# EUR-Lex - 52003DC0445 - EN

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# 52003DC0445

**Commission report - Protection of the financial interests of the Communities and fight against fraud - Annual report 2002 /* COM/2003/0445 final */ **

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COMMISSION REPORT - PROTECTION OF THE FINANCIAL INTERESTS OF THE COMMUNITIES AND FIGHT AGAINST FRAUD - ANNUAL REPORT 2002

CONTENTS

Introduction

Title I - The activities of the Community for the protection of the financial interests of the communities and the fight against fraud: major developments in 2002

1. An overall and coherent anti-fraud policy

1.1. Associating the applicant countries with a prevention policy and the fight against fraud

1.2. Strengthening the legal instruments for detection, control and sanctions

2. Cooperate with the Member States and non-member countries

2.1. Cooperation with the competent authorities in the fight against certain forms of criminality

2.2. Cooperation with non-member countries

3. An inter-institutional step to prevent and fight against corruption

3.1. The interinstitutional framework

3.2. Disciplinary and specialised authorities

4. The strengthening of the criminal law dimension

4.1. Penal sanctions in the field of the protection of financial interests

4.2. Judicial cooperation in penal matters

5. Follow up of the action plan 2001-2003

Title II - Implementation of Article 280 by the Member States in 2002 - Measures taken to protect the Community's financial interests-

6. Texts contributing to the implementation of Article 280 of the EC Treaty - principal legislative, regulatory and administrative developments

7. Texts contributing to the implementation of the Convention on the protection of the Communities' financial interests

8. Organisation of departments responsible for protecting the Communities' financial interests

9. Coordination between departments within the Member States

Title III - Statistics and Analyses

10. The situation in 2002

10.1. Introduction

10.2. Cases notified by the Member States

10.3. Cases under investigation by OLAF

11. Specific analysis: trends

12. Financial monitoring

STATISTICAL ANNEXES

ANNEXES

ANNEXE TITLE I : FOLLOW UP OF THE 2001-2003 ACTION PLAN

ANNEXE TITLE II : Implementation of Article 280 by the Member States in 2002

Introduction

The EC treaty calls on the Commission, in cooperation with the Member States, to transmit each year to the European Parliament and to the Council a report on the measures taken to implement its Article 280. To illustrate the principle of shared responsibility of the Member States and the Commission for the protection of the Community's financial interests, the report, as last year, presents this action from three aspects: Community initiatives, measures taken by the Member States, the results of the operational action taken by the Member States and by the Commission to detect the attacks on financial interests and to fight against fraud. The Commission is more particularly responsible for designing the policy of protection of financial interests and presenting to this end political and legislative initiatives.

The first part of the report follows the logic of the Overall Anti-Fraud Strategy 2000-2005 [1] but focuses on the outstanding facts in this activity during 2002. In this part, one year before accession, the Commission wished to emphasise the efforts undertaken to integrate the candidate countries in this approach. Moreover, the more specific elements provided by the Member States this year help highlight the importance of a good organisation of different levels of checks and controls, including investigations for the specific purposes of the fight against fraud. The presentation is punctuated with some exemplary cases.

[1] For an overall strategic approach of protection of financial interests and the fight against fraud (COM (2002) 358 final of 28.06.2000).

Moreover, the report provides a full and detailed summary of the measures planned for 2002 in the 2001-2003 Action Plan [2] which is annexed: the summary table thus gives the essential elements in terms of responsibility, timetable and follow-up to appreciate the state of progress of this programme. As for 2004-2005, the Commission will prepare a new Action Plan on the basis of the Overall Strategic Approach 2000-2005 which will of course take into account the recommendations made in the Report on the Evaluation of the activities of the European Anti-Fraud Office [3], the opinion of the Supervisory Committee and the guidelines defined by the other institutions.

[2] See the Action Plan 2001-2003 on the protection of financial interests (COM (2001) 254 final of 15.05.2001) on the implementation of the overall strategy for 2001-2005.

[3] Evaluation Report of the activities of the European Anti-Fraud Office, under Article 15 of Regulations (EC) N°1073/99 of the European Parliament and the Council and (EURATOM) N°1074/99 of the Council (COM(2003) 153 of 02.04.2003).

Part II of the Commission report covers specifically the measures taken by the Member States to implement Article 280. This presentation includes certain information communicated by the Member States on their control activity and its results [4]. It reports on their efforts to coordinate their inspection and investigation services from the threefold angle of the monitoring of operations, audit of systems and anti-fraud investigations.

[4] Specifically, the Member States'annual reports provided by Article 17(3) of Council Regulation N°1150/2000 of the Council of 22 May 2000 implementing Decisin 94/728/EC, Euratom on the system of own resources (OJ L130 of 31.05.2000).

Part III of the Commission report presents the statistical data concerning the level of frauds and other irregularities as well as the results in terms of recovery and of action by the Member States and the Commission departments.

These results are analysed from the point of view of the detection of frauds and other irregularities, as they are communicated by the national administrations in accordance with the obligations provided for by the sectoral regulations. Given the incomplete and not very homogeneous nature of the data transmitted last year, the Commission first gives an account of the progress achieved in the electronic communication of data. Subsequently, the Commission endeavours to carry out a first analysis of the irregularities communicated, according to a budgetary (income/expenditure) and sectoral approach which reflects the major Community policies.

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As a general rule, the 2002 report shows the interlinking of the responsibility between the different actors and the convergence in the different levels (Community and national). The information provided by the Member States [5] allows for better reporting on the activity of the different services involved in the protection of financial interests. The analysis carried out by the Commission shows that risks are better covered, especially from the point of view of checks and controls, whether they be controls of the regularity of operations, audit of systems, investigations and prosecutions. The coherence that it notes between the various functions, including specific action against fraud, in line with the four axes of the Strategic Approach, appears at both the Community level (Title I) and the national (Title II). Title III throws further light, on the basis of frauds and other irregularities notified by the Member States, on the control and investigation systems, their adaptation to the risks and their results from the point of view of recovery. The presentation therefore consolidates the complementarity logic recommended by the Overall Strategic Approach of the fight against fraud, which makes it possible for the Commission, in addition to the action proper of the Member States, to implement the means at the disposal of the Community.

[5] On the basis of this information, alignments are possible with some findings highlighted in the report on the implementation of former Article 209 A of the EC Treaty (see comparative analysis of the reports supplied by the Member States on national measures taken to combat wastefulness and the misuse of Community resources (COM(95) 556 of 13 November 1995) and its supplement on inspections and administrative penalties (SEC (2000) 843 final of 24.05.2000).

Title I - The activities of the Community for the protection of the financial interests of the communities and the fight against fraud: major developments in 2002

The Commission established its general political objectives as regards protection of the financial interests of the Community in an Overall Strategic Approach adopted on 28 June 2000 [6] for the period 2001-2005. It reports on them regularly, in particular in this report. The approach includes Community initiatives in this area, including actions involving Title VI of the Treaty on European Union, in particular when they are related to the protection of the Community's financial interests. The objective is to develop a legislative and regulatory framework for the protection of financial interests adapted to all European policies, which allows for cooperation and the partnership with those working on the ground inside and outside the Union. Some audit or investigation cases illustrate the reality of the fight against financial crime on the ground to prevent, detect but also to penalise those responsible and repair the financial damages where it is possible.

[6] COM (2000) 358 final of 28.06.2000.

The 2002 execution of the measures planned in the Action Plan 2001-2003 is presented in detail in the annex to Title I. The development that follows highlights some major developments in the 2002 action of the Commission, following the four themes of the Overall Strategic Approach as well as certain horizontal themes such as the overall organisation of protection of financial interests from the aspects of detection, checks and sanctions (financial, administrative and judicial follow up) [7]. Particular attention is focused on the final preparations for accession by the candidate countries.

[7] Thanks to the useful elements provided this year by the Member States on the organisation of their checks and the coordination of their services. See Title II, point 8 of the report and its Annex, points 3 and 4, in particular.

1. An overall and coherent anti-fraud policy

1.1. Associating the applicant countries with a prevention policy and the fight against fraud

By regrouping financial control, sound financial management, the protection of the Communities' financial interests and the fight against fraud in one specific chapter of the acquis (Chapter 28 - "Financial Control"), the Commission emphasises the importance which it accords to these countries managing their budget in accordance with sound financial management.

In its strategy document of 9 October 2002 entitled "Towards the enlarged Union" and presented at the same time as its regular reports on the progress achieved by each applicant country on the route to accession, the Commission once again stressed that any Community financing was dependent on compliance with all the conditions ensuring a sound management of Community funds [8]. That involves not only complete alignment with the Community legislative 'acquis', but also - perhaps more importantly - the existence of sufficient institutional guarantees.

[8] Also see item 43 of the Resolution of the European Parliament on the 2001 annual report concerning the Protection of financial interests adopted on 13 March 2003.

Indeed, the strategy document stipulates that applicant countries have to strengthen their administrative structures and capacities to be in a position to ensure the protection of the financial interests of the Community from the second half of 2003.

The Commission's support activities within this framework were situated mainly at two levels. Part of the Commission's support was focused on the encouragement of the applicant countries to develop upstream sound financial management for protection of the Communities' financial interests, by following a control and audit model, applicable not only to Community funds but also to income and national expenditure. Other activities were specifically aimed at strengthening the protection these interests and the fight against fraud in the applicant countries. The progress achieved in these two, closely linked fields, was the subject of a sustained follow-up by the Commission under Chapter 28 of the 'acquis', and of regular reporting to the Parliament and the Council. It should be noted that the protection of the Community's financial interests is fully taken into account in the other chapters of the "acquis" [9] where this proves necessary. In this report, the Commission will however restrict itself to highlighting the actions undertaken in the specific chapter on Financial control (Chapter 28).

[9] The Commission also followed the progress achieved on protection of financial interests or in linked areas in other chapters of the acquis, in particular chapters 24 (cooperation in justice and home affairs), 25 (Customs Union) and 29 (financial and budgetary provisions). Regarding traditional own resources for example, the Commission carried out actions on chapter 29, aimed at ensuring that administrative and accounting systems in the ten accession countries meet the Community requirements in the area.

1.1.1. Control of the pre-accession instruments (PHARE, SAPARD and ISPA [10])

[10] The PHARE programme, set up in 1989 to help Poland and Hungary, now covers the ten candidate countries of central and eastern Europe and contributes some 11 billion euros in cofinancing for technical assistance, investment support, strengthening of public institutions and administrations and the promotion of economic and social cohesion. SAPARD (Special pre-accession programme for agriculture and rural development) aims to help candidate countries deal with the problems of the structural adjustment in their agricultural sectors and rural areas, as well as in the implementation of the acquis communautaire concerning the CAP (Common Agricultural Policy) and related legislation.

Over the last ten years, as relations with the accession states strengthened, the Community's assistance changed in nature and increased in extent. By the late 1990s, PHARE [11] was exclusively targeted at the accession process, particularly in the fields of Institution Building and alignment with the acquis. This was accompanied by increasingly rigorous financial management systems. In a dynamic decade of transition, the accession states transformed themselves into emerging market economies. The Community's annual assistance in 2000 doubled but it also brought about both the additional instruments of SAPARD& ISPA, and more demanding management and control requirements, accompanying the candidate countries' increasing responsibilities in this respect.

[11] The PHARE programme encompasses the 10 candidate countries of central and eastern Europe : Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia and Romania. Malta and Cyprus benefit from a specific financial instrument installed by Regulation (EC) 555/2000 of 13 March 2000 on the implementation of operations in the framework of the pre-accession strategy for the Republic of Cyprus and the Republic of Malta, (OJ L 068 , 16/3/2000).

As regards PHARE, management (DIS) has already been decentralised for several years, and the transition towards an extended implementation system (EDIS) is underway. Under EDIS, the Commission can waive the current requirement for ex ante approval of the tendering and contracting of projects.

