
a directive on the fight against fraud by means of
criminal law in July 2012 which should remove loopholes in Member States'
anti-fraud legislation that impede the effective prosecution of fraudsters;

· 
a regulation on the establishment of a European
Public Prosecutor’s Office (EPPO) in July 2013. The EPPO proposal is one of the
most significant legislative proposals over concerning the protection of the EU
financial interests.

The Commission has also taken a number of significant
measures specifically to protect the revenue side of the EU budget. These
include:

· 
the proposal for an amendment of Regulation
515/97 on Mutual Administrative Assistance in the customs area;

· 
the Directives on a quick reaction mechanism
against VAT fraud and a reverse charge mechanism;

· 
the signing of the FCTC Protocol against illicit
tobacco trade; and

· 
the Communication on the fight against tobacco
smuggling in 2013.

With these measures, the Commission has
shaped a new landscape for anti-fraud policy at EU level.

Detection and
reporting of (fraudulent and non-fraudulent) irregularities that affect the EU
budget

In 2013, 1 609 irregularities were reported as fraudulent (this includes both
suspected and established fraud), involving EUR 309 million in EU funds. There
are still significant differences in the number of fraudulent irregularities
reported by each Member State, possibly due to different approaches to detecting
fraud and, in some cases, to non-homogeneous interpretations when applying the
legal framework. Reported fraudulent irregularities have been decreasing on the
revenue side. On the expenditure side, their number dropped sharply between
2009 and 2011, but is increasing again.

Some trends have grown stronger in the past
two years: the involvement of administrative bodies in detecting fraudulent
irregularities has continued to increase and the use of falsified documentation
has become the most common way of committing fraudulent acts.

Irregularities not reported as fraudulent
have increased, particularly in terms of amounts. This mainly reflects the
increased resources made available to various spending programmes, more
programmes being implemented, and the fact that European institutions and
national audit services are paying more attention to the management of funds.

Preventive and
corrective measures

In 2013, the Commission made several
decisions to ensure that EU resources are spent according to the principle of
sound financial management and that EU financial interests are protected. It
made 217 decisions to interrupt payment (involving over EUR 5 billion) in the
cohesion policy area. Of these, 131 were still open at the end of 2013
(involving about EUR 2 billion of interrupted payments). The Commission also
made four new suspension decisions (three of these were still ongoing at the
end of the year).

The Commission made financial corrections
of over EUR 2.5 billion and issued recovery orders for EUR 955 million.

The measures taken in 2013 show that the
Commission takes protecting the EU’s financial interests seriously and that the
mechanisms in place are effective in accomplishing this goal. However, now it
is national budgets that bear the risk of not recovering amounts that have
already been paid out to beneficiaries but are subject to financial corrections.

Anti-Fraud
Coordination Services (AFCOS)

This year's report focuses on the requirement
for each Member States to set up an Anti-Fraud Coordination Service (AFCOS) in
accordance with Article 3.4 of Regulation (EU) No 883/2013. Setting up AFCOS
aims to facilitate effective cooperation and exchange of information with the
European Anti-Fraud Office (OLAF).

Four Member States have not formally
established their AFCOS yet but plan to do so by the end of 2014.

The responsibilities of national AFCOS vary
depending on the country. All Member States gave their AFCOS a coordinating
role, albeit to varying extents. Only a few Member States empowered their AFCOS
to act in an investigative capacity.

1.           Introduction

Each year, under Article
325(5) of the Treaty on the Functioning of the European Union (TFEU), the
Commission, in cooperation with the Member States, submits to the European
Parliament and the Council a report on measures taken to counter fraud and any
other illegal activities affecting the EU’s financial interests.

The Treaty states that
the EU and the Member States share responsibility for protecting the EU’s
financial interests and fighting fraud. National authorities manage around 80 %
of EU expenditure and collect Traditional Own Resources (TOR). The Commission oversees
both of these areas, sets standards and verifies compliance. It is essential
that the Commission and Member States work closely together to ensure that work
protecting the EU’s financial interests is effective. One of the main aims of
this report is to assess how effective this cooperation was in 2013, and how it
could be improved.

This report describes the measures taken at
EU level in 2013 and provides a summary and evaluation of the actions taken by
Member States to counter fraud. An analysis of the main achievements of
national and European bodies in detecting and reporting fraud and
irregularities relating to EU expenditure and revenue is included. The report in
particular highlights the establishment of an Anti-Fraud Coordination Service
(AFCOS) in each Member State, as this will facilitate the exchange of key
information relating to the EU’s financial interests between Member States and OLAF.

The report is accompanied by six Commission
Staff Working Documents[2]. The documents entitled ‘Implementation of Article 325 by Member
States in 2013’ and the‘Statistical Analysis of Irregularities’ contain tables
summarising the main results of each Member State’s anti-fraud actions.

2.           Fraud
and other irregularities

2.1.        Reported
irregularities and overall trends and tendencies, 2009-13

In 2013, 15 779 (fraudulent and non-fraudulent) irregularities were reported to
the Commission, involving an overall amount of about EUR 2.14 billion, of which
about EUR 1.76 billion concern the expenditure sectors of the EU budget. The
detected irregularities represent 1.34 % of payments on the expenditure side
and 1.86 % of gross TOR collected.

Compared to 2012, the number of irregularities
increased by 17%. However, the financial amount related to the detected
irregularities decreased by 36%.

In the last five years, there have been significant
changes in the way Member States and the Commission report irregularities. Two
platforms[3] were specifically developed and have facilitated an increase in the
timeliness and overall quality and quantity of information on irregularities
affecting the EU budget.

The availability of this information has led
to a significant change in the information made available through this report,
shifting the focus from irregularities treated in general terms to those
reported as fraudulent.

Between 2009 and 2013, the number of
reported irregularities increased by 22%; while the related amounts increased
by 48%.

This increase is partly linked to the
resources available to the EU budget, which in 2013 were over 10% higher than
in 2009. However, the most likely factor causing the increase is the fact that
the EU institutions (the European Commission and Court of Auditors) and
national services have paid more attention to and exercised greater control over
the management of EU funds.

Consequently, although the irregularities
reported as fraudulent (the detection of which falls largely under the responsibility
of Member States and is more difficult) have decreased to a certain extent in
the last five years (see Section 2.2 and Chart 2, below), the number of
irregularities not reported as fraudulent has progressively increased.

Chart 1:
Reported irregularities (fraudulent and non-fraudulent) and the related amounts,
2009-13

2.2.        Irregularities
reported as fraudulent affecting the EU budget

The number of fraudulent irregularities
reported and the related amounts are not a direct measure of the level of fraud
affecting the EU budget. They indicate the results achieved by Member States and EU institutions in detecting cases of potential fraud. The final decision
on whether a case really constitutes fraud pertains to the responsible
(judicial) authorities of the Member State involved[4].

In 2013, Member States reported as
fraudulent 1 609 irregularities
involving an overall amount of EUR 309 million in EU funds. Out of these, 25
fraudulent irregularities concerned funds managed under direct expenditure,
involving EUR 1.2 million, and eight fraudulent irregularities were reported by
candidate countries and involved about EUR 1 million.

The number of fraudulent irregularities[5] reported in 2013 increased by 30% in comparison with the previous
year, while their financial impact decreased by 21%. It should be noted that
annual fluctuations in amounts are less important than variations in the number
of reported cases (amounts can be particularly affected by individual cases involving
high values). Significant differences are recorded between sectors, as shown in
Table 1. Chart 2 shows the overall trends over the last five years,
highlighting a certain decrease in the number of reported cases and amounts during
this period.

There are also differences between the revenue
trend (decreasing) and the expenditure trend (where fluctuations appear to be
linked to the evolution of the multi-annual programming cycles and where there
has been an increase since 2012).

Table 1: Irregularities reported as fraudulent in 2013[6]

A breakdown of all fraudulent
irregularities reported in 2013, by Member State and budget sector, is set out
in Annex 1.

Chart 2: Irregularities reported as fraudulent and the
related amounts, 2009-13

2.2.1.     Revenue

The number of fraud cases reported for 2013
(633) is 17% lower than the average number reported for 2009-13 (763). The
total established amount of TOR reported for 2013 (EUR 54 million – 61 million
including estimated amounts) is 44% lower than the average established amount
for 2009-13 (EUR 96 million).[7]

In 2013, almost half of fraud cases (47%)
were revealed during inspections by anti-fraud services and 29 % during customs
controls carried out at the time of clearance of goods. About 56% of all TOR
amounts involved in fraud cases were established during an inspection carried
out by anti-fraud services.