The rate of progress varies substantially in the different countries. The eight acceding states from central and eastern Europe should be making applications for their implementation agencies in late 2003 and early 2004. Cyprus and Malta should be granted full waiver of ex-ante control in 2003. The obligation to complete the transition to fully decentralised management for PHARE by the date of accession is stipulated in a clause in the Accession Treaty.

In order to ensure a high degree of complementarity and monitoring of the functioning of EDIS, the capacity for delegation will be maintained in each new Member State for up to one year after accession.

SAPARD is the first EU external aid programme to be implemented in a fully decentralised manner. This means that once the SAPARD Agency receives the Conferral Decision from the Commission, it becomes responsible for calls for grant applications, for project selection, for grant approval, for contracts with beneficiaries, for treasury and debt management, for payments, for keeping accounts, and for ex-post controls. On the basis of national accreditation, the National Fund approves the management and control systems implemented according to the criteria of the Multi-Annual Financing Agreement. The National Authorising Officer as Head of the National Fund bears the full financial responsibilities and liabilities for Community funds. The Commission inspectors carry out audits to determine, on a basis of reasonable assurance, that the system will work as planned. If the outcome of the audit is positive, a draft decision is made granting a Conferral of Management to the SAPARD Agency, the National Fund and the measures requested in the National Accreditation Act.

In 2001 and 2002, the Directorate General for Agriculture granted provisional Conferral to all eight SAPARD Agencies [12] in the acceding countries as well as to Bulgaria and Romania.

[12] Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia in respect of the functions and criteria as stipulated in the Council Regulations 1258/1999, 1266/1999 and1268/1999 and Commission Regulation 2222/2000. The Conferral audit ascertained that the national procedures are in compliance with the Multi-annual Financing Agreement and in particular that

Subsequently, the Commission departments will carry out Clearance of Accounts audits on the accounts and the conformity of expenditure, and make financial corrections as necessary.

The Commission has been stringent in its requirements concerning SAPARD, in order to ensure that, after accession, there will be reasonable assurance that European Agriculture funds are properly managed.

In general, better awareness of modern sound financial management within the candidate countries can be seen and new methodologies have been introduced. With the completion of the Conferral of the management of SAPARD aid, acceding countries have achieved the basic conditions that will allow them to take full responsibility for the implementation of EU agricultural funds.

Steady progress has also been made as far as ISPA is concerned. The principal requirements for both financial management and control and the treatment of irregularities follow closely those applicable to the Cohesion and Structural Funds. The key elements relate to internal financial controls which ensure the accuracy of declared expenditure, adequate internal audit capability, a sufficent audit trail and appropriate treatment of irregularities. The setting up of satisfactory systems for ISPA is therefore a significant step in the preparation for future management of the Cohesion Fund and Structural Funds. This is given a further dimension by the procedure envisaged for the candidate countries to move towards EDIS for ISPA. The granting of a conferral of EDIS is subject to a prior inspection whereby the Commission ensures compliance with specific conditions and criteria which relate principally to sound financial management and control.

In 2002, the Commission completed the audit work started the previous year by carrying out a second cycle of systems audits in the ISPA countries to assess the adequacy of the systems established for management of ISPA funds and their compliance with Community requirements. By following up on previous audits and completing the coverage of the implementing bodies and systems, the Commission ensured that the candidate countries were fully aware of the standards applicable for managing Community funds and it was verified that the key elements of the management and control systems were in place. When it was recognised that these were deficiencies, within a deadline, recommendations were made for their correction.

One candidate country submitted its formal application for EDIS at the end of 2002. A significant number of other countries should complete their preparations for EDIS in 2003.

The Commission will also give a high priority to Financial Control in its November 2003 Inspection Reports and in the Evaluation Report on the implementation of commitments necessary for programming the structural funds. This will pay particular attention to the progress made in financial management and control in the context of the Action Plans, with a view to accelerating corrective action where required.

1.1.2. Development of a general financial control and audit capacity ("Public Internal Financial Control - PIFC")

The Commission's interest in financial control and audit in the candidate countries goes beyond the control of the pre-accession instruments. Indeed, in application of the principle of equivalent protection of national and Community funds, the Commission has actively encouraged candidate countries in developing a general financial control and audit capacity that can guarantee sound financial management in the public sector, regardless of whether Community or national funds are at stake.

The request for assistance in this area originally emanated from the applicant countries, which asked for guidance on the development of effective internal control structures within the framework of their transition towards modern economic and financial policies.

Being interested directly in the establishment of sound financial management by the applicant countries before and after accession, the Commission has in this framework developed a modern internal control approach (Public Internal Financial Control - PIFC), based on the experience acquired within and outside the Union. This approach includes three basic concepts: the managerial responsibility for sound financial management of national budgetary funds, the development of internal audit capacities, and the establishment of a centralised body, responsible for the development and harmonisation of the organisation and the methodologies of control and audit systems.

These principles of PIFC broadly coincide with the principles applicable to the sound financial management of Community funds.

The Commission also gave its support to the establishment of appropriate services, in particular the internal audit services within all the ministries and services for the centralised harmonisation of internal control throughout the public sector.

Applicant countries obtained at the same time more targeted support from national experts under "Twinning" conventions, or from specialised agencies.

All these efforts resulted in uniform strategies, policies and legislation on internal control in the applicant countries. Although applicant countries have made different degrees of progress, the governments concerned were generally very supportive of the internal control model suggested by the Commission.

The legislation concerned being largely in place in the majority of the applicant countries, attention henceforth was moved from the analysis and development of legislation towards training and the implementing measures.

1.1.3. The reinforcement of the protection of the EC's financial interests and the fight against fraud in the applicant countries

In accordance with the commitments entered into during the negotiations, and in close consultation with the Commission, applicant countries considerably intensified their efforts in 2002 to set up effective anti-fraud coordination services (Anti-Fraud coordination service, or AFCOS), required to coordinate the legislative, administrative and operational activities linked with the protection of the financial interests of the Communities.

By the end of 2002, such coordination services were established in eleven applicant countries, Estonia, Lithuania, Cyprus and Slovenia having defined such structures in 2002. [13] In the other applicant countries, where services of this type already existed before, the activities carried out in 2002 primarily aimed to make the anti-fraud coordination services completely operational. This implied, in particular, a more precise definition of the AFCOS' operating procedures and the relations between the AFCOS and other institutions and bodies involved in the protection of the financial interests of the Communities, as well as between the AFCOS and the European Anti-Fraud Office. In addition, the physical operational framework of the AFCOS was strengthened, training activities were carried out and staff was recruited. These measures all contributed to a reinforcement of the candidate countries' administrative capacity to react swiftly to possible indications of irregularities and suspected fraud. By making their anti-fraud structures more effective, the candidate countries were thus in a position to demonstrate their commitment to the protection of Community funds.

[13] Bulgaria adopted a decision on this subject in January 2003.

In order to enable the authorities of the applicant countries to exchange their first experiences concerning the creation and the operation of their anti-fraud coordination services, a first stage was passed with the organisation of regular meetings bringing together representatives from the candidate countries' AFCOS' and OLAF were organised. A first meeting of this type took place in Brussels on 7 and 8 October 2002. In addition to their intelligence and investigation services, the candidate countries' prosecution services were also invited to attend. This meeting was followed by two parallel working sessions involving on the one hand prosecutors from the applicant countries and magistrates from the "magistrates, judicial advice and follow-up" unit of the Office and, on the other hand, representatives of the candidate countries' AFCOS', investigators from the Office and members of the intelligence services. Further such meetings took place thereafter.

These meetings represent a useful forum to exchange information and experiences and to follow the efforts made by the applicant countries to strengthen their administrative structures with a view to protecting the financial interests of the Communities.

Such activities as well as other forms of cooperation between OLAF and the candidate countries will receive in future aid under a specific programme, the multi-country "anti-fraud" PHARE [14] programme adopted on 16 May 2002. This programme provides for multi-annual assistance (a total of 15 million euros) in three principal fields: the creation of anti-fraud structures, the installation of communication networks and databases and the strengthening of the operational know-how of the anti-fraud coordination structures and of the police and prosecution authorities with whom they cooperate. The implementation of the programme started in 2003 [15].

[14] Multi-country PHARE concerning the fight against fraud affecting the financial interests of the Community (PH/2002/1412).

[15] Outside the framework of the PHARE Multi-country anti-fraud Programme, PHARE support in the past, present and future in the fields of Justice and Home Affairs, Customs and Borders, has a direct bearing on increasing overall capacity in the fight against fraud.

At operational level, the Office has, in specific cases, been cooperating for some time already with the applicant countries' authorities as the following case illustrates.

Fraud by a consulting company - External aid to applicant countries

In July 2002, in accordance with Article 3 of Regulation No 1073/99, the European Anti-Fraud Office (OLAF) launched an external investigation on the basis of information received from the Community delegation in Croatia. The information showed the possibility of double invoicing by a German firm within the framework of financing a consulting company as regards harmonisation of national law with Community law. The financial impact is estimated at approximately euros 110,000, mainly on PHARE and OBNOVA financing. The Office found evidence of an irregularity connected with projects managed by the German firm in Slovakia, the Czech Republic and Croatia. These irregularities included overcharging and double invoicing. The Office also alerted the Czech prosecutor and the Czech police proceeded to a search of the offices, seizing computers, data and several thousand documents. The evidence collected by the Office was presented to the Prosecutor General in Berlin. An arrest warrant was issued. The German authorities arrested a suspect, the court case being due to take place in 2003.

The Community delegation brought to an end the project in Croatia due to the lack of results in August 2002, shortly after the beginning of the investigation.

The projects in the Czech Republic and Slovakia were completed to the satisfaction of the Czech and Slovak authorities, under the arrangements for decentralised management of Community funds.

Since then the Commission has taken action to suspend payment to the Czech authorities of an amount equivalent to all outstanding funds in two ongoing projects by the same German firm in the Czech Republic, to protect the Community's financial interest, pending outcome of the Berlin Court case.

In order to facilitate the communication on irregularities, as envisaged by the pre-accession instruments (PHARE, ISPA, SAPARD) and Community legislation, the Office undertook to equip the administrations of the applicant countries with terminals of the AFIS anti-fraud information system [16]. Fifteen terminals of this type are currently in operation, covering ten applicant countries. At the same time, guidance was provided on the communication of irregularities under the pre-accession instruments, in order to ensure a clear understanding of the procedures which should be applied.

[16] On AFIS, see also point 2.1.

1.2. Strengthening the legal instruments for detection, control and sanctions

An effective policy of protection of financial interests is achieved through the mobilisation of all the authorities concerned at Community and national level. The management of 80 % of the Community funds is decentralised. The collection of the own resources of the Community is the responsibility of the Member States [17]. In addition, the Commission departments manage a part of the budget directly while guaranteeing the sound financial management of the system.

[17] See Part II of the report where the latter give an account of the organisation of their services in managing funds, checking they were appropriately used, collecting duties and recovering the amounts received without justification and lost income.

The development which follows shows how the overall system of control, follow-up and sanctions set up at the level of the Member States and the Community aims to guarantee that the different levels of responsibility work in a complementary way, while respecting the principles of effectiveness and equivalence of the protection of the financial interests on the territory of the European Union. This echoes the presentation made this year by the Member States, in Title II of the report, of the organisation of their checks and the coordination of their departments involved in the protection of financial interests and certain analyses presented in Title III concerning the notification of frauds and other irregularities.

1.2.1. Detection and control

As regards controls, as is shown in part II of the report, the Member States first contribute to the protection of the financial interests by a broad monitoring of operations (customs, transactions, programmes or plans) and a systematic checking of the regularity of procedures. This approach is supplemented by systems audit strategies and control of the use of funds. Finally, on the basis of suspicions of fraud, administrations detect the irregular facts or behaviour which can lead to bringing individual responsibilities into question at administrative or penal level. Title III (point 11.3 in particular) in this regard, enables it to be seen, on the basis of the communications from the Member States of frauds and other irregularities, that in certain sectors, the overall control system selected by a Member State influences recovery (size of the payments suspended before closure of programmes, share of recoveries a posteriori). Suggestions are also made (point 11.2 in particular) to adapt the control and investigation strategies to the type of risk (cases with significant amounts, sectors or products with a high risk of irregularity).

At Community level, checks for the protection of financial interests are structured in a similar way. The checks on the regularity and sound application of applicable legislation are carried out, in coordination with the Member States, by the authorising Directorates-General, also responsible for checks on the use of funds and the systems audits provided for by the various sectoral regulations, with the national administrations. The partnership is often very detailed, as it appears below. In the event of problems, the Commission has to take the appropriate measures.

Development of the Joint Audit Arrangement in traditional own resources

Under the Joint Audit Arrangement, the Commission and the internal audit services of certain Member States, cooperate in the field of traditional own resources, to facilitate the exchange of experience, expertise and techniques as regards internal audit. According to this approach, the internal audit service of the Member State concerned carries out the check in accordance with an appropriate module [18] covering the preselected customs and/or accounting field. Once it has completed its work, it sends its report at the same time to the national administration and the Commission. The latter examines the results of the audit work carried out and checks the working papers and the methodology used. The Commission then draws up its own report. Possible anomalies - specific or structural - are the subject of a budgetary regularisation under standard conditions. If the analysis of the systems were to make it possible to qualify an anomaly as structural, the Commission will be informed of the measures proposed by the Member State with a view to mitigating the underlying weaknesses of the system. The Commission and the Member States, in particular Denmark, Austria and the Netherlands who are the pioneers, found a substantial benefit to carrying out controls within the framework of such an approach. Seven checks have already been carried out with these Member States in this connection, including three in 2002.

[18] The following modules are currently available: Free circulation, including A accounts (external transit (T1 and TIR), warehousing, generalised preferencial schemes, inward processing, separate accounts.

Audit missions in the Structural Funds

Thus, as seen from the data provided by the Member States as regards control staff [19], the national systems of detection, communication and follow-up of irregularities show certain weaknesses. Improvement in this field was identified as a priority [20] and the Commission committed itself, within the framework of the discharge procedure of 2000, to carry out audits covering the application of Regulation 1681/94 for the Structural Funds, and Regulation 1831/94 for the cohesion fund. These audits cover, in particular, 1) the checking of the national irregularity notification systems for the Structural Funds and the cohesion fund, and 2) the application of Article 8 of Regulation 438/2001 and of Article 3 of Regulation 448/2001, concerning respectively the accounting of the recoverable amounts and the financial correction procedures.

[19] See Title II of the report

[20] See the White Paper on the reform (Action 97) and the Commission Communication on 7 August 2001 on this subject (Doc. C (2001) 2517 concerning the improvement of the financial follow-up and control of the Structural Funds). See also Item 1.2.2 of the 2001-2003 Action Plan.

The conclusions and recommendations of these audits, carried out between November 2002 and January 2003, will be notified to all the Member States for what concerns them as well as to the European Parliament, the Council and the Court of Auditors in 2003.

Different types of control are involved in the protection of the Communities'financial interests and coordination between the different responsible services is essential. Thus, anomalies detected in a routine control or at the time of an audit can lead to a more detailed investigation on the operators' individual responsibility. This last type of action which has the purpose of detecting facts or irregular acts liable to lead to administrative or criminal proceedings is the responsibility of the European Anti-Fraud Office [21]. The following investigation illustrates this complementarity of checks:

[21] See the progress report on the activities of the European Anti-Fraud office (OLAF) previously mentioned (COM (2003) 153 of 27.3.2003), in particular point 1.1.2

Case concerning fraud in the fisheries sector

During 2002, information reached OLAF concerning the non-observance by a company of transformation of the minimum price to be paid to the fish producers for the marketing year 2000/2001 in Greece. Within the framework of an external investigation on the basis of (EC) Regulation N°1258/99 regarding the Common agricultural policy and of (EC) Regulation N°2185/96, the Office carried out checks on the spot at certain economic operators and verified information. Irregularities concerned in fact at least 8 cooperatives. In January 2003, the investigation report estimated the amount to be recovered at 1,472,033 euros. The Greek judicial authorities were alerted and opened an investigation . As it does as a general rule, the Office, in association with the Directorate General Agriculture, sent, in February 2003, its recommendations to the Greek Ministry of Agriculture. A judicial and administrative follow-up was put in place.

The different approaches to controls described above are complementary but, as it emerges from Title II of the report, the very limited share (8% on average, all sectors included) of manpower assigned at national levels to such anti-fraud controls (investigation services of the ministries, police and judicial authorities) may indicate that insufficient account has been taken of the criminal law dimension of serious acts prejudicial to Community public finance. In this context, OLAF endeavours, in accordance with the principle of subsidiarity, to encourage cooperation with the national authorities and to structure its own investigative capacities, where the action of the Member States seems less effective. It has been assigned its own administrative powers of investigation by the legislator and, although the investigations targeted at operators and companies [22] remain difficult to organise on the ground [23], it has the capacity to establish direct links with the police and judicial authorities.

[22] The sectoral dispersal of legal bases applicable for on the spot checks and inspections, mentioned in Article 9 of Regulation (EC, Euratom) n° 2988/95 leads the Commission to envisage, as a complement to the inquiries proper of OLAF (see previous footnote), in 2003 to follow up the 2001-2003 Action Plan (Item 1.2.2) and propose a Council Regulation. Without affecting existing mechanisms, this regulation would create a single new base for antifraud investigations conducted by the national investigation services upon OLAF's request and would facilitate an effective and harmonised follow up of the results of the investigations, in particular regarding the rules of confidentiality and of data protection. See the progress report on the activities of OLAF previously mentioned, recommandation n°3, under item 1.1.2.

[23] In particular checks on the spot envisaged by Regulation (EC) n° 2185/96, the Community anti-fraud missions in third countries under Regulation (EC) n° 515/97. See the evaluation report under Article 15, recommendation n°3. In order to reinforce OLAF's own investigation powers, the Commission considers extending this framework to direct expenditure.

1.2.2. Ensuring more efficient financial follow-up and reinforcing sanctions

The Commission is required to follow the procedures for recovery of Community funds unduly received in the Member States and to give an account of them in the annual revenue and expenditure account [24]. Under this chapter, significant measures on recovery more adopted in 2002. Moreover, the important effort carried out by the Commission since 2000 to renew the rules of financial management within the institutions led in 2002 to the adoption of the new financial regulation [25].

[24] In compliance with the Financial Regulation, the Commission produces for the 1st May the consolidated annual revenue and expenditure account of the preceding year.

[25] 5 New financial Regulation: Regulation (EC, Euratom) N°1605/2002 of the Council applicable to the General Budget of the European Communities (OJ L248 of 16.9.2002); new implementing arrangements: Regulation (EC, Euratom) N°2342/2002 of the Commission establishing the implementing provisions of the (EC, Euratom) Regulation N°1605/2002 of the Council Regulation (OJ L357 of 31.12.2002).

1.2.2.1. Improving effectiveness and clarifying responsibilities in the field of the decentralised management of Community funds

From the financial point of view, it is for the Member States or the non-member countries to carry out the recovery from the final beneficiaries and to pay the amounts concerned to the Commission (see Title III for the statistics by area). This concerns funds unduly paid under Community policies implemented in a decentralised manner (EAGGF-Guarantee, Structural Funds, external aid). Under the terms of existing legislation, the Commission is required for its part to follow the procedures for recovery carried out by the Member States in this framework, and, if necessary, to apply the clearance procedures [26]. The slowness of these procedures and the accumulation of Community debts are a subject of concern both for the Commission, the Court of Auditors and for the Budgetary Authority, in particular the European Parliament which raises it regularly in its resolutions on the protection of financial interests [27].

[26] On 30 June 2002, for the period 1972-2000, the Community debts related to the regularisation of advance payments or following mistakes, formal or substantial irregularities, and more rarely, frauds, exceeded 3 billion euros: 2,3 billion euro for EAGFF-Guarantee, 387 million euro for the Structural funds and 373 million euro for direct expenditure (see COM (2002) 671, page 3)

[27] Items 6 to 8 of the resolution on the Commission's 2001 annual report of 13 March 2003.

Within the framework of the implementation of the White Paper on internal administrative reform, the Commission committed itself to improving the effectiveness of recovery [28] by clarifying the responsibilities of the different actors. In its communication of 3 December 2002 [29] which aims in particular to clear the arrears of amounts linked with irregularities awaiting to be recovered in the EAGGF Guarantee Section, the Commission announced the setting up of a temporary "recovery" task force, to allow the latter to complete the clearance of cases prior to 1999. The results of the work of this cell will be presented in the 2003 report.

[28] Communication from Mrs Schreyer to the Commission on Action 96 of the White Paper (Doc.COM (2000) 200 final/2 of 05.04.2000 "More effective management of funds unduly received" on 13 December 2000 - SEC(2000)2204/3. See also Item 1.2.2 of the Action Plan 2001-2003 quoted above.

[29] 9 COM (2002) 671 final of 3.12.2002.

1.2.2.2. Simplifying the direct management of Community funds and strengthening sanctions

With regard to Community debts arising from direct management by the Commission, the new financial framework [30] applicable from 1 January 2003, and the implementation by the Commission of its role, implements the principle of the separation of functions (authorising officer, delegated authorising officer, accountant, auditor, anti-fraud investigator). Moreover, it improves the establishment of Community debts and recovery methods (by compensation, by using preliminary guarantees, by distraint).

[30] See above the references to the new financial Regulation and the detailed rules for implementation and new internal procedure provisions concerning the recovery of the debts born from direct management and the recovery of fines, flat-rate sums and penalties under the treaties. In addition, so as to fulfill its duties regarding the financial follow-up of files gone into criminal procedures, the Commission asked its services (OLAF/Legal Service) to prepare a draft decision authorising the member of the Commission in charge of the fight against fraud to act on behalf of the Commission before the jurisdictions of the Member States or of third countries in criminal procedures concerning the Communities' protection of financial interests.

With regard to sanctions, the new financial regulation [31] stipulates henceforth that unreliable operators providing misleading or fraudulent information shall be excluded from participating in a market and any future procedure for a certain period [32]. Moreover, candidates and subcontractors, either in a conflict of interests situation or guilty of making a false statement in the tendering procedure shall be excluded from participation in this market. The information concerning them will be captured in a centralised database, also accessible to the other European institutions. The same exclusion provisions shall apply to subsidy recipients. This is linked to a proposal for a directive concerning national procedures for the award of public supply contracts, currently being examined by the European Parliament and the Council [33].

[31] In particular Articles 93-95 and 113.

[32] In the event of serious fault in professional matters, in the event of judgement for fraud, corruption, participation in a criminal organisation or any other illegal activity undermining the financial interests of the Communities, or where they are declared for serious breach of implementation for non-observance of their contractual obligations following an award for a contract or the granting of a subsidy financed from the Community budget.

[33] 3 A proposal for a Directive COM (2000) 275 final of 10.5.2000 concerning the coordination of procedures for the award of public supply contracts, public service contracts and public work contracts (OJ C 29 E of 30.1.2001). One of the objectives of the new directive is to compel the authorities to exclude non reliable operators. The Council and Parliament judged that the implementation of Article 46 of the proposal for a Directive does not require the setting up of a system of exchange of information.

2. Cooperate with the Member States and non-member countries

The EC treaty, in Article 280(3), stipulates that Member States shall organise close and regular cooperation among themselves, with the help of the Commission [34]. The Commission assumes its responsibility in particular by providing assistance in the field of intelligence as well as in the operational field.