Analysis shows that the number of fraud
cases decreased over the 2009-13 period, as shown in Chart 3.

CHART 3: TOR — Cases of fraud and the established
amounts affected, 2009-13

2.2.2.     Expenditure

For EU expenditure, the increase in the
number of irregularities reported as fraudulent was significant, at 76%. It reflects
mainly the natural resources sector (where the increase was at 175%, see
paragraph 2.2.2.1). Increases were also seen in the cohesion (15%) and pre-accession
(27%) policies. Decreases were seen in direct expenditure (14%). The
fluctuations in the amounts involved is less explicative as already specified
as they decreased in all sectors, with the exception of agriculture (+10%).

Notified irregularities often relate to
transactions that took place in a financial year other than that in which they
were detected or reported. There is an average time lapse of about four years
between when a (potential) act of fraud is committed and when it is reported to
the Commission[8].

Charts 4 and 5 show the reported fraudulent
irregularities and their related amounts, by expenditure sector.

Unlike in previous years, most
irregularities reported as fraudulent (60%) were detected in the agricultural
sector. As in previous years, however, the largest share of amounts that
involve irregularities (63 %) comes from cohesion policy.

Charts 4 & 5: Irregularities reported as
fraudulent by budget sector (expenditure) — by number and amount

Detected modi operandi did not vary
significantly compared to previous years. The use of false or falsified
documentation or declarations remained the most frequently used method.

Only three of the irregularities reported
as fraudulent relate to corruption[9].

About 48% of the irregularities reported as
fraudulent in 2013 were detected by anti-fraud bodies or during criminal
investigations or other external controls. 52% were detected by the
administrative control systems provided for under sectoral regulations. This
underlines the importance of external controls in the fight against fraud and
the need for strong coordination with managing and audit authorities. It also
shows that the latter have improved significantly. Anti-fraud or criminal
investigations detected cases of potential fraud involving high financial
amounts, which reflects their ability to target their work, and reflect their strong
investigative capabilities.

In 2013, only one Member State, Ireland, did not classify any of its irregularities as fraudulent. Detection continues to vary
between Member States[10]. The Member States who detected and reported the highest number of
fraudulent irregularities are: Italy, Romania, Bulgaria, Poland, Denmark and Greece (between 302 and 55). In terms of the amounts involved, the highest
figures were reported by Italy, Poland, Romania, Greece and Germany (between EUR 68 and 24 million). Very few fraudulent irregularities (fewer than
three for all expenditure sectors) were reported by Belgium, Lithuania, Luxembourg, Hungary, the Netherlands, Finland, and Sweden. These differences are caused
by several factors and reflect very different approaches, not only among Member
States but also among various administrations in the same Member State. Some Member States allocate significant resources to countering fraud; others prefer to
apply financial corrections without further investigation of the potential
criminal offence.

Of the irregularities reported as
fraudulent in the last five years, 8 % were classified as fraud (ratio of
established fraud)[11]. This ratio has doubled in comparison with that in 2012.

2.2.2.1.  Natural
resources (agriculture, rural development and fisheries)

The sharp increase in fisheries sector (+475%)
was expected considering the delayed implementation of the programmes and the
low numbers reported until last year.

For agriculture, the picture is more complex,
as the irregularities notified by four Member States (Bulgaria, Denmark, Italy
and Romania) represent about 75% of the total number of irregularities reported
as fraudulent, but the number of irregularities reported as fraudulent also
increased for five other countries (Czech Republic, Greece, Spain, France and
Poland).

For Denmark, the reported cases are a
continuation of the investigation started in 2012. The cases of suspected fraud
are related to non-compliance with national restrictions on the use of
fertiliser and cross-compliance requirements. Administrative proceedings on cross-compliance
are ongoing and in many cases it is the court who will deliver the final
judgement.

For Romania and Bulgaria, a number of weaknesses
were identified in the system and this has led to more controls and consequently
to more irregularities being detected.

Italy had the highest
number of irregularities reported as fraudulent (213). About one-third are a
consequence of a wide-spread ongoing investigation. However, a significant number
may have been caused by an over-zealous application of the fraudulent
classification; this will be further monitored in the coming years.

The increase in irregularities reported as
fraudulent concerns both the European Agriculture Guarantee Fund[12] and the Rural Development Fund[13]. 18% of reported cases concern both funds.

Almost 30% of fraudulent irregularities involved
the use of false or falsified documents or declarations.

In 2013, the proportion of potential fraudulent
irregularities detected by anti-fraud services increased in comparison with
previous years, to 44%, while the proportion of criminal investigations
remained stable (8%). This is in particular due to the results notified by Italy and Denmark.

The ratio of established fraud in agriculture
increased compared to 2012: it stood at 7 % of all cases reported in
2009-13 (6% in 2012).

2.2.2.2.  Cohesion
policy (in the 2007-13 and 2000-06 programming periods)

Although reporting of fraudulent irregularities
increased by 15% in comparison to 2012, for the first time cohesion policy was
not the area of budgetary expenditure with the highest number of irregularities
reported as fraudulent. The related amounts, although decreasing, still
represent the largest share of the total, however.

Consistently with the trends highlighted in
2012, the European Regional Development Fund (ERDF) accounted for the largest
proportion of reported fraudulent irregularities in 2013. However, in the past
five years the number of irregularities reported as fraudulent was almost the
same for the European Social Fund (ESF) and the ERDF. In terms of amounts
involved, the ERDF always represented the biggest proportion (because it
provides higher amounts of financing for supported projects).

Most fraudulent irregularities (55 %) were
detected by the control system provided for in EU legislation, not criminal
investigations or anti-fraud bodies. This continued the trend already highlighted
in 2012, but represents a striking change from the previous programming period (2000-06),
when fraudulent irregularities  were almost exclusively detected during
anti-fraud and criminal investigations.

The Commission’s work in recent years on raising
awareness of fraud in cohesion policy seems to have paid off, but the trend described
above needs further consolidation[14]. In terms of financial amounts, the most significant fraudulent irregularities
were still detected during criminal and anti-fraud investigations (76 %).

The time taken to report fraudulent cases after
they are detected remains the same, eight months on average. Irregular
practices were detected, on average, two years and six months after they began.

The ratio of established fraud for cohesion
policy has increased in comparison with 2012; 11% of the irregularities reported
as fraudulent in 2009-13 were declared as established due to final decisions in
Greece, Germany, Poland and Slovenia (this figure stood at 3% in 2012).

2.2.2.3.  Pre-accession
policy (Pre-accession assistance (PAA) and the Instrument for Pre-Accession
(IPA))

The number of irregularities reported as
fraudulent in PAA remained at the same level as in the previous year, although
it has been decreasing since 2009. Romania and Bulgaria are the countries that
reported fraudulent irregularities in PAA, mostly in rural development[15].

The number of fraudulent irregularities and the
related irregular amounts related to the IPA increased in comparison with 2012.
This increase can be considered within the norm because reporting of
irregularities in IPA only started in recent years. Most of the fraudulent
irregularities were reported by Turkey. The highest fraudulent amounts were
recorded in relation to transition assistance, institution building and rural development.

2.2.2.4.  Expenditure
directly managed by the Commission

Expenditure directly managed by the Commission
is analysed based on data on the recovery orders issued by Commission services.

In 2013, according to the accrual-based accounting
system (ABAC), Commission services classified 25 recoveries as suspected fraud
and reported them to OLAF. They accounted for EUR 1.2 million – less than in
the previous year.

2.2.3.     Results
of the European Anti-Fraud Office (OLAF)[16]

In 2013, OLAF launched 253 investigations
and 34 coordination cases, and concluded 293 (of which 164 contained
recommendations).

It sent 85 recommendations for judicial
action to national authorities and recommended that approximately
EUR 402.8 million be recovered, of which EUR 84.9 million related to
revenues and EUR 317.9 million to expenditure (see Table 2).

Table 2: Amounts recommended for recovery in 2013
following OLAF investigations[17]

2.3.        Irregularities
not reported as fraudulent

In 2013, the Commission was notified of 14 170
irregularities not reported as fraudulent (about 16 % more than in 2012). The
figures increased for all sectors with the exception of pre-accession. The
related financial impact decreased to about EUR 1.84 billion (38% less
than in 2012), with significant increases in agriculture (see paragraph 2.3.2),
as shown in Table 3.

Table 3: Irregularities not reported as fraudulent in
2013[18]

Annex 2 shows a breakdown of all
non-fraudulent irregularities reported in 2013, by Member State and budgetary
sector.

2.3.1.     Revenue

The number of irregularities reported for
2013 (4 144) was 5% higher than the average number of irregularities reported
for 2009-13 (3 936)[19].  The total established amount of TOR involved (EUR 326 million –
327 million including estimated amounts) was 16 % higher than the average
established amount for 2009-13 (EUR 280 million).

CHART 6: TOR – Cases of irregularities not reported as
fraudulent and the amounts affected, 2009-13

In 2013, most cases of irregularities (56%)
and the established TOR amounts (56%) were detected using post-clearance
controls.

2.3.2.     Expenditure

The increase in the number of
irregularities not reported as fraudulent concerns all expenditure sectors of
the EU budget, with the exception of pre-accession.

However, this increase in reported
irregularities is mirrored by a significant decrease in the amounts concerned,
in particular in cohesion policy. A significant increase was observed in the natural
resources policy area (mainly linked to rural development and to progress in
implementing its programmes and the increased checks required by the findings
of the European Court of Auditors and the Commission in the past years), and in
direct expenditure.

3.           Recovery
and other preventive and corrective measures

An important aspect of protecting the EU’s
financial interests involves the use of mechanisms to prevent and correct fraud
and other irregularities so as to ensure that the budget is implemented in
accordance with the principles of sound financial management[20].

Under shared management, the Commission may
adopt the following measures:

· 
preventive measures: interruption of payments
(moving the payment deadline back by up to six months)[21]; suspension of all or part of the interim payments to a Member State[22];

· 
corrective measures: if a Member States does not
take the required measures, the Commission may decide to impose a financial
correction[23]. Expenditure that is not in accordance with applicable rules is
either the subject of a recovery order or a deduction from the
subsequent request for payment.

Data on Member States’ direct recoveries from
beneficiaries are only partially available[24] and are included in the Commission staff working document
‘Statistical evaluation of irregularities’.

Data on management types other than shared
management (particularly direct expenditure) mainly concern recovery orders
issued by Commission services or deductions from cost claims.

3.1.        Expenditure:
preventive mechanisms

3.1.1.     Interruptions
in 2013

In 2013, the Commission took 217 decisions to
interrupt payments in the cohesion policy area (involving almost EUR 5 billion,
similarly to the previous year). Of these, 131 were still open at the end of
2013 (involving almost EUR 2 billion).

Table 4 shows the interruption cases handled
in 2013 and the significant prevention activity carried out, particularly in
relation to the ERDF/Cohesion Fund, which represent more than 72 % of
cases and about 87 % of the total amounts concerned.

Table 4: Interruption cases handled by the Commission
services in 2013

3.1.2.     Suspensions

One of the two suspension decisions concerning
the ERDF and still in force at the end 2012 was lifted by the end of 2013[25], while the other remained in force[26]. Four new suspension decisions were adopted in 2013[27]. Another two new suspension decisions were adopted in January 2014[28].

One of the two suspension decisions concerning
the ESF adopted in 2012 and still effective at the end of 2012 was lifted in
2013[29], while the other remained in force[30]. 11 suspension decisions were adopted in 2013 and all but one[31] were still ongoing at the end of 2013[32]. One suspension decision adopted in 2011 was still ongoing at the
end of 2013[33].

3.2.        Expenditure:
financial corrections and recoveries in 2013

In 2013, corrective measures decided by the
Commission vis-à-vis Member States and beneficiaries increased in
comparison with the previous year (by 20 %), while those implemented
decreased (by 24%) , mainly in the cohesion policy area and in particular in
relation to the ERDF (where they decreased by 40%, see Table 5).

Table 5: Financial corrections and recoveries per budgetary sector, 2013–12

Annex 3 shows a breakdown by Member State of financial corrections implemented in 2013 under shared management.

3.3.        Recovery
relating to own resources revenue

About 98% of all established amounts of TOR
are collected without any particular problems. The remaining 2% relate to cases
of fraud and irregularities. Member States are obliged to recover the unpaid
amounts of TOR and to register them in the OWNRES database. For 2013, the
amount to be recovered after fraud and irregularities involving a TOR amount of
over EUR 10 000 was EUR 380 million. Of this, EUR 234 million has already been
recovered by Member States for cases detected in 2013, making the recovery rate
for 2013 62%, the best recovery result reported in the last decade. In addition,
Member States continued their recovery activities for cases from previous
years. In 2013, they recovered a combined total of approximately EUR 130
million for cases of fraud and irregularities detected between 1989 and 2012.

The overall historical recovery rate
(1989-2010) is 75% when the calculation only takes into account closed cases
for which Member States have completed their recovery work.

The classification of a case as fraudulent
can be used as an indicator for forecasting recovery results. Recovery in cases
of fraud is generally much less successful than in cases of irregularity
(recovery rate of 24% compared to 68%).

Member States’ activities to recover TOR
are monitored by means of TOR inspections and by a procedure that requires all
amounts exceeding EUR 50 000 that are finally declared irrecoverable by Member
States to be reported to the Commission. Member States are held financially
liable for the non-recovery of TOR if weaknesses are observed in their recovery
work.

4.           Anti-fraud policies at EU level

4.1.        Anti-fraud
policy initiatives taken by the Commission in 2013

4.1.1.     Regulation
No 883/2013 on investigations conducted by OLAF

The OLAF regulation
governing its work came into force on 1 October 2013[34]. It strengthens the rights of the persons
concerned by an OLAF investigation and clarifies the rights of witnesses. It
clarifies the way in which investigation procedures should be conducted. It
also strengthens the obligations on exchanging information between OLAF and EU
Member States. Member States are now required to designate an Anti-Fraud Coordination Service (AFCOS)
to facilitate effective cooperation and exchange of information with
OLAF, including information of an operational nature.
OLAF is assisting and advising Member States in their implementation of this
new obligation. The regulation also contains provisions on cooperation with EU
law enforcement bodies and with third countries[35].

4.1.2.     Proposal
for a directive on the fight against fraud to that affects the Union’s financial interests by means of criminal
law

The Commission submitted a proposal for a directive
on the protection of the EU’s financial interests by means of criminal law in
2012[36]. It aims to strengthen the existing legal framework in this area by
creating common minimum rules on defining criminal offences, sanctions and
time-limitations for these offences. The Council adopted a general approach on
6 June 2013 and the European Parliament adopted its report in first reading on
16 April 2014.

4.1.3.     Proposal
for the establishment of a European Public Prosecutor's Office (EPPO)

On
17 July 2013 the Commission adopted a proposal for a regulation on the
establishment of a European Public Prosecutor's Office (EPPO)[37]. The initiative is based on Article 86 of the TFEU. The EPPO would
have the mandate to investigate, prosecute and bring to judgement crimes
affecting the EU’s financial interests, as defined in the future Anti-fraud directive[38], and to ensure that this is done in a harmonised, independent and
efficient way. According to the proposal, the EPPO would consist of a central level
with a limited number of European prosecutors, and of a decentralised level
with European delegated prosecutors in the Member States. Investigations would
be carried out mainly at decentralised level by the delegated prosecutors, but certain
key decisions would be taken at central level. The EPPO’s powers would be
balanced by strong defence rights as guaranteed by Member States’ national
laws, EU law and the Charter of Fundamental Rights. At the end of 2013,
negotiations in the Council were still ongoing.

4.1.4.     Fighting
corruption in the EU

In 2011, the Commission presented an overall EU
anti-corruption policy[39] and called for a sharper focus on corruption in
a range of policy fields. It highlighted closer cooperation, updated rules on
confiscating criminal assets, revised public procurement legislation, better
crime statistics and more rigorous use of conditionalities in cooperation and
development policies.

The Commission committed to publishing an EU anti-corruption
report every two years. The first report was adopted in February 2014[40]. It seeks to intensify anti-corruption measures
in the EU and to strengthen mutual trust between Member States. It also
identifies EU-wide trends, facilitates the exchange of best practice and
prepares the ground for future EU policy measures.
Corruption in public procurement is the cross-cutting theme of the first report
and complements the study on
the ‘Costs of corruption in public procurement’ presented by OLAF in 2013[41].