[34] Of course, this cooperation concerns the Member States with the whole array of the means at their disposal, including their repression apparatus. This is the reason why, the Commission and the law maker have granted OLAF the necessary powers to be the interlocutor of the law enforcing and judicial authorities.

This involves the effective cooperation with the national authorities whenever the Commission asks the Member States to start an investigation on the basis of the information available to it. In accordance with the priority identified by the Overall Strategic Approach under the heading "Community service Platform", the Commission has throughout 2002 deployed its efforts to strengthen partnership in the framework of external investigations [35]. The results of such partnerships are illustrated by a few significant actions below.

[35] Notwithstanding this cooperation, as it is recalled in the « Article 15 » report, the Commission and the European Anti-Fraud Office, in compliance with the principles of subsidiarity and proportionality laid down in the treaty and secondary legislation, assume their own responsibility by exercising the powers conferred by the European legislator as regards autonomous investigations, in accordance with Article 3(1) of Regulation N° 1073/199921. For these investigations the Office has the direct responsibility for the financial, administrative and judicial follow-up (see point 1.2.2.2 above).

2.1. Cooperation with the competent authorities in the fight against certain forms of criminality

2.1.1. Joint civil action before the American courts (cigarette fraud)

The Member States and the Community have common interests: this reality on the ground is extremely well illustrated by the fight against cigarette smuggling which affects in particular customs duties, excise duties and VAT receipts, VAT being both a national income and own resource of the Community.

The European Commission, supported by ten Member States [36], is carrying out in the United States judicial proceedings against cigarette manufacturers whom it accuses of taking part in a cigarette smuggling system on the territory of the European Union. This has resulted, amongst other damages, in very significant losses for Community and national finances during at least the last ten years. This case is of a considerable order of magnitude and illustrates the will to cooperate of both the Community and the Member States, which go well beyond ordinary litigation. The civil action concerns a massive international smuggling and money-laundering scheme involving very considerable amounts. It is important to underline that the cigarette smuggling is linked to other serious forms of organised crime, in particular drug-trafficking and the related money-laundering. What starts as drug trafficking proceeds, therefore ends up as smuggled cigarettes in the EU and other countries, with the proceeds from this activity being transferred subsequently into the countries of origin of the firms.

[36] Belgium, Germany, Greece, Spain, France, Italy, Luxemburg, The Netherlands, Portugal and Finland.

These civil lawsuits in the United States complement the strenuous efforts undertaken by the Commission and all of the Member States effectively to control tobacco smuggling and money laundering. These efforts have met some notable successes on the whole. However, cigarette smuggling and money laundering remain major problems, and in particular a major drain on the EC and Member States' public finances. The EC and the Member States have determined that the remedy to this problem requires attacking it at source.

The civil lawsuits were filed in the United States because the defendants are US companies suspected of having organised from smuggling the United States, in contravention of US law. The US jurisdiction constitutes therefore the adequate forum for an appeal introduced on the basis of the Racketeer Influenced and Corrupt Organizations Act (RICO), which is an important tool in fighting organised crime. In addition, the US jurisdiction provides the opportunity to obtain court-ordered injunctive relief, which could be an efficient tool for preventing this type of crime.

A first civil action carried out in November 2000 against cigarette manufacturers Philip Morris, R.J. Reynolds and Japan Tobacco before the "United States District Court - Eastern District" of New York was rejected for procedural error. The action was relaunched in August 2001 with the ten Member States acting as co-applicants. On 19 February 2002, the court rejected the allegations based on smuggling, a decision which is currently under appeal. The Commission introduced however a new case against RJ Reynolds for money laundering, this option having been preserved by the American judge.

In addition, on 15 January 2003 [37], the Court of First Instance rejetected the complaints made by the three cigarette manufacturers Philip Morris, R.J. Reynolds and Japan Tobacco which aimed to have the civil action rejected on the grounds of the lack of competence of the European Commission to bring a case before American jurisdiction. Eight countries of the EU supported the Commission in this procedure, with the support of the European Parliament [38]. The applicants made an appeal.

[37] Judgement of the Court of First Instance "Philip Morris, Reynolds and Japan Tobacco v Commission" in linked cases T-377/00, T-379/00, T-380/00, T-260/01 and T-272/01.

[38] Spain, France, Italy, Portugal, Finland, Germany, Greece and the Netherlands.

The Commission wishes to emphasise that these conclusions strengthen the determination of the Community, to fight fraud where it harms the financial interests of the Union.

2.1.2. Cooperation against certain forms of criminality prejudicial to the interests of the Communities

Among the key-sectors identified in the Overall Strategic Approach, the Commission mentioned the need to improve the fight against organised crime, in particular transnational crime affecting Community interests linked to the fight against fraud or corruption. In certain very specific fields where a Community policy or basic legislation already exists, in particular as regards protection of the euro or the fight against piracy and counterfeiting [39] the experience gained on the ground can be put to use to strengthen cooperation with the Member States, and to adapt the regulatory framework if necessary.

- The legislative framework [40] being in place to protect the euro against counterfeiting, the Commission has set up transnational and multi-disciplinary exchange, assistance and training projects [41]. During 2002, seven projects were implemented under this Pericles programme, involving the representatives of OLAF, the European Central Bank and Europol. The protection of coins is the subject of a specific Community action entrusted to the European Technical and Scientific Centre, managed by two agents of the Commission (OLAF) one of whom is located at the Paris Mint. In 2002, initiatives were taken for the analysis of counterfeit coins, the authentication of euro coins and the establishment of a database relating to the materials used.

- Industrial and Commercial counterfeiting, and more generally, economic crime against intellectual property, contribute to sustaining the underground economy, often by smuggling circuits which cause losses of own resources for the Community. This development calls for an improvement and strengthening of the existing mechanism making it possible, to ensure the safety and protection of the consumer, the respect of the rights of intellectual property holders, as well as the financial interests of the Community.

In 2002, the Commission prepared two new legal instruments which it proposed in January 2003: a proposal for a Regulation [42] which aims to extend intellectual property to new products, to facilitate the approaches by the holders of rights with the customs authorities and to simplify the action of the competent authorities of the Member States in the event of suspicion of counterfeiting linked with goods from third countries; a proposal for a Directive [43] which is intended to harmonise in the national legislation of the European Union instruments enabling intellectual property rights to be respected and to define a framework for the exchange of information between the competent national authorities. The proposal would guarantee identical conditions to the owners of rights in the EU, would strenghten measures against offenders and would act as a deterrent to counterfeiters and pirates.

[42] Proposal for a Council Regulation on the intervention of the customs authorities with regard to goods suspected of contravening certain intellectual property rights as well as the measures to be taken with regard to goods contravening certain intellectual property rights (Doc. COM (2003) 20 final of 20.01.2003).

[43] Proposal for a Directive of the European Parliament and of the Council concerning the measures and procedures aimed at ensuring the respect of intellectual property rights (Doc. COM (2003) 46 (01) of 30 January 2003).

2.2. Cooperation with non-member countries

Since 1998, the Commission has endeavoured with the Council bodies to remove obstacles to the fight against economic and financial criminality at international level and, in particular the Swiss Confederation. It recognised in particular the usefulness of broadening into other fields such as tax [44] and direct expenditure, the mechanisms for administrative cooperation established in the protocol of 1997 on mutual assistance in customs matters [45]. Moreover, judicial cooperation, in particular in the fight against tax and customs fraud and laundering of the products of such fraud suffered from gaps. Obstacles persisted with regard to requests for access to documents from Swiss economic operators and recipients of Community funds.

[44] See Commission Communication to the Council on the report concerning the negociations with countries on the taxation of savings (SEC (2002) 1287 final of 27.11.2002).

[45] Agreement in the form of exchange of letters between the European Economic Community and the Swiss Confederation - Joint Declaration (OJ L 169 of 27.06.1997 p. 0077 - 0084).

In its resolution of 13 March 2003 on the protection of the Communities' financial interests and the fight against fraud - 2001 annual report, the European Parliament expresses its concern at the lack of progress in the anti-fraud negociations with Switzerland in 2002. In fact, significant progress has not yet been made on a series of key questions. For the Commission, the future agreement should lead to a qualitative improvement in the cooperation on the basis of European Union standards in the area of administrative assistance, judicial assistance and the fight against laundering. The Commission reaffirms its attachment to the aim set by the Council in the mandate given on 14 December 2000 and intends to conclude the negotiations with Switzerland in 2003

Cooperation with non-member countries is also developing through operational and in particular Community investigation missions carried out under Articles 19 and 20 of Regulation N°515/97. There follows a notable example of this operational cooperation.

Investigation -Electricity company in Kosovo

At the end of April 2002, the European Anti-Fraud Office was alerted by the mission of the United Nations in Kosovo (UNMIK) of a suspicion of fraud and decided to open an external investigation in accordance with Article 5, Paragraph 1 of Regulation (EC) n° 1073/1999.

Following information obtained from Kosovo, it was established that the European funds concerned (roughly 4.2 million USD, approximately 4 million euros) had been transferred to a bank in Gibraltar. Another attempt by the principal suspect to transfer the funds from Gibraltar to Belize was thwarted by the bank.

The Attorney General of Gibraltar, at the request of OLAF, was able to obtain from the Supreme Court, the freezing of the bank accounts concerned. In August 2002, OLAF was able to ensure the return to the budget of Kosovo of the full amount which had been misappropriated. It launched a procedure to ensure the repayment of the balance and to have access to the bank account details. In July 2002, the Office transferred to the German judicial authorities all information and documents that it was able to obtain on suspected fraud, during its investigation. In December 2002, the principal suspect, a former employee of the United Nations in Kosovo appeared before the German prosecutor's office in Bochum and was taken into custody. The German court decided that it was competent to try the case ("rational personal") and sentenced the accused in June 2003 to three and a half years in prison for the misappropriation of the funds intended for the KEK.

Despite the complexity of the international relations which had to be put in place, this inquiry was successfully concluded within a short timeframe thanks to the collaboration of the German, Gibraltar, Kosovo and Serbian authorities. The participation of the judicial authorities in Germany and Gibraltar was a key in the production of evidence of the offence, as well as the contacts established with the United Nations in New York.

3. An inter-institutional step to prevent and fight against corruption

3.1. The interinstitutional framework

Since May 1999, the Community has had a legal framework to fight inside the institutions, bodies and agencies against fraud, corruption and any other illegal activity undermining the financial interests of the European Community and to guarantee the safety of Community interests against irregular behaviour [46]. In 2002, this legal framework has led to several disputes [47] which provided useful information on the consistency of the interinstitutional framework of internal investigations [48]: this applies without exception to all the institutions, bodies and agencies set up by the EC and Euratom treaties or by the Council, whatever their prerogatives, to the members or the institutions whether or not they are covered by the staff regulations and whether or not they are subject to disciplinary control. It emerges in particular from recent case law that the "Communities' financial interests" mentioned in article 280 of the EC Treaty include not only the income and expenditure which come under the Community budget but also from the budget of other bodies or agencies set up by the EC Treaty, such as the ECB and the EIB [49] and as well as all the funds and resources managed by the Community institutions, bodies and agencies, whatever their origin.

[46] Adoption on 25 May 1999 of Regulation (EC) N° 1073/1999 of the European Parliament and of the Council and Council Regulation (Euratom) N° 1074/1999 of 25 May 1999 concerning investigations conducted by the European Anti-Fraud Office (OLAF) giving the latter the responsibility to investigate serious matters, relating to the discharge of professional duties liable to constitute a breach of the obligations of the officials and other servants of the Communities, liable to lead to disciplinary and, where appropriate, criminal proceedings and to inquire into any possible breach of the similar obligations on the part of members of the institutions and bodies, heads of offices and agencies or members of staff of the institutions, bodies, offices and agencies not subject to the staff regulations. Interinstitutional Agreement of 25 May 1999 between the European Parliament, the Council of the European Union and the Commission of the European Communities concerning internal investigations by the European Anti-Fraud Office (OLAF) - Commission Decision N° 1999/352/EC, ECSC, EURATOM of 28 April 1999 .