4.1.5.     Anti-fraud
policy in customs

4.1.5.1.  Mutual
Administrative Assistance (MAA) - proposal for an amendment to Regulation
515/97)

On 25 November 2013, the Commission
adopted a proposal for an amendment to Regulation (EC) No 515/97[42]. The objective is to improve detection of and the fight against
customs fraud by improving the availability of data, addressing inefficiencies
of dual data protection supervision, ensuring admissibility of evidence in
Member States’ court proceedings, and increasing data confidentiality.

The European Parliament adopted a
Resolution on this in April 2014[43]. Negotiations are still ongoing in the Council.

4.1.5.2.  Joint
Customs Operations (JCOs)

JCOs are coordinated and targeted operational
measures implemented by the customs authorities of Member States and third
countries, over a limited time period, to combat illicit cross-border
trafficking in goods.

In the context of mutual assistance
between EU customs administrations and the Commission, OLAF provides an IT platform,
IT applications and an operations room for Member States to use to carry out
JCOs. In 2013, OLAF supported or co-organised the following JCOs:

JCO HELIOS[44]: Its aim was the fight against illegal maritime activities[45] on high-taxed goods and illegal drugs and/or other
prohibited/sensitive goods.

JCO HALYARD[46]: The main aim was to identify, locate, intercept and reinforce the
control of yachts and other vessels[47] suspected of carrying illegal drugs and/or other
prohibited/sensitive goods (including cigarettes).  124 Kg of cocaine were seized  by the Customs authorities in the United Kingdom

JCO WAREHOUSE[48]: It targeted excise goods in transit and excise goods imported
under procedure 42 and subsequently put into the Excise Movement Control System
(EMCS) under suspension of excise duties and VAT. This was the first time that tax
authorities on a European-level were involved in the entire course of a JCO. As a result, almost 45
million smuggled cigarettes, nearly 140.000 litres of diesel fuel and about
14.000 litres of vodka were seized, in an estimated amount of € 9
million in the form of evaded customs duties.

JCO ROMOLUK[49]: It targeted cigarette and alcohol smuggling. It also started the
process of strengthening multi-agency cooperation[50]. Cooperation with border guards and Frontex led to more seizures at
the green border and inland through mobile control groups. Around
23 million pieces of smuggled cigarettes were seized, averting potential losses
of customs duties and taxes in the EU of approximately 4.6 million €.

In addition to the JCOs, OLAF supported the PCA
DISMANTLE project[51] that ran throughout 2013.

4.1.5.3.  Undervaluation
Initiative

Undervaluation
fraud in the customs area means the misdescription of the value of goods to
evade full payment of customs duties on importation into the EU. This fraud has
a direct impact on both the EU budget and national tax revenue and contributes
to trade distortion, which penalises those Member States that carry out
stricter controls with regard to declared customs values.

OLAF, together
with a number of Member States, launched an initiative addressing this
persistent and complex phenomenon to foster coordination/cooperation and
equivalent protect the EU’s financial interests. It is based on an analysis of
trade flows and aims to detect suspicious patterns and identify specific
targets for risk-based checks, co-ordinate control strategies and ultimately
lead to investigation and prosecution.

It will enter
its operational phase in 2014.

4.1.5.4.  The
Anti-Fraud Information System (AFIS)

The main objective of AFIS is to improve cooperation with
partners to help them correctly apply EU customs law. Member States use AFIS to
report cases of fraud and irregularities. By the end of 2013, AFIS had 8 642
registered end-users on behalf of 1 670 services in Member States, third
countries, international organisations, the Commission and other EU
institutions.

In 2013, AFIS users exchanged 10 978 MAB mail[52] messages. A total of 8 598 cases were published in the
AFIS mutual assistance databases and modules[53]. The transit information database (ATIS)
received information on seven million new transit consignments, representing a
total of 35 million movements of goods. The irregularity management system
(IMS) received 23 282 new communications (9 998 related to new cases and 12 740
updates to existing cases) on irregularities from Member States and candidate
countries, and at the end of 2013 it held a historical total of 174 000
communications. A total of four JCOs, three regional and one EU-wide, were
conducted in 2013 using the AFIS system’s Virtual Operations Coordination Unit
(VOCU) as its communication tool.

4.1.6.     Fight
against VAT fraud

In 2013 Directive 2013/42[54] was adopted to implement the Quick Reaction Mechanism to handle
massive and sudden fraud that cannot be stopped using traditional means. The
scope of the Reverse Charge Mechanism was also extended.[55]  Two Recommendations to the Council have been launched and are
currently being discussed; they would make it possible to open negotiations
with Russia and Norway for an EU agreement on administrative cooperation in the
field of VAT. The Eurofisc network is fully operational and new ways are being
explored to strengthen its activities, including a new cross-border risk
analysis project. The VAT gap bi-annual study published in 2013[56] gives a better understanding of recent trends in VAT fraud.

4.1.7.     Anti-fraud
provisions in international agreements

To
safeguard the EU’s financial interests and ensure proper application of customs
legislation, EU international agreements contain provisions on customs mutual
administrative assistance (MAA) and measures on the enforcement of preferential
treatment.

In
2013, 46 agreements including MAA provisions for 69 third countries were in
force and bilateral or regional negotiations were under way with another 51
countries.. In 2013, agreements containing free trade provisions became
operational between the EU and Peru, Colombia and the Central American region.
Such agreements were also initiated with Singapore, Moldova and Georgia. It should also be noted that in 2013 the EU Council adopted a revised Overseas
Association Decision[57] covering 25 of the EU’s Overseas Countries and Territories and, for
the first time, the Decision includes measures on the enforcement of
preferential treatment.

4.1.8.     Fight
against illicit trade in tobacco products

4.1.8.1.  Communication
on stepping up the fight against cigarette smuggling and other forms of illicit
trade in tobacco products

A comprehensive EU Strategy and an Action Plan were adopted in June 2013[58].The Communication builds on the anti-smuggling policy in place at
the EU’s Eastern borders and proposes measures to reinforce cooperation with
the main sources and transhipment countries for smuggled tobacco products, and
measures to secure the supply chain of tobacco products such as tracking[59] and tracing[60]. Measures are proposed to organise targeted customs operations, to
increase enforcement capacity with more coordinated financing, technical
assistance and training, and sharing of best practices. Attention is given to
addressing corruption, decreasing the incentives created by gaps and loopholes
in the excise legislation, strengthening sanctions and raising awareness among
the public about the risks associated with illicit cigarettes. The majority of
actions planned for 2013 were achieved and the implementation of the Action
Plan will continue in 2014.

4.1.8.2.  World
Health Organisation Framework Convention on Tobacco Control (FCTC) – Protocol
to Eliminate Illicit Trade

In 2013[61], the FCTC Protocol[62] was signed by 54 parties, including the EU, and will enter into
force once it is ratified by the 40 countries that need to do so. The EU and
its Member States are now in the process of preparing the conclusion of the
Protocol and adopting a decision on this matter.

The Protocol aims to combat illicit trade in
tobacco products by putting in place a variety of measures. These include inter
alia an obligation for all tobacco manufacturers to record information that allows
the tracking and tracing of their product, access of officials to that
information, and the reporting of that information upon request to a global
information sharing point. Moreover, the Protocol foresees rules on the
licensing of manufacturers and persons involved in the import and export of
tobacco products and due diligence obligations for the manufacturers with
regard to their customers’ compliance with the applicable laws and regulations.
These supply chain control provisions are complemented by provisions on offences,
law enforcement co-operation, mutual administrative and legal assistance, and
extradition and international cooperation.

The Commission is fully committed to the FCTC
Protocol and its ratification at global level.

4.1.8.3.  Cooperation
Agreements between the European Union, the Member States and four cigarette manufacturers

Binding agreements have been concluded between
the EU,  Member States and four tobacco manufacturers.[63] The Agreement with PMI was concluded in 2004, the one with JTI in
2007, and the agreements with BAT and ITL in 2010. All EU Member States acceded
to the cooperation agreements, with the exception of Sweden, who has not yet concluded
agreements with BAT[64] and ITL. Croatia also acceded to the cooperation agreements[65]. OLAF monitors the implementation of the agreements which includes
compliance with rules on global tracking and tracing of products to avoid them ending
up on the illicit market.

4.1.9.     Public
procurement rules

Public procurement is a
“hot spot” for fraud and corruption. It was chosen as the special chapter in
the first EU Anti-Corruption report of early 2014[66]. EU public procurement rules contribute to preventing, detecting
and redressing corruption. The new public procurement and concessions
directives[67] enhance transparency, e.g. by making e-procurement mandatory,
regulating concessions and looking closer at the vulnerable post-award phase.
They strengthen the anti-corruption purpose, e.g. by defining conflicts of
interest, extending the exclusion grounds to collusion between bidders and
unduly influencing the contracting authority, and introducing monitoring and
reporting obligations to curb procurement fraud and other serious
irregularities.

4.1.10.   Proposal
for a Directive on the protection of the euro and other currencies against
counterfeiting by means of criminal law

In 2013, the Commission
submitted a proposal for a Directive[68] to better protect the euro and other currencies from counterfeiting
by using criminal law measures. Directive 2014/62/EU[69] was adopted in the first half of 2014[70].

The Directive builds on
and replaces Council Framework Decision 2000/383/JHA on increasing protection
against counterfeiting by using criminal penalties and other sanctions, which
was adopted in connection with the introduction of the euro. It maintains the provisions
of the Framework Decision and introduces the following new provisions:

– 
effective investigative tools, such as those
used in organised crime or other serious cases, made available in cases of
counterfeiting of currency;

– 
common maximum penalties, including imprisonment
of at least eight years for production and five years for distribution, for the
most serious counterfeiting offences;

– 
transmission of seized counterfeit euro notes
and coins to National Analysis Centres and National Coin Analysis Centres
during ongoing judicial proceedings for analysis and identification, to enable
the detection of further counterfeit euros in circulation; and

– 
the obligation to report every two years to the
Commission the number of counterfeiting offences committed and the number of
persons convicted.

4.1.11.   Commission
Anti-fraud Strategy (CAFS)

Adopted in June 2011,
the Commission Anti-fraud Strategy (CAFS)[71] is mainly addressed to Commission services. It has now been
implemented and the Commission is required to report on its implementation this
year.

In summary, the three
priority actions[72] that had to be completed by 2013 have been implemented:

– 
Anti-fraud provisions have been added to the new
legal framework for spending programmes under the Multi-annual Financial
Framework 2014-20;

– 
All Commission services but one have developed
an anti-fraud strategy in which they propose anti-fraud activities specific to
their sector. One Commission service is still in the process of developing its
strategy and will finalise it shortly;

– 
The procurement directives have been revised to
add measures that prevent, detect and correct fraud[73].

4.1.12.   The Hercule
and Pericles programmes

4.1.12.1.          Implementation of the Hercule II and Pericles programmes

In 2013, the Hercule II Programme (2007-13)
continued to support actions aimed at strengthening the operational and
investigative capacity of customs and law enforcement agencies to combat fraud
against the EU. The programme provided grants for assistance (EUR 7 million),
training activities, including two digital forensic training sessions (EUR 3
million), legal training and studies (EUR 0.7 million), as well as IT
support for the purchase of data and information made available to Member State
authorities (EUR 3.3 million). Beneficiaries reported that significant results
were achieved with the equipment purchased under the programme, in particular
in their fight against cigarette smuggling and corruption perpetrated against
the EU’s financial interests.

In 2013, under the
Pericles Programme for the protection of euro banknotes and coins against fraud
and counterfeiting, the Commission (OLAF) committed to 13 activities, including
conferences, seminars and staff exchanges, organised by it and/or by Member
States. These events focused specifically on increasing networking and regional
cooperation in sensitive areas, as well as strengthening cooperation between
different professional categories with a role in protecting the euro against
counterfeiting. 95.42% of the Pericles Programme’s EUR 1 million budget was
committed by the end of 2013.

4.1.12.2.          Multiannual
Financial Framework (MFF) 2014-20

Negotiations on the proposal[74] for the Hercule III programme were successfully concluded with a
political agreement in November 2013 and the adoption of Regulation (EU) No
250/2014[75]. For the Pericles 2020 programme[76], Regulation (EU) No 331/2014[77] establishing an exchange, assistance and training programme to
protect the euro against counterfeiting was adopted on 11 March 2014, and the
Proposal for a Council Regulation extending to the non-participating Member
States the application of Regulation (EU) No 331/2014 is expected to be adopted
by the end of 2014.

4.2.        Advisory
Committee for Coordination of Fraud Prevention (COCOLAF)

Under Article 325 of the TFEU, Member States
continued the close and regular cooperation between their authorities
responsible for fraud prevention. They were supported by the Commission,
including in the Advisory Committee for Coordination of Fraud Prevention
(COCOLAF)[78], which is a major forum for coordinating activities in Member
States and whose meetings are organised by OLAF.

In 2013, COCOLAF met twice and was consulted
by OLAF on the main developments in legislative and policy initiatives in the
fight against fraud, such as the initiatives on criminal law for protecting the
EU’s financial interests and the setting up of the European Public Prosecutor's
Office.

COCOLAF shared its views on the
implementation of the new OLAF regulation,[79] in particular with regard to the designation of an anti-fraud
co-ordination service (AFCOS) in all Member States, to facilitate effective
cooperation and exchange of information. OLAF has advised Member State administrations on designating their AFCOS.

COCOLAF’s expert groups were restructured to
further improve its overall functioning.

4.3.        European
Parliament resolution of 3 July 2013 on protecting the EU’s financial interests
– the fight against fraud – Annual Report 2011

The resolution[80] welcomed OLAF’s work on implementing the action plan on cigarette
smuggling[81] and the Protocol on eliminating illicit trade in tobacco products.

The Commission proposals to establish the
European Public Prosecutor’s Office (EPPO) and on the fight against fraud that
affects the EU’s financial interests by means of criminal law were outlined.
These initiatives aim to contribute to investigations, the prosecution of
offences and putting in place common definitions of criminal offences,
sanctions and the time-limitation for offences.

Work aiming to harmonise the legal framework
has been carried out to address the issues of comparability in anti-fraud
systems. The development of standard evaluation criteria is difficult as the
concept of ‘irregularity’ is defined according to national provisions. This
also presents a challenge in comparing data on the implementation of
obligations on fraud reporting.

The Commission supports the European Parliament’s
recommendation for Member States to make it easier for tax officials to access customs
data.

It adopted new provisions on irregular
payments, as requested by Parliament in discussions on the recovery system in the
agricultural sector.

OLAF and its Supervisory Committee agreed
temporary working arrangements in September 2012. Permanent working arrangements
were subsequently agreed in January 2014. The role of the Committee was
clarified in the new OLAF Regulation, which entered into force on 1 October
2013.

The Commission appreciates the Parliament’s
support for the Anti-Fraud Strategy for administrative arrangements with third
countries and international organisations..

The Commission is in complete agreement with
Parliament on the need for political non-interference in current legal
proceedings and on respecting confidentiality. It notes that no breaches of
fundamental rights or procedural guarantees were identified by the OLAF
Supervisory Committee.

OLAF notes that no thresholds were introduced
in the selection of cases for investigation, which was based on OLAF’s investigative
policy priorities (IPPs).

The Commission agrees that customs fraud
warrants special attention but does not share the view of Parliament that most
customs cases are attributable to corruption as less than 1% of OLAF customs
investigations involve suspected or established corruption.

The Commission does not agree with the
Parliament that steps on national declarations have not been taken since 2011.
Mandatory reporting in shared management was adopted as part of the 2012
Financial Regulation.

Simplification of the rules on public
procurement has not been as extensive as the Parliament hoped. The Commission
will continue to encourage and support Member States in their simplification work.

5.           Measures
taken by Member States to counter fraud and other illegal activities affecting
the EU’s financial interests

5.1.        Measures to combat fraud and other irregularities affecting the EU’s
financial interests

Each year, the Member States report to the
Commission on the main measures taken under Article 325 TFEU to combat fraud
and other illegal activities affecting the EU’s financial interests. In 2013,
Member States implemented various general and specific provisions to improve the
prevention and combatting of such fraud.

The vast majority of legislative measures
adopted by the Member States individually or as part of packages[82] concerned public procurement, and were mainly adopted in
combination with other measures related to financial crime, conflicts of
interest, corruption, fraud and organised crime with horizontal or sectoral
effects[83]. Ten Member States introduced specific measures or sets of measures
concerning public procurement in order to mitigate corruption and strengthen
transparency, the effectiveness of management, and the effectiveness of control
and audit[84]. These measures also included operational measures with a sectoral
effect[85].

Some Member States[86] also reported on implementing separate general measures related to
corruption, financial crime (including money laundering) and organised crime.
The Czech Republic and Greece introduced anti-corruption measures within their national
anti-corruption strategies.

Most Member States reported that they put in
place administrative measures[87], in general related to increased monitoring and desk checks carried
out by managing authorities, agencies or bodies involved in financial audit and
investigation. This included the adoption of new guidelines, instructions and
manuals.