[47] As a result of the request for dismissal introduced by 71 deputies of the European Parliament, the Court considered that the decision of this institution as a general application measure which applies to all the members of the European Parliament, notwithstanding their statutory prerogatives (Judgement of 26 February 2002 of the Court of First Instance in the T-17/00 case (Rothley and 70 other members of the European Parliament).

[48] 8 See the judgement of the CFI referred to above and conclusions of the Advocate General on 3 October 2002 in connection with cases C11-00 Commission/ECB and C15-00 Commission/EIB.

[49] Judgement of the Court of Justice of 10 July 2003 in cases C-11/00, Commission v ECB and C-15/00, Commission v EIB, declaring void the decision of 7.10.1999 taken by the European Central Bank and the decision of 10.11.1999 by the European Investment Bank.

It follows moreover from the progressive setting up of this framework that the internal investigation function for the purposes of protecting Community interests cannot be interpreted as an attack on the autonomy of management of the various bodies, who decide in particular on the appropriate follow-up action to be taken apart from any penal follow up. In its judgement of 10 July 2003, the court recalls the guarantees aimed at ensuring the strict independence of OLAF, the latter's subjection to respect fully Community law, the clear demarcation between the subject of its powers and its means of action and the diverse specific rules to which their conduct is subject.

The question also arose in connection with the bodies set up within the framework of the 3rd pillar: Europol, which is in theory financed exclusively by the Member States and whose staff have their own staff regulations is not concerned; Eurojust on the other hand will be in a very major part financed by the Community budget and will have a secretariat made up of officials subject to the staff regulations of the Community civil service. This is why Article 38(4) of the Council Decision [50] makes it possible for the European Anti-Fraud Office to carry out internal investigations within Eurojust [51].

[50] Council decision n° 2002/187/JHA of 28 February 2002, setting up Eurojust with a view to reinforcing the fight against serious crime (OJL 63 of 6.3.2002).

[51] To take account of the sensitive activities of Eurojust as regards investigations and proceedings, the Council Decision excludes access from OLAF to any information held or created within the framework of these activities.

3.2. Disciplinary and specialised authorities

Each institution, body or agency has its own disciplinary authorities, sometimes with a responsibility to carry out internal investigations. In February 2002, the Commission for its part created an Investigation and Discipline Office instructed to conduct administrative investigations [52] and to prepare disciplinary proceedings. On the other hand, for anything referring to serious facts or the Communities' financial interests, on the basis of its expertise in penal matters and the field of economic and financial criminality, OLAF is informed first of all.

[52] See Article 2 of the Commission Decision of 19 February 2002 (C(2002) 540). Article 5 paragraph 2 of this same decision clarifies the division of responsibilities in the field of internal administrative investigations.

In addition, the new financial regulation [53] of 25 June 2002 provided for the setting up by each institution of a specialised body, independent at functional level, which decides on the possible existence of financial irregularities and their consequences. The opinion which these bodies are required to give does not prejudge the competence of the responsible authorities as regards fraud and corruption. The overall setting up of the internal inspection mechanism could be the subject of protocols intended to avoid any overlapping of responsibilities.

[53] Article 66 paragraph 4 of Regulation (EC, Euratom) n°1605/2002 of the Council of 25 June 2002 on the financial Regulation applicable to the European Community budget (OJ L 248 of 16.09.2002).

Internal investigation concerning a delegation of the Commission.

Cases of internal corruption often involve the improper application of the procedures for the granting of public supply contracts.

The European Office for the fight against fraud opened an investigation regarding a Commission employee working in a delegation in Zagreb, in Croatia, who was suspected of corruption. The allegation was that the offers for the purchase of computer equipment and services had been systematically doctored. This would have led to the conclusion of contracts with companies with whom two employees had relations. In the follow up to the recommendations made by OLAF in its investigations report addressed to the departments in September 2002, the Commission is preparing recovery orders for the double invoicing and opened disciplinary measures against one of its agents.

The internal investigations are in general opened on the basis of information provided by members of staff of the institutions [54]or even on the basis of information acquired during an external investigation. All information concerning officials, servants, heads or members of institutions, bodies and agencies is evaluated by the European Anti-Fraud Office. Since the Commission decision of April 2002 [55], the servant or official who supplied in good faith, information to the European Anti-Fraud Office, may request from the institution, protection against any inequitable or discriminatory treatment.

[54] In accordance with Article 4 of the model decision annexed to the interinstitutional agreement of 25 May 1999.

[55] Commission Decision of 4 April 2002 concerning conduct to be taken in cases of suspicion of serious acts (doc. C(2002) 845).

4. The strengthening of the criminal law dimension

The strengthening of the criminal law dimension in the field of illegal activities undermining the Communities' financial interests calls for initiatives from the Commission targeted at the specific nature and needs of the fight against these forms of criminality against Europe.In addition, the creation of an area of freedom, security and justice, in accordance with the requests of the October 1999 Tampere Council, involves a strengthening of cooperation between the Member States, and between the different bodies responsible for judicial and police cooperation.

Some remarkable progress has been made in this area in 2002, in particular in the ratification of Convention instruments, on the debate on the project for a European Public Prosecutor and in judicial cooperation in criminal law.

4.1. Penal sanctions in the field of the protection of financial interests

4.1.1. The ratification of the conventions on the Protection of the financial interests of the European Communities and some of its protocols

In the field of the protection of financial interests in general an important stage was reached with the entry into force on 17 October 2002, following their ratification by all the Member States, of the Convention on "Protection of Financial Interests" [56], of its first protocol [57], as well as the protocol of 29 November 1996 relating to the competence of the Court of Justice. These ratifications are detailed in title II of the report. Under the terms of this Convention and of its first protocol, the Member States are required in particular to incorporate the penal definition of fraud and corruption (active and passive) harmful to the Communities' financial interests, into their national law and to envisage criminal liability for the heads of companies for these offences. This does not prejudge the jurisdiction of the Commission, under the terms of Article 280 of the EC Treaty, or its capacity to make proposals with a view to strengthening the criminal law dimension. The Commission has at present to examine the way in which the Member States conformed to their obligation as regards the criminalisation of fraud and corruption (as well as money laundering after the ratification of the second protocol), and to present the result of this analysis.

[56] Convention drawn up on the basis of article K3 of the Treaty on European Union, relating to the protection of the financial interests of the European Communities - OJ C 316 of 27.11.1995.

[57] Protocol of the Convention on the protection of the financial interests of the European Communities - OJ C 313 of 23.10.1996.

The second protocol [58] dating from 1997, on the other hand, has not yet entered into force, in the absence of ratification by all the Member States, in spite of the call from the Council in its conclusions of 8 November 2002 [59]. This new delay is prejudicial to the effectiveness of the action at Community level in the area of money laundering and technical and operational cooperation between the prosecution authorities and with the Commission (OLAF). The specific nature of this close and regular cooperation does not prejudge the necessary coordination by the Commission (OLAF) with the competent authorities in the fight against criminality.

[58] Second protocol of the Convention on the protection of the financial interests of the European Communities concerning the laundering of the proceeds of fraudulent acts prejudicial to the Communities' financial interests, the liability of legal persons, the confiscation of goods and cooperation with the Commission - OJC 221 of 19.07.1997.

[59] Item 10 of the conclusions of the Economic and Financial Affairs Council of 8 November 2002 on the protection of financial interests and the fight against fraud (document 13244 FINAL 409)

Given the urgency to give full effect to cooperation between the Member States and the Commission, such as it arises moreover from Article 280(3) of the EC treaty [60] and from secondary legislation, the Commission maintains in any event its proposal for a Directive related to the protection of the Communities' financial interests [61], which it regards as the most appropriate means to ensure an effective and proportionate application of Community law. Enjoying the support of the European Parliament and the Court of Auditors, the proposal for a directive would moreover enable in fact the Community, once it was adopted, to carry out its responsibilities as regards checks. [62]

[60] As stated in Article 1(2) of regulation 1073/99, Article 2(2) of the Commission Decision n°1999/352/CE, Euratom as well as Council regulation 2185/96 (Article 4).

[61] JOCE C240E on 28.08.2001

[62] This same analysis is the basis of a proposal for a directive for the criminal law protection of the environment based on article 175 of the EC Treaty on which the Court of Justice will have to give its view soon and thus clarify the question of responsibilities in the area of criminal law in the treaties.

4.1.2. Green Paper on the criminal law protection of the Community's financial interests and the creation of a European Public Prosecutor.

The requirement to prosecute in a more effective way the authors of criminality undermining the Community's financial interests, a fortiori in the framework of an enlarged Europe, led the Commission to propose the creation of a European Public Prosecutor, in order to remedy the splintering of the area of criminal law in this field [63]. The Commission adopted a Green Paper on a European Public Prosecutor on 12 December 2001 [64], and organised a wide-ranging debate throughout 2002 on this topic with all the interested parties: national Parliaments and governments, Community institutions and bodies, professions connected with criminal trials, experts and academics, concerned non governmental organisations. The Commission then organised, on 16 and 17 September 2002, a public hearing with the representatives of the interested parties.

[63] COM(2000)34 complementary Contribution of the Commission to the Intergovernmental Conference on institutional reforms - the criminal law protection of the Community's financial interests: a European Public Prosecutor, 29.9.2000, COM(2000)608. A proposal for inserting a new article 280 b of the EC Treaty was not taken up the Nice European Council.

[64] COM(2001)715. The European Council in its conclusions of Laeken, on 14 and 15 December 2001 asked the Council to examine this Green Paper quickly, taking into account the diversity of the legal systems and traditions.

In the main, reactions are for the most part favourable to the principle of the creation of a European Public Prosecutor but the governmental authorities on this point retaining overall a low profile in relation to the European Parliament [65], the Supervisory Committee and the Court of Auditors or in relation to the experts and representatives of civil society. Many insist that the Commission proposal should be refined to meet at the same time the criteria of effectiveness and full respect of basic rights. A part of the opinion favourable to the project defends in addition the idea of placing at Community level the function of the review of the European prosecutor's acts.

[65] See in particular points 59 to 62 of the resolution of the European Parliament of 13.02.2003 concerning the protection of financial interests - Annual report 2001.

The Green Paper has therefore fulfilled its aim and, in line with its proposal to the 2000 Intergovernmental Conference (IGC), the Commission submitted to the Convention on the Future of Europe a substantial contribution and participated actively in the work. Within the Convention, some governments considered that the responsabilities of a European Public Prosecutor should be broader than the Commission proposal, other governments reiterated their opposition to the creation of a Public Prosecutor. The draft Treaty establishing a Constitution includes a proposal which enables the Council unanimously to establish a "European Public Prosecutor's Office", responsible both for combating offences affecting the Union's interests and serious cross border criminality. The Commission welcomes this possibility, while regretting the weakness of the proposal.

4.2. Judicial cooperation in penal matters

In accordance with the requests of the October 1999 Tampere Council, the adoption of a European area of freedom, security and justice involves a strengthening of cooperation between the Member States, in particular by the alignment of criminal law [66] and the application of the principle of mutual recognition. Progress in this area, in 2002, in particular the framework decision concerning the European arrest warrant [67], intended to replace the extradition procedures between Member States will have a positive impact for protection of financial interests.

[66] Communication from the Commission to the Council and to the European Parliament on the creation of an area of freedom, security and justice in the European Union - COM (final 2001)628.