Organisational measures adopted by Member
States related mostly to the reorganisation of existing bodies and the adjustment
of their competences, as well as inter-agency cooperation[88], general trainings and training on fraud awareness[89] .

Many Member States put in place operational
measures that mainly involved new or upgraded IT tools, web reporting and
hotlines[90], as well as strengthened risk indicators and more checks[91]. Four Member States reported enhanced cooperation with law
enforcement and judicial authorities[92].

5.2.        Implementation
of Article 3.4 of the new OLAF Regulation on designating the anti-fraud
coordination service (AFCOS)

The specific theme of the 2013 questionnaire is
the implementation of Article 3.4 of the new OLAF regulation[93], which requires Member States to designate an Anti-Fraud
Coordination Service (AFCOS) to facilitate effective cooperation and exchange
of information, including information of an operational nature, with OLAF.

The AFCOS may be responsible for coordinating
all national legislative, administrative and investigative obligations and
activities related to protecting the EU’s financial interests and must ensure
cooperation with OLAF and other Member States. If an AFCOS is vested with
investigative powers (administrative or criminal), it can usefully complement
and support OLAF’s investigations (on-the-spot checks) in the Member States.

So far, 23 Member States[94] have appointed an AFCOS[95]. These include all post-2004 Member States, plus Belgium, Denmark, Greece, France, Italy, the Netherlands, Austria, Portugal, Finland and the United Kingdom[96].

The four remaining Member States who have not
formally designated their AFCOS yet reported that the procedures were ongoing[97], and are expected to be finalised before the end of 2014, or within
two years[98]. Germany reported that the Federal Ministry of Finance[99] continues to coordinate matters relating to OLAF at national level.

All designated AFCOS are entrusted with
coordination responsibilities, which are particularly broad in Bulgaria, Czech Republic, Estonia, Croatia, Cyprus, Italy, Lithuania, Hungary, Malta, Romania, Slovenia, Slovakia and Portugal.

In eight Member States[100], the AFCOS are also entrusted with certain investigative powers. Cyprus, Romania, Portugal and Malta reported broad competences here. Cyprus, Lithuania and Romania specified that their AFCOS had investigative competences in the area of criminal
investigations.

Cooperation agreements between AFCOS and
judicial authorities have been set up in Bulgaria, the Czech Republic, Estonia, Croatia, Latvia, Malta, Romania and Slovenia. Cooperation happens on a case-by-case
basis in Belgium, France, Italy, Cyprus, Lithuania, Hungary, the Netherlands, Poland, Portugal and Finland.

AFCOS act as a contact point in the framework
of OLAF’s investigations in Belgium, Bulgaria, Cyprus, Lithuania, Malta, Portugal, Romania and Slovakia. Germany reconfirmed its cooperation arrangement
with OLAF[101].

The Commission will carefully monitor whether
each designated AFCOS complies with the requirements set out in Article 3.4 of the
OLAF Regulation and whether it ensures efficient and effective cooperation with
OLAF.

5.3.        Implementation
of the 2012 recommendations

In the 2012 report on the protection of the
Union’s financial interests, the Commission made a number of recommendations to
Member States, in particular on: designating the national Anti-fraud
Coordination Service (AFCOS); the need for appropriate criminal law sanctions
for fraud; the speedy adoption and transposition of the public procurement
directives; improving the low levels of reporting of fraudulent irregularities;
the need for effective systems of risk assessment for checks of high-risk
imports; and the adoption and implementation of the Multi-annual Financial
Framework (MFF) provisions on fraud prevention in spending programmes. Implementation
of these recommendations, presented during the 2013 reporting exercise, was generally
adequate, although some concerns were not fully addressed.

Most Member States designated an AFCOS but
some are still in the course of setting one up, discussing where in their
public administration to locate it, or have not yet taken steps to set one up
at all[102].

Although most Member States have adopted and
implemented criminal law legislation covering fraud, their follow up reports show
that there is still a lack of consistency in sanctions for fraud and the
limitation period for prosecutions across the EU.

A number of Member States outlined their
commitment to implementing the package of reforms included in the Public
Procurement Directives as soon as it is adopted, and indicated that
transposition of the Directives is advancing.

Three Member States were specifically mentioned
in the 2012 report on low reporting of fraudulent irregularities in cohesion policy.
  Greece outlined updates made to its internal procedures and significant
progress has been seen since these were implemented. Spain is examining a more
integrated approach to underpinning risk analysis mechanisms for the 2014-20
programming period. France highlighted that checks carried out by the
Commission and the Court of Auditors led to no findings of suspected fraud.

Most Member States said they take account of the
analysis included in the report and the accompanying Staff Working Documents
when planning checks and controls related to cohesion policy. Several Member
States outlined changes already made or changes planned as a result of the
report’s findings[103].

Member States were asked to step up their
work to address the risks highlighted in rural development investment projects.
  Sweden reported significant improvements to systems and payments in 2013,
after ‘serious or very serious shortcomings’ were identified following a 2012
review of procedures. Spain outlined the improvements it made, including in
inspection procedures and trainings for inspectors, following recommendations
by the Commission and the Court of Auditors. In its 2013 report on
infringements, Slovenia highlighted significant weaknesses, particularly in the
area of public procurement. It also reported that it had held seminars that aimed
to improve procedures.

As concerns revenue and customs controls for
high-risk imports, almost all Member States reported that adequate risk-analysis
systems were now in place and no changes had occurred since 2012.

A structured cooperative relationship between
managing authorities and relevant anti-fraud bodies is in place in most cases. As
concerns specific IT tools for analysing the risk of fraud, Belgium reported its intention to use ARACHNE in the next programming period. Denmark stated that it is considering using ARACHNE for structural funds and will try to use
IT tools in agriculture.

Most Member States reported that preparations
for implementing the Multiannual Financial Framework 2014-20 were advancing,
and that they remain committed to complying with the MFF provisions.

6.           Conclusions
and recommendations

As the mandate of the current Commission is
coming to an end, it is worth taking a retrospective look at the most
significant initiatives undertaken and the results achieved over the last five
years in the area of protecting the EU’s financial interests and the fight
against fraud.

6.1.        An
unprecedented set of anti-fraud measures

Unprecedented legal and administrative measures
and proposals have been taken, which profoundly impact on how the Commission
and the Member States deal with protecting the EU’s financial interests.

6.1.1.     The
beginning of the road: CAFS

In 2011, the Commission adopted its multiannual
Anti-Fraud Strategy (CAFS)[104]. Initially addressed to the Commission services, the Strategy was
pivotal in raising fraud awareness and bringing the issues of fraud detection
and prevention into the spotlight.

The Strategy led to Commission services and EU
agencies adopting sectoral anti-fraud strategies. The addition of anti-fraud
provisions to the new legal framework for spending programmes in 2014-20 was
also a significant achievement[105].

The actions implemented in the framework of the
Strategy have increased the Commission’s and national authorities’ awareness
and capabilities.

6.1.2.     The
reform of the European Anti-Fraud Office

In 2012, the European Anti-Fraud Office carried
out an extensive reorganisation to step up efficiency in its investigative
process and streamline governance and policy actions.

The adoption of Regulation (EU) No 883/2013
provided an improved legal framework which strengthens the rights of the persons
concerned by an OLAF investigation, and also enhances the necessary cooperation
with Member States through the appointment of the AFCOS.

Recommendation 1:

The four Member States who have not yet designated AFCOS are invited
to do so by the end of 2014.

6.1.3.     Measures
to fight fraud and corruption in public procurement

Public procurement is a “hot spot” for fraud
and corruption. In 2012, the Commission started to modernise the existing rules
to strengthen transparency and their anti-corruption purpose. In February 2014,
three directives were adopted[106].

In 2013, OLAF presented a study on the ‘Costs
of corruption in public procurement’, and in February 2014 the first EU
anti-corruption report was adopted[107]. Both reports contain recommendations and highlight best practices.

In addition, Member States reported a
significant number of legislative and administrative measures aimed at
strengthening work in this area.

Recommendation 2:

Member States are invited to take into account the recommendations included
in the anti-corruption reports and the best practices highlighted there.

6.1.4.     Sectoral
measures: revenue

In order to step up the fight against VAT
fraud, a directive was adopted in 2013 to implement the Quick Reaction
Mechanism to deal with massive and sudden VAT fraud. Established in 2010[108], the Eurofisc network started operational work in 2011 with the
progressive establishment of four working fields and specific risk-analysis
projects.