[67] Framework decision of the Council of 13.06.2002 relating to the European arrest warrant and the surrender procedures between Member States - 2002/584/JAI - OJ L 190 of 18.07.2002.

Moreover, the progressive adoption of a European area of freedom, security and justice strengthens the need for the partnership between the bodies set up within the framework of the "third pillar" (title VI of the treaty on the EU) and the Community bodies responsible for the protection of financial interests. In particular, cooperation between judicial cooperation and police bodies (responsible as regards international organised criminality) reached a new stage in 2002, following the extension of the mandate of Europol and the creation of Eurojust decided by the Council.

In annex to the Council decision of 6 December 2001, extending the mandate of Europol to all serious forms of international criminality listed in the annexe of the Europol Convention [68], the Council had called for the negotiation of an agreement between Europol and the Commission to take account of the competencies of OLAF and the Commission. The negotiations [69] pursued in 2002, ended on 18 February 2003 with the signing of an administrative cooperation arrangement. This arrangement places the general framework for cooperation in the fields of respective jurisdiction, in particular as regards consultation, mutual assistance and exchange of information for areas where a common interest exists, except for the exchange of personal data. Moreover, the administrative arrangement stipulates that, in the field of its operational activities where its independence applies, OLAF can conclude arrangements with Europol directly to specify the practical cooperation methods.

[68] OJ C362 of 18.12.2001.

[69] Negociations begun in early 2001 with the adoption of Regulation (EC) 1338/2001 of the Council of 28 June 2001 concerning the protection of the euro against counterfeiting. In this area, the Commission report (COM(2001) 77 final of 13.12.2001) establishes that all the Member States did not manage to comply with in particular Article 6 of the Council Framework decision of 29.05.2000 (2000/383/JHA-OJL 140 of 14.06.2000). This Article provides for each Member State to ensure that conduct deemed to be offences of counterfeiting are punishable by effective, proportionate and dissuasive criminal penalties.

In addition, as a result of the creation of Eurojust by decision of the Council of 28 February 2002, work progressed in order to ensure the synergy between the respective competencies of Eurojust and OLAF to encourage the exchange of operational information between these two bodies. One should in particular specify the articulation between the "close and regular cooperation" defined in Article 280-3 of the EC treaty (between the competent authorities and with the Commission) and cooperation between the national authorities organised via the Eurojust members, within the framework of the 3rd pillar [70]. The memorandum of understanding negotiated in 2002 and signed by the Office and Eurojust on 14 April 2003, envisages close coordination between the unit of magistrates of OLAF and Eurojust members.

[70] The Council Decision indicates in its recital 8 that "the Eurojust competencies are without prejudice to the competencies of the Community as regards protection of financial interests". The Commission made a statement, annexed to the Council Decision, according to which "the protection of the Community's financial interests is a responsibility shared between the Community and the Member States and in this connection, it is important to stress that at the level of the treaties, Article 280 of the EC treaty constitutes the specific legal basis to lead the cooperation projects with the competent national authorities (Article 280,3 EC) or to take the measures necessary to prevent and fight fraud and any other illegal activity undermining the Community's financial interests (Article 280 (4) EC). It is in particular within this framework that the close and regular cooperation between the European Anti-Fraud Office (OLAF) and the national prosecution authorities on the one hand and between the Commission (OLAF) and Eurojust on the other should be guaranteed. "

In accordance with the Action Plan of the Commission for 2001-2003 on the fight against fraud [71], 2002 therefore marked a step forward in the definition of the practical methods of cooperation between bodies which have the aim of becoming privileged interlocutors, from the point of view of the respect of the principles laid down in Article 280 of the EC treaty. This represents of course only a first stage in the process which should lead to a coherent, transparent and legible system at the level of all the European bodies involved in the fight against transnational criminality and in particular, for the protection of financial interests, towards the establishment in the treaty of a European public prosecutor.

[71] Commission communication of 15 May 2001, Protection of the financial interests of the Communities. Fraud prevention. Action plan for 2001-2003 (COM(2001)254 final), para. 2.1.2.

5. Follow up of the action plan 2001-2003

The Commission presents here a progress report on the implementation of the 2001-2003 Action Plan on the protection of the Communities' financial interests [72]. It aims to highlight the achievement of actions planned for 2002 in compliance with the achievement of the main objectives decided in the overall strategic approach of June 2000 and given the necessary adaptations of the Commission timetable and work programme.

[72] COM (2001) 254 final of 15.5.2001.

The table in the annex [73] shows the relevant elements in terms of compliance with the provisional timetable, the departments responsible as well as the identification of legal or administrative instruments. The link is made each time with the initiatives in the Action Plan and when information is supplied on the follow up beyond the year 2002.

[73] The table does not include actions where no initiative or follow up is planned for 2002. Regarding the columns in the table:

Title II - Implementation of Article 280 by the Member States in 2002 - Measures taken to protect the Community's financial interests-

In accordance with Article 280 of the EC Treaty, the Commission's Annual Report also presents the efforts made by the Member States over the previous year to combat fraud and other illegal activities affecting the financial interests of the Community.

Unlike previous years, the Member States' also replies to the different items of the questionnaire are set out in an annex to the Report. They can thus be consulted by those wishing to have a complete picture of the action taken by Member States over the previous twelve months to protect the Community's financial interests in each of the sectors covered. This Title of the Report will therefore be limited to an overview of the main developments notified by the Member States.

The Commission has based this overview on the Member States' replies to a questionnaire ("Article 280 questionnaire") that has been adapted in the light of experience while preserving the necessary continuity with previous years. This will make it easier to keep track of Member States' efforts to combat fraud in recent years.

The overview begins with a snapshot of the main legislative, regulatory and administrative developments in the Member States contributing to the protection of the Community's financial interests against fraud and irregularities. A separate paragraph is devoted to each of the three main areas of Community resources and expenditure (traditional own resources, agricultural spending and structural measures).

As in previous years, the second section (point 7) deals with implementation of the Convention on the protection of the Community's financial interests and its protocols. The state of ratification of these "third pillar" instruments is, however, limited to the Second Protocol since the process of ratifying the Convention itself and its other protocols was completed in 2002 by those Member States which had not yet done so.

The third and fourth sections (points 8 and 9) relate in turn to the organisation of controls, in terms of staffing levels, in the three sectors concerned (own resources, agricultural expenditure and structural measures) and interdepartmental coordination within each Member State. The aim is to give an initial picture of the system for the protection of the Community's financial interests set in place by each Member State. The Commission has endeavoured to analyse the figures communicated by Member States for this part of the Report.

The fact that the annual report is drawn up on an annual basis and follows a horizontal, multisectoral approach means that it is difficult to assess in depth all aspects of the protection of the Community's financial interests by the Member States. [74] The Commission is therefore considering the possibility of adopting a more focused, multiannual approach in future.

[74] Parliament has on two occasions stressed that the list of new national measures should be accompanied by a Commission analysis pinpointing any weaknesses in the protection of the Communities' financial interests (Parliament resolution of 13 March 2003 on the protection of the Community's financial interests and the fight against fraud - annual report 2001; Parliament resolution of 29 November 2001 on the Commission annual report 2000 on the protection of the Communities' financial interests and the fight against fraud and on the Commission communication on protecting the Communities' financial interests, Fight against fraud, Action plan for 2001-2003).

6. Texts contributing to the implementation of Article 280 of the EC Treaty - principal legislative, regulatory and administrative developments

The new measures contributing to the implementation of Article 280 of the Treaty reported by Member States in response to the Article 280 questionnaire for 2002 are of various types: new legislative measures, institutional changes, adoption of texts interpreting the Community legislation on the protection of financial interests, and introduction of new IT systems.

Clearly, the impact in the Member States of these different measures on the degree of protection of the Community's financial interests is not the same.

The most salient developments in 2002 reported by the Member States are summarised below by area of activity (own resources, agricultural expenditure, structural measures). The summary is not exhaustive.

A complete list of all the new measures contributing to the implementation of Article 280 of the Treaty in 2002 is still provided for consultation (Tables 1.1., 1.2. and 1.3.).

As pointed out by several Member States in their replies to the questionnaire, the lack of any new measures in 2002 is not a basis for drawing general conclusions on the degree of protection of Community's financial interests in the Member State concerned; on the contrary, it can reflect more intensive legislative or regulatory activity in previous years.

6.1. Own resources

Table 1.1. sets out by Member State the new legislative, regulatory and administrative developments which occurred in 2002 in the own resources field.

One of the most significant developments in the area of own resources was the amendment of Denmark's Customs Act enabling the Danish customs and tax authorities to seize any amount of cash exceeding EUR15,000.

In France, following the entry into force in December 2001 of the new Article 28-1 of the Code of Criminal Procedure authorising certain customs officers to conduct judicial investigations, in particular into fraud affecting the Communities' financial interests, new arrangements were adopted in 2002 in order to enable such officers to operate as part of an independent service, thereby increasing the resources made available to the judicial authorities in the economic and financial field.

In Italy the Customs Agency issued a circular introducing new procedures for the computerised management of the separate accounts for own resources.

The UK authorities report that their customs administration played an active part, together with the authorities of the other Member States, in the working party on the draft mutual assistance convention drawn up under the auspices of the World Customs Organisation with the aim of modernising and revising the Nairobi Multilateral Convention on mutual assistance. The proposed new convention will help the international customs authorities to apply more effective controls and will have a positive impact on tax checks and the fight against fraud in trade between the EU and third countries.

In Belgium new legislation on bankruptcies was adopted which will prevent shell companies being used, by facilitating preparation of the statement of affairs, determination of the causes and circumstances of the bankruptcy and establishment of the de facto or de jure liability of directors who have engaged in serious and organised tax evasion.

The Irish authorities report the adoption in March 2002 of the CIS (Customs Information System) and Naples 2 Conventions and of related instruments. Ireland has thus been able to implement the agreement on the provisional application of the CIS Convention since 1 June 2002.

6.2. Agricultural expenditure

There were several significant new developments in 2002 in the field of agricultural expenditure.

The Austrian authorities report that the number of payment agencies was reduced in 2002 from three to two through the transfer, from 16 October onwards, of the tasks of the payment agency for rural development (Agriculture Ministry) to Agrarmarkt Austria (AMA). The aim of this change is to concentrate the money flows, administrative procedures and notification systems, to standardise and unify the audit system, to improve technical expertise, efficiency and funds recovery, and to concentrate and standardise certification of the clearance of accounts by the payment agency.

In Greece controls and penalties were strengthened as regards rural development measures in particular. A ministerial order provides for penalties in the event of breaches of the Community and national rules, in the form of financial corrections covering all or part of the Community funding, together with initiation of the procedure for recovering amounts unduly paid and exclusion of the body concerned in cases of serious irregularities.

Among the other interesting developments of a horizontal nature, mention can be made of the strengthening in Spain of the body responsible for coordinating controls and penalties in the field of the common agricultural policy and the introduction in Italy of procedures for imposing penalties under Regulation No 4045/89.

All the new measures adopted by the Member States in the field of agricultural expenditure can be consulted in the Annex (Table 1.2.). The concrete application of these new measures will be the subject of a follow up action.

6.3. Structural measures

Special Report No 10/2001 [75] of the Court of Auditors pinpointed certain weaknesses in the national systems for detecting, reporting and following up irregularities concerning the Structural Funds. In the light of the Special Report, the new legislative, regulatory and administrative measures taken by the Member States in 2002 with regard to the Structural Funds deserve special attention.

[75] Special Report No 10/2001 concerning the financial control of the Structural Funds, Commission Regulations (EC) Nos 2064/97 and 1681/94 (OJ C 314, 8.11.2001).

Among the significant developments observed in 2002, mention can be made of the entry into force in the Netherlands of two acts that have a major impact on the protection of the Community's financial interests. One is the EC Grants Monitoring Act, which governs the right to recover funds, powers of appointment and the right to be informed. It applies among other things to the Structural Funds. A report on the use of EU grants from May to December 2002 inclusive will be submitted to the Dutch Parliament in the autumn of 2003. The decentralised management bodies covered by the Act are to provide government departments with details of the EU grants they have received. The second piece of legislation, the Government Accounts Act (Eighth Amendment), confers powers on the Dutch General Government Audit Office with regard to monitoring the use of EU aid down to the final beneficiary. [76]

[76] For further details on the EC Grants Monitoring Act and the Government Accounts Act (Eighth Amendment), see the Dutch contribution to the Annual Reports 2000 and 2001 on the implementation of Article 280 of the EC Treaty.

In Finland the regional development legislation was reviewed and overhauled. Like the previous legislation, the new rules contain provisions governing the granting of funds, payment, monitoring, control, action taken on any irregularities and the criteria for recovery. The province of the Åland Islands reports that it has adopted a new Act on the protection of financial interests which introduces criminal penalties for offences against public finances irrespective of the origin (provincial, national or Community) of the funds.

The Greek authorities undertook a wide-ranging overhaul of the procedure for recovering amounts unduly or illegally paid under Community programmes, which started in 2002, with a view to establishing a national system for financial corrections in accordance with Commission Regulation No 438/2001.

In Portugal a Decree-Law was adopted which applies to the Cohesion Fund, as an integral part of Community Support Framework (CSF) III, the same financial control standards as those in force for the Structural Funds. Given the large amounts at stake in Cohesion Fund operations in Portugal, the Portuguese authorities take the view that the adoption of legislation establishing the framework in which they operate and the bodies responsible for monitoring them constitutes a major step forward in applying the essential measures for safeguarding the Communities' financial interests.

The procedures for monitoring and inspecting projects were also tightened in the United Kingdom, with special reference to spending financed by the European Social Fund.

A full list of the new measures taken by the Member States with a view to implementing Article 280 in the field of structural policies is given in the Annex (Table 1.3.).

7. Texts contributing to the implementation of the Convention on the protection of the Communities' financial interests

The year was marked by the ratification by the last Member States which had yet to do so of the Convention on the protection of the European Communities' financial interests, [77] of the First Protocol, [78] which defines active and passive corruption, and of the Protocol of 29 November 1996 concerning the interpretation of the Convention by the Court of Justice. [79] This enabled these three "third pillar" instruments to enter into force on 17 October 2002.

[77] Convention, drawn up on the basis of Article K.3 of the Treaty on European Union, on the protection of the European Communities' financial interests, signed in Brussels on 26 July 1995 (OJ C 316, 27.11.1995). Ratification of the Convention by Belgium was notified on 12 March 2002, by Ireland on 3 June 2002 and by Italy on 19 July 2002. The Belgian authorities state that the Act of 17 February 2002 giving assent to the Convention and its three Protocols was published in the Official Gazette on 15 May 2002 and has entered into force.

[78] Protocol, drawn up on the basis of Article K.3 of the Treaty on European Union, to the Convention on the protection of the European Communities' financial interests, signed in Dublin on 27 September 1996 (OJ C 313, 23.10.1996). Ratification of the Protocol by Belgium was notified on 12 March 2002, by Ireland on 3 June 2002, by Italy on 19 July 2002 and by the Netherlands on 28 March 2002.

[79] Protocol, drawn up on the basis of Article K.3 of the Treaty on European Union, on the interpretation, by way of preliminary rulings, by the Court of Justice of the European Communities of the Convention on the protection of the European Communities' financial interests, signed in Brussels on 29 November 1996 (OJ C 151, 20.5.1997). Ratification of the Convention by Belgium was notified on 12 March 2002, by Ireland on 3 June 2002 and by Italy on 19 July 2002.

The Member States' criminal law now has to include harmonised definitions of and penalties for fraud and active and passive corruption affecting the Communities' financial interests. Criminal-law cooperation between the Member States in matters of jurisdiction, mutual judicial assistance, extradition and the transfer and centralisation of prosecutions is furthermore reinforced.

On the other hand, the Second Protocol, [80] signed on 19 June 1997, containing provisions on money laundering, the liability of legal persons, confiscation of the instruments and proceeds of infringements and vertical cooperation with the Commission (OLAF) still has to be ratified by Italy, Luxembourg and Austria. [81]

[80] Second Protocol, drawn up on the basis of Article K.3 of the Treaty on European Union, to the Convention on the protection of the European Communities' financial interests - Joint Declaration on Article 13(2) - Commission Declaration on Article 7 (OJ C 221, 19.7.1997).

[81] Ratification by Germany and Finland was completed in 2003.

Table 2.1. in the Annex shows in greater detail the state of progress with ratification of the Second Protocol. It indicates the date on which the Member State notified the Council of ratification.

The implementation of all four agreements by the Member States is the subject of Table 2.2., which lists the new steps taken in 2002 with a view to transposing the 1995 Convention and its Protocols and any aspects or provisions not yet covered by national measures and any difficulties encountered.

Progress in transposing the Convention and its Protocols was achieved notably in Germany, the Netherlands, Portugal and Finland.

Other Member States report that the transposal of these instruments was largely completed before 2002.

8. Organisation of departments responsible for protecting the Communities' financial interests

Protection of the Communities' financial interests is largely based on the primary responsibility of the Member States, which have the task of managing more than 80% of expenditure and of collecting all the traditional own resources. The different types of control provided for by sectoral regulations involve a wide range of actors and staff at various levels of the national administration (payment agencies, management authorities, central and decentralised national services, local authority services).

These controls contribute to the protection of Community financial interests where Member States are required to ensure both effective action and action that is equivalent to that which they undertake to defend their own interests.

They consist of what are known as regularity controls, required by the sectoral regulations, and controls that are more targeted on the fight against fraud, as required by Article 280 of the EC Treaty.

Regularity controls comprise documentary checks, sometimes called "first-level" or ex ante/a priori checks, aimed at assessing compliance with procedures and the criteria determined by regulation for the granting of financing or of advantages.

They also include ex post/a posteriori checks (after payment of the funds, for example) the aim of which is to check that the work has really been done, that the financed projects exist or that the control system is reliable. These checks are often based on a risk analysis, as required by the Community rules for a number of sectors. [82]

[82] See, for example, Commission Regulation (EC) No 3122/94 of 20 December 1994 laying down criteria for risk analysis as regards agricultural products receiving refunds (OJ L 330, 21.12.1994);

In addition, Member States are required to take more targeted measures to combat fraud. These controls (anti-fraud investigations) are conducted on the basis of suspected fraud established by different authorities, depending on the Member States: customs, police, financial administration, judicial authorities at an advanced stage.

Since the organisation of departments is the Member States' sole responsibility, they were asked to describe their control activities in functional terms according to the above classification. This starts from the sector controlled rather than the organisational entity to which the staff concerned are assigned.

Tables 3.1., 3.2. and 3.3. in the Annex set out the Member States' estimates of the staff numbers assigned in 2002 to each type of control (ex ante, ex post and anti-fraud) in the three sectors covered (traditional own resources, agricultural expenditure and structural measures). To arrive at comparable data, the types of information sought and the control concepts were spelled out as clearly as possible. In the last two columns of each table, the staff numbers assigned to control in the Member States are given alongside the amount of expenditure or resources checked. These data will enable Member States to make an initial assessment of their efforts to afford effective and equivalent protection to the Community's financial interests and assign them the same status as their own, as required by Article 280 of the Treaty.

However, since they are estimates, based on possibly divergent interpretations of the underlying control and staff definitions, the data should be interpreted with caution and used for guidance only. The principal interest is to identify some major trends, which should be refined with the Member States within the framework of a structured dialogue.

It can be seen from the tables that, in all the Member States and all the areas covered, the vast majority of human resources were assigned in 2002 to ex ante checks (ex ante checks: 81%; ex post checks: 11%; anti-fraud investigations: 8%).

This tends to show that, generally, priority was given to supervision and prior verification mechanisms that come into play, in the case of revenue, when customs declarations are presented and, in the case of expenditure, when requests for finance are vetted.

From a quantitative standpoint, checks on the use of funds or on project implementation (ex post/a posteriori checks) usually require fewer resources since they are carried out on the basis of programming, sampling techniques or risk targeting.

As far as staff numbers assigned to anti-fraud investigations are concerned, account has to be taken of the fact that the inspectors responsible for them often cover several sectors (in Greece, for example, this is the case with the unit for prosecuting economic offences) and that some Member States have included in their figures officials with powers to conduct judicial investigations.

Overall, the Member States assigned more staff to traditional own resources (50,467) than to the other two sectors (agricultural expenditure: 16,240; structural measures: 6,769).

The amount to be checked per member of staff was highest in the case of the Structural Funds (EUR3.10 million per staff member; agricultural expenditure: EUR2.56 million; own resources: EUR0.29 million). [83] This result appears to confirm the findings of the comparative analysis carried out in 1995 and 1998 on the implementation of Article 209a (280 since Amsterdam) of the Treaty. [84]

[83] These figures are based on contributions to the budget and operational expenditure by each Member State in 2001.

[84] Protection of the Community's financial interests - Synthesis document of the comparative analysis of the reports supplied by the Member States on national measures taken to combat wastefulness and the misuse of Community resources (COM(95) 556 final); Supplement on controls and administrative penalties (1998).

The data are commented on below by budget area.

Although these data show how the control approach varies from one Member State to another, they fall far short of providing a genuine qualitative assessment, which would require a more detailed examination of the control instruments and methods used by each Member State.

8.1. Traditional own resources

In this area:

- ex ante checks correspond to the supervision and control by the customs authorities required by Article 4(13) and Article 4(14) respectively of the Community Customs Code, as well as to the documentary checks and inspections of goods required by Article 68 of the Code, with the exception of checks on export refunds for agricultural products;

- ex post checks are those required by Article 4 (14) and Article 78 of the Community Customs Code;

- anti-fraud investigations are the investigations conducted in the event of suspected irregularities, including those carried out where appropriate by the investigation and prosecution departments.

In the field of traditional own resources, most of the staff numbers appear to be employed on ex ante checks in most Member States (for all the Member States, ex ante checks: 80.4%; ex post checks: 9.8%; anti-fraud investigations: 9.8%). Nevertheless, there is little uniformity between the Member States as regards the allocation of staff between the three types of control (ex ante and ex post checks and anti-fraud investigations).

As shown in Table 3.1. in the Annex, two Member States (Denmark and the United Kingdom) assigned more staff to ex post than to ex ante checks.

One Member State (Spain) devoted more human resources to anti-fraud investigations (43.4%) than to each of the other two types of control.

The figures appear to indicate that the Member States are implementing different control strategies based to a greater or lesser extent on one or other methodology.

It should, however, be pointed out that some Member States had difficulties in producing a breakdown by type of control, while others stress that their inspectors cover several sectors, which makes it impossible to carry out more detailed analyses, e.g. of the amount to be checked per member of staff.

This amount varied between EUR0.05 million and EUR2.51 million. For all the Member States taken together, the figure was around EUR0.29 million. In the case of Denmark and to a lesser extent Belgium and the United Kingdom, the figure was much higher.

Additional information provided by the annual reports submitted by the Member States pursuant to Article 17(3) of Regulation No 1150/2000

Under Article 17(3) of Regulation (EC, Euratom) No 1150/2000, [85] the Member States are also required to transmit statistics on staff numbers assigned to the customs departments at national level.

[85] Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000 implementing Decision 94/728/EC, Euratom on the system of the Communities' own resources (OJ L 130, 31.5.2000).