The fight against illicit tobacco products
gained momentum. In 2010, the two latest cooperation agreements with tobacco
manufacturers were concluded. In 2011, the Commission prepared an action plan
to fight cigarette and alcohol smuggling along the EU’s eastern border. In June
2013, a comprehensive EU strategy and an action plan to fight smuggling and
other forms of illicit trade in tobacco products were adopted. At the end of
2013, the Protocol to eliminate the illicit trade in tobacco products appended
to the World Health Organisation’s (WHO’s) Framework Convention on Tobacco Control
(FCTC) was finalised and signed by the EU.

6.1.5.     Sectoral
mesures: expenditure

In 2013, the main regulatory provisions for the
2014-20 spending programmes were adopted. For the first time, they contain a
specific requirement for national authorities to set up effective and
proportionate anti-fraud measures taking into account the risks identified.

National audit authorities and the Commission
will monitor the correct implementation of such requirements. In addition, guidelines
on fraud risk assessments and effective and proportionate ant-fraud measures
were prepared together with the national authorities[109].

Member States will need to respect these to
ensure that the EU’s financial interests are protected against fraud.

Recommendation 3:

The Commission recommends that Member States implement the legal
requirements according to the adopted guidelines.

6.1.6.     What
lies ahead

Three main legislative proposals have been
submitted to the co-legislators in previous years and are awaiting approval:

(1) 
a directive on the fight against fraud by means
of criminal law;

(2) 
a regulation to set up the European Public
Prosecutor’s Office;

(3) 
the amendment of Regulation (EC) No 515/97 on
mutual administrative assistance in the customs area.

The adoption of these proposals would complement
and strengthen the legal framework shaped in 2009-13. It would strengthen the
fight against fraud and would ensure stronger coordination with and between
Member States.

Recommendation 4:

The Commission invites the co-legislators to swiftly complete the
legislative work started and to adopt the pending proposals.

6.2.        Operational
results: a different pace

Although the legislative landscape has changed
considerably in the last few years, the analysis described in section 2.2 of
this report shows that the impact of these measures is not as evident as one
could have expected.

On the one hand, the overall trend in detecting
and reporting potential fraudulent irregularities in the last five years shows
a slow decrease, although this seems to have reversed since 2012. On the other
hand, the number of irregularities not reported as fraudulent has progressively
increased. The decreasing trend is more evident on the revenue side than it is on
the expenditure side.

6.2.1.     Revenue:
Quality of information and control strategies

On the revenue side, it is not clear whether the
trend is due to a shift towards detecting irregular cases or to the way in
which Member States classify cases. Other possible reasons could include: the new
fraud prevention measures implemented in Member States to identify
vulnerabilities; the possibility of Member States pursuing financial interests
without further investigation of the potential criminal offence; the
possibility that Member States’ controls strategies may need to include more
dynamic factors to better adapt to the changing environment.

Recommendation 5:

In view of the decreasing number of fraud cases reported, the
Commission recommends that Member States review their control strategies to
ensure that well-targeted, risk-based customs controls are in place to make it
possible to effectively detect fraudulent import operations.

Some quality issues have nonetheless been
identified when the reported information was analysed. When comparing the
number of fraud and irregularity cases for 2009-13 with the figures from
previous reports, it appears that there is a time gap between when the cases
are detected and when they are reported via the OWNRES application. Although
Member States’ work to regularly update the information on cases of fraud and
irregularities can only be welcomed, the timely reporting of fraud and
irregularity cases should nevertheless be respected.

Recommendation 6:

Member States should step up work to ensure timely reporting on and
updating of fraud and irregularity cases. To ensure effective monitoring and
follow-up, reliable information on fraud and irregularity cases should be
entered in OWNRES.

6.2.2.     Expenditure:
a developing landscape

On the expenditure side, the changes in the number of fraudulent
irregularities reported in the last five years are more difficult to interpret
(decreasing in 2009-11, and then increasing in the following two years). However,
it seems to be more linked to the fact that most of spending programmes are
multi-annual (structural and rural development funds and Pre-accession
assistance).

An unexpected change was observed in 2013 in
the agricultural sector (with significantly more cases of potential fraud
detected and reported); this could be the result of ad hoc investigations
and might not be confirmed in future years.

However, the role of the managing authorities
in detecting fraud has been growing, in particular since 2012. Their role
should grow further in the coming years, thanks to the recently developed
anti-fraud strategies that will be fully implemented in 2014-20.

Recommendation 7:

The Commission recommends that Member States correctly implement the
EU’s anti-fraud rules, based on carefully prepared and up-to-date fraud risk
assessments, and supported by adequate IT tools that will help to better target
checks.

Structured coordination (exchange of data and information) between
anti-fraud bodies and managing authorities has proved to be a best practice and
should be implemented in all Member States.

Fraud detection practices remain very different
between Member States and the Commission remains concerned with the low number
of potentially fraudulent irregularities reported by some countries. The
Commission will continue its work to raise fraud awareness and to provide guidelines
to improve the convergence of national systems to protect the EU’s financial
interests against fraud more efficiently.

Recommendation 8

As some Member States report very low numbers of fraudulent
irregularities, the Commission recommends strengthening their work on detecting
and/or reporting fraud:

-         in the area of cohesion policy: France, Spain, Ireland, Hungary, Denmark and the Netherlands;

-         in the
area of agriculture: Lithuania, the Netherlands, Portugal and Finland.

ANNEX 1 —
Irregularities reported as fraudulent

(The number of irregularities reported as
fraudulent measures the results of Member States’ work to counter fraud and
other illegal activities affecting EU financial interests; it should not be
interpreted as the level of fraud on the Member States’ territories)[110]

ANNEX 2 —
Irregularities not reported as fraudulent

ANNEX 3 — 2013
financial corrections implemented under shared management (EUR million)[111]

[1]               OJ L 248,18.9.2013, p.1.

[2]               (i) Implementation of Article 325 by the Member States
in 2013; (ii) Statistical evaluation of irregularities reported for 2013
own resources, natural resources, cohesion policy and pre-accession assistance;
(iii) Recommendations to follow up the Commission report on protection of the
EU’s financial interests — fight against fraud, 2012; (iv) Methodology
regarding the statistical evaluation of reported irregularities for 2013; (v)
Annual overview with Information on the Results of the Hercule II Programme in
2013; VI) Implementation of the Commission Anti-Fraud Strategy (CAFS).

[3]               The Irregularity Management System (IMS) for
reporting irregularities in the areas of shared management and the ‘recovery
context’ in the Commission’s accounting system (ABAC) for expenditure managed
by the Commission.

[4]               This implies that the cases initially reported by
Member States as potentially fraudulent may be dismissed by judicial
authorities.

[5]               For definitions, see Annex IV (Methodology).

[6]               The high percentage of amounts for which
irregularities were reported as fraudulent relative to the total payments for
Pre-accession assistance (last column of Table 1) is entirely due to the fact
that payments for this sector were very limited in 2013 (EUR 28 million) as the
assistance programmes were almost completed. Fraudulent irregularities detected
and reported in 2013 relate to actions financed under previous financial years.

[7]               For comparability reasons, figures for 2009-12 are
based on the data used to prepare the reports for those years.

[8]               On average, two years and nine months pass between the
time when a fraudulent act is committed and the moment it is detected. Another
average of fifteen months then pass before the irregularity is reported to the
Commission. However, these figures are significantly influenced by the
irregularities reported in the agricultural sector (20 months after detection);
in cohesion policy the time gap is much shorter (eight months).

[9]               Two in cohesion policy and the other in agriculture.
Three Member States reported that they had detected such cases: Czech Republic, Latvia (cohesion policy) and the Netherlands (agriculture). The latter is
related to the financial year 1999 and is linked to other similar cases
reported in previous years by France and Belgium. Due to its complexity and the
secrecy of investigations it was only reported in 2013.

[10]             See Annex 1.

[11]             The ratio of established fraud is the percentage of the
number of cases of established fraud over the total number of irregularities
reported as fraudulent (cases of suspected or established fraud) during the
five‑year period.

[12]             EAGF.

[13]             EAFRD.

[14]             The Commission services responsible for cohesion
policy, together with OLAF, have implemented a Joint Anti-Fraud Strategy since
2008.

[15]             SAPARD.