These reports enable the data submitted by the Member States in reply to the Article 280 questionnaire to be supplemented. However, in absolute terms, the figures communicated in reply to the Article 280 questionnaire are lower than those transmitted by the Member States under Regulation No 1150/2000. The difference springs quite naturally from the fact that the scope of the Article 280 questionnaire is limited to specific areas of control, whereas the summary reports contain more general data. [86]

[86] The data communicated under Regulation No 1150/2000 comprise controls on export refunds for agricultural products; in the Article 280 questionnaire, these were included under the heading 'Agricultural expenditure'. Furthermore, the Article 280 questionnaire was strictly limited to inspection staff.

On the basis of the summary reports for 2002, [87] the total number of customs officials was 89,566. In comparison with 2001, this represents a reduction of 2.00%; a fairly widespread decline can be observed, the exceptions being Greece, Spain, Luxembourg, Finland and Sweden.

[87] In the absence of any reply from Portugal, the Commission used the figures communicated by this Member State in 2001.

The number of staff assigned to ex post checks, according to the annual reports submitted under Regulation No 1150/2000, totalled 14,184 in 2002, an increase of 9% on 2001. None of the increases observed are significant, except in the case of two Member States: in Ireland the number rose from 43 to 99 between 2001 and 2002 [88]. The figures for the United Kingdom (919 officials) also differ greatly from those given for the previous year (101 officials) owing to an internal reorganisation of the customs service and the tax administration.

[88] The actual number of staff involved in post clearance checks at National level remains unchanged from the 2001 level. The increase in the number listed from the 2001 figure is due to the inclusion of staff carrying out warehouse controls etc who were not previously included in such figures.

Data transmitted in application of Article 17, paragraph 3 also give a general image of activity in terms of the number of accepted declarations and the number of declarations submitted to a posteriori controls. Both the global number of accepted declarations and the global number of controlled declarations have increased. These numbers have shown a constant increase since 1999. Member States have accepted 114,74,680 declarations for the year 2002, corresponding to an increase of 5.85% compared to 2001. In addition, national customs services controlled 7,943,620 declarations in 2002, corresponding to an increase of 2.4% as compared to 2001. A certain number of Member States have witnessed significant decreases in the percentage of controlled declarations, while the number of accepted declarations has increased. Member States will be invited to provide more detailed information in the framework of the Advisory Committee on Own Resources.

8.2. Agricultural expenditure

In this area, the checks carried out by Member States are as follows:

- a priori checks correspond to the physical checks and the documentary checks on payment requests carried out by the customs authorities and the payment agencies. They include checks on export refunds, checks on aid for the internal market and checks as part of interventions for regulating agricultural markets;

- a posteriori checks are the on-the-spot inspections on undertakings provided for by Regulation No 4045/89;

- anti-fraud investigations are the investigations conducted in the event of suspected irregularities.

In this area too, the staff numbers assigned to ex ante checks in the Member States in 2002 greatly exceeded those assigned to both other types of control (for all the Member States, ex ante checks: 88%; ex post checks: 7.5%; anti-fraud investigations: 4.5%), but practice appeared to be more uniform from one Member State to another, something which can be partly explained by the nature of the obligations laid down by regulation.

As regards ex ante and ex post checks in particular, the control obligations and methods of risk analysis are laid down more precisely by the Community rules (scrutiny of 5% of expenditure required by Regulations Nos 4045/89 and 386/90, for example). This appears to confirm the findings of the comparative analysis of the implementation of Article 209a, [89] which identified a correlation between, on the one hand, the definition of common rules for management, control and sanctions and, on the other, the equivalence of the control systems.

[89] See general introduction at point 3.

As can be seen from Table 3.2. in the Annex, anti-fraud investigations were the category of control to which most Member States assigned the least staff (less than 10% in the case of ten Member States). Three Member States were an exception to this, however (Italy: 28.9%; Austria: 12.1%; Finland: 19.3%). One Member State was unable to estimate staff numbers involved in this activity and stressed that it is mandatory under its legislation to report suspicions of fraud to the public prosecutor's office.

It can be concluded on the basis of these figures that in the sector of agricultural expenditure, as in the field of own resources, the protection of the Communities' financial interests appeared to rely above all on ex ante checks. Moreover, the agricultural expenditure audit departments protect the financial interests of the European Union in the framework of the clearance of accounts by their ex post checks on the management and control systems applied in the Member States.

8.3. Structural measures

In this area:

- ex ante checks are the checks and verifications carried out on projects or operations at different levels (management bodies, payment agencies, decentralised or intermediate authorities, final beneficiaries) to ensure the accuracy, regularity and eligibility of applications for Community assistance [90];

[90] See Annex to Title II, point 3.3.

- ex post checks are the on-the-spot inspections and verifications carried out by staff independent from the management and payment departments [91];

[91] See Annex to Title II, point 3.3.

- anti-fraud investigations are all the investigations carried out following suspicions of fraud.

In the area of structural measures, most of the Member States' inspection staff (68%) were likewise assigned to ex ante checks, although the differences with ex post checks (27.9%) were less marked than in the other sectors. This is in line with the conclusions of the comparative analysis of the implementation of Article 209a of the Treaty, which found that the concept of control adopted by the Member States in the field of structural measures tended to be that of external control.

Table 3.3. in the Annex shows that three Member States (Greece, Spain and Portugal) allocated more human resources to ex post than to ex ante checks in 2002.

Relatively few resources (4.1%) were assigned to anti-fraud investigations. Three Member States indicated that anti-fraud investigations were included in the data on the other types of control.

Overall, the staff numbers assigned by the Member States to this sector, for all types of control taken together, were small (6 769) compared with total control personnel in the areas of own resources (50 467) and agricultural expenditure (16 240).

This cannot be explained by the share of the budget to be controlled since the level of control, expressed in terms of the share of the budget to be controlled per staff member, was higher than for the other two sectors.

An explanation could possibly be sought in the nature of the expenditure to be controlled (relatively large projects compared with agricultural spending), which calls for a different control strategy, as well as in the difficulties encountered by Member States in collecting details of staff numbers from all the bodies involved at the different levels of the national administration, which is heavily decentralised in this area.

This appears to be confirmed by the low rate of response to the question concerning the number of officials, including in the criminal prosecution departments, responsible for anti-fraud investigations in this area: only seven Member States were able to provide the data requested.

As regards the amount to be checked per member of staff, most Member States were close to the figure of EUR3.10 million for all the Member States taken together, the exceptions being Greece (EUR16.15 million), Spain (EUR15.00 million) and Portugal (EUR10.88 million).

In the light of the Court of Auditors' Special Report No 10/2001 and given the greater decentralisation of control responsibilities towards the Member States since 2001, it nevertheless seems that the level of risk in this area should be considered as high, and that the organisation of the fight against fraud should be particularly effective in order, wherever possible, to compensate for the shortcomings of upstream controls.

9. Coordination between departments within the Member States

Effective action by the Member States to combat fraud and irregularities requires close coordination between the different departments responsible for the control of Community resources and expenditure.

It can be seen from the Member States' contributions that, in some cases, new horizontal measures were taken in 2002 in order to strengthen coordination and information exchange between the different departments involved in the protection of financial interests. Sweden reports that it has set up a board under the authority of the Economic Crimes Bureau with the main task of improving cooperation between the departments directly or indirectly responsible for protecting the Community's financial interests.

Most of the coordination and information exchange mechanisms reported by the Member States operate, however, at sectoral level (traditional own resources, agricultural expenditure, structural measures).

Tables 4.1., 4.2. and 4.3. in the Annex list by sector the new measures taken by Member States in 2002 with a view to organising such coordination.

These comprise measures to coordinate controls and investigations carried out by different bodies (in order to avoid duplication or indeed lack of action in specific cases), measures to exchange information between the different departments responsible for controls and investigations (administrative authorities, police, customs, judicial authorities, etc.) and measures enabling the administrative authorities to report cases of suspected fraud to the judicial authorities.

Title III - Statistics and Analyses

10. The situation in 2002

10.1. Introduction

The Community legislation defines the conditions for the notification of frauds and other irregularities by the Member States with a view to protecting the Community's financial interests in all areas of activity [92]. The Member States are obliged to inform the Commission of all irregularities with an impact above EUR4,000 (EUR10,000 for traditional own resources) and of the various stages in the procedure for recovering the amounts involved.

[92] See in particular Article 3(1) of Council Regulation (EEC) No 595/91 of 4 March 1991 (OJ L 67, 14.3.1997), Commission Regulation (EC) No 1681/94 of 11 July 1994 (and No 1831/94 of 26 July 1994 (OJ L 191, 27.7.1994) for expenditure, and Article 6(5) of Council Regulation (EC, Euratom) No 1150/2000 for traditional own resources.

The distinction between irregularities and frauds is due to the fact that frauds [93] are acts which a judge alone is authorised to determine the criminal nature following judicial proceedings. In this context, as long as the judicial procedure has not come to an end, the Commission is informed of irregularities, some of which give rise to suspicions of fraud. It is clear that the quality of the information, and in particular, the speed with which the Member States notify cases as well as the accuracy of their data and the fact that it involves a centralised management system, impact on the overall statistical image of irregularities (sometimes fraudulent) which may appear in the management of Community funds. It has to be recognised that the reliability of the communication system suffers from these different difficulties.

[93] See the definition in Article 1 of the Convention on the protection of the Communities' financial interests of 26 July 1995 (OJC No 316 of 27.11.1995), entered into force on 17 October 2002.

The practices of the national administrations, still vary despite the efforts made at harmonisation. The data communicated by the Member States is often incomplete, in particular a number of cases do not include any mention of the amounts or of references to the identification of the products concerned. Also the distinction between "frauds" and other irregularities remains due to the fact that the Member States do not always have the same view of criminal risk. Consequently, communications refrain, in a not insignificant proportion, from identifying the case as a fraud or a simple irregularity.

Therefore, the figures which are presented here must be handled with great caution. It would in particular be inappropriate to draw simple conclusions on the level of frauds in this or that part of the Union or on the efficiency of the services which contribute to the protection of financial interests. The Commission is working in close cooperation with the Member States to improve the notification system for irregularities, in particular to clarify the concepts of "fraud" and "irregularity" [94]. The Commission is also endeavouring to make progress with the recovery procedures for old cases and to clear the important backlog of debts which exists in certain fields (see point 12.2 below).

[94] The Commission opened a dialogue with the representatives of the Member States to clarify basic concepts and to convince all the Member States that the communication of irregularities in no way prejudices the outcome of criminal judicial proceedings. A working document concerning the practical modalities for the communication of irregularities was established. Discussions are continuing in the Advisory Committee on the Coordination of Fraud Prevention.

It must be noted in addition that the results of the notifications from the candidate countries did not justify a specific development at this stage. This is not surprising, given that the management of Community funds has been delegated to these countries only recently. The Commission however ensures that the conditions necessary for the notification of irregularities are met in the perspective of these countries' membership.

10.2. Cases notified by the Member States

In general, the number of frauds and other irregularities as notified for the year 2002 is on the rise: after a fall in 2001, the figure rises by 13.1% in own resources (see Annex 1), 36 % in agriculture (see Annex 3); in structural actions, the number of cases more than quadrupled, a trend which ties in with the closure of programmes for the period 1994-1999 (see Annex 5). The number of detected cases in direct expenditure is also on the rise (+21%, see Annex 6).

In all areas except direct expenditure, amounts are also on the increase, which is in line with average term trends: respectively by 35.8% and by 41% in traditional own resources (see Annex 1) and in agriculture (see Annex 3). In the field of structural actions, the total amount has tripled, which is in line with the increase in the number of cases (see Annexes 4 and 5). In direct expenditure (Annex 6) the total amount is stable.

It is to be reminded that the financial impact of frauds and other irregularities is below 1% of the budget concerned, with the exception of structural actions due to the closing schedule mentioned above.

10.2.1. Traditional own resources (see Annex 1)

Article 6(5) of Regulation N° 1150/2000 requires Member States to inform the Commission