[16]             For a full description see ‘The OLAF report 2013’. http://ec.europa.eu/anti_fraud/documents/reports-olaf/2013/olaf_report_2013_en.pdf

[17]             Ibidem, Figure 16, page 21.

[18]             See footnote 4.

[19]             For comparability reasons, figures for 2009-2012 are
based on the data used for the reports of those years.

[20]             Data presented in this section reflect those published
in the Commission’s annual accounts, i.e. in Explanatory Note No 6 of the
Accounts of the Union, pending the audit by the European Court of Auditors.

[21]             Cases of a significant deficiency of Member State management and control systems in 2007-13, or of certified expenditure being linked
to serious irregularities.

[22]             Applied in three cases: (a) evidence of serious
deficiency in the management and control system with no corrective measure
taken; (b) certified expenditure linked to serious irregularity; or (c) a Member State’s serious breach of its management and control obligations.

[23]             Financial corrections follow three main steps: (a) in
progress: subject to change not formally accepted by the Member State; (b) confirmed/decided: agreed by the Member State or decided via a
Commission decision; (c) implemented: the financial correction is
carried out and undue expenditure corrected.

[24]             Subsequent amendments to the legal framework have
significantly changed the reporting rules for the current programming period.

[25]             Germany

[26]             Italy

[27]             Three related to Spain were still in force at the end
of 2013; one (Estonia) was lifted before year-end.

[28]             Spain

[29]             Czech Republic

[30]             Slovakia

[31]             Germany

[32]             Belgium, Czech Republic, Spain, France, Italy, Slovakia and the United Kingdom

[33]             France

[34]             For further details, see:
http://ec.europa.eu/anti_fraud/about-us/legal-framework/memo_en.htm

[35]             See also SWD ‘Implementation of Article 325 by the
Member States in 2013’.

[36]             COM(2012) 363 final.

[37]             COM(2013) 532.

[38]             See point 4.1.2.

[39]             Communication from the Commission to the European
Parliament, the Council and the European Economic and Social Committee of 6
June 2011 on Fighting Corruption in the EU — COM(2011) 308 final.

[40]             COM(2014) 38 final of 3.2.2014.

[41]             http://ec.europa.eu/anti_fraud/documents/anti-fraud-policy/research-and-studies/pwc_olaf_study_en.pdf

[42]             COM(2013) 796.

[43]             A7-2041/2014.

[44]             Regional Maritime Joint Customs Operation involving
Italian, Spanish and French customs services.

[45]             In the zone of the Western Mediterranean Sea between
Gibraltar and Sicily

[46]             Regional Joint Customs Operation of maritime
surveillance, involving: Belgium, France, Ireland, the Netherlands, Portugal, Spain, Germany and the United Kingdom (including Gibraltar, Guernsey, Jersey
and the Isle of Man).

[47]             Sailing from South America, the Caribbean, and West and
 North Africa, to the European area.

[48]             OLAF and Lithuania co-organised this JCO involving all
28 Member States.

[49]             OLAF and Romania co-organised this regional JCO that
was carried out at the Romanian/Moldovan and Romanian/Ukrainian borders.

[50]             FRONTEX, EUROPOL and EUBAM were
involved.

[51]             PCA (Priority Control
Area)-DISMANTLE was set up by DG TAXUD in close coordination and with the
support of OLAF. It addressed the risk of smuggling and diversion of cigarettes
and alcohol from specific identified third countries at the eastern border. It
also covered specific transit and excise risks as identified by Member States
experts. PCA was carried out from 1 February 2013 until 31 December 2013. It
was endorsed by the Customs Code Committee (CRM section) and was  based on the
Customs Code.

[52]             AFIS secure mail service

[53]             1 779 of those cases were forwarded to the WCO (non-nominal
data only), at the request of Member States

[54]             OJ L 201, of 26.7.2013, p. 1

[55]             Directive 2013/43

[56]             19 September 2013

[57]             (2013/755/EU), OJ L 344,
19.12.2013, p 1.

[58]             COM(2013) 324 final, 6.6.2013.

[59]             Monitoring the movement

[60]             To detect at which point the product fell off the legal
supply chain

[61]             20 December 2013.

[62]             The FCTC-Protocol is an international treaty annexed to
the WHO Framework Convention on Tobacco Control.

[63]             Philip Morris International (PMI), Japan Tobacco (JTI), British American Tobacco (BAT) and Imperial Tobacco Limited (ITL)

[64]             The text of the agreements is available at:
http://ec.europa.eu/anti_fraud/investigations/eu-revenue/cigarette_smuggling_en.htm

[65]             See also the OLAF report 2013.

[66]             See also point 4.1.4.

[67]             Directive 2014/23/EU of the European Parliament and of
the Council of 26 February 2014 on the award of concession contracts, Directive
2014/24/EU of the European Parliament and of the Council of 26 February 2014 on
public procurement and repealing Directive 2004/18/EC and Directive 2014/25/EU
of the European Parliament and of the Council of 26 February 2014 on
procurement by entities operating in the water, energy, transport and postal
services sectors and repealing Directive 2004/17/EC

[68]             COM(2013) 42 final.

[69]             OJ L 151, 21.5.2014, p. 1.

[70]             The Council adopted a general approach in October 2013
and the European Parliament its opinion in December 2013.

[71]             COM(2011) 376 final.

[72]             See the staff working document on implementing the
CAFS.

[73]             See paragraph 4.1.9

[74]             COM(2011) 914
final

[75]             OJ L 84,  20.3. 2014, p. 6.

[76]             COM(2011) 913 final.

[77]             OJ L 103, 5.4.2014, 1.

[78]             Established
under Commission Decision 94/140/EC of 23 February 1994, as amended on 25
February 2005.

[79]             See point 4.1.1.

[80]             http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P7-TA-2013-0318+0+DOC+XML+V0//EN&language=EN

[81]             The successful outcome of ‘Operation Barrel’ involved
the cooperation of 24 Member States and a number of external actors, resulting
in the seizure of 1,2 million cigarettes.

[82]             Legislative, administrative, organisational or
operational measures.

[83]             Single legislative measures concerning public
procurement were adopted by Bulgaria, the Czech Republic, Lithuania, Malta, Spain, Romania and Sweden, while packages of measures (legislative,
administrative, organisational or operational measures) were adopted by Estonia and Greece.

[84]             Germany, Greece, Italy, Cyprus, Latvia, Hungary, Malta, Romania, Slovenia and the United Kingdom.

[85]             Germany, Cyprus, Latvia, Hungary, Slovenia and the United Kingdom.

[86]             Belgium, Bulgaria, Denmark, Cyprus, Latvia, Malta, Poland Romania and Finland.

[87]             Belgium, Denmark, Germany, Estonia, Ireland, Greece, France, Croatia, Italy, Latvia, Luxembourg, the Netherlands, Romania, Slovenia, Slovakia Finland, and the United Kingdom.

[88]             Greece, Spain, France, Luxembourg, Hungary, Poland, Portugal and Romania.

[89]             Greece, Spain, Italy, Latvia and the United Kingdom.

[90]             Bulgaria, Estonia, Ireland, Greece, Luxembourg, Hungary, Romania and Slovenia.

[91]             Bulgaria, Ireland, Greece, Poland and Slovenia.

[92]             France, Lithuania, Malta and Romania.

[93]             Regulation (EU, EURATOM) No 883/2013, Art. 3.4.

[94]             Denmark, Greece, Austria, Portugal and the United Kingd om appointed its AFCOS service in 2014.

[95]             By June 2014.

[96]             Finland reported an interim solution. .

[97]             Ireland, Spain, Luxembourg and Sweden.

[98]             Spain.

[99]             Department EA6.

[100]            Belgium, Bulgaria, Cyprus, Lithuania, Malta, Portugal, 
Romania and Slovakia,

[101]            Concluded in April 2008 and naming the contact point for
OLAF.

[102]            See section 5.2.

[103]            Cyprus reported that it has no formal procedures for
taking these documents into account but outlined its intention to changes this.
  Slovakia believes this recommendation does not reflect risk areas that
require targeting by its audit authority.

[104]            See section 4.1.11.

[105]            See section 6.1.5.

[106]            See section 4.1.9.

[107]            See section 4.1.4.

[108]            Regulation (EU) No 904/2010.

[109]            In 2013 and 2014.

[110]            For the amounts related to agriculture in the Netherlands, see footnote 9 and paragraph 3.4.1 of the Commission staff working document on
‘Statistical evaluation of irregularities’.

[111]            Row and column totals may not correspond to the sum of
values displayed due to rounding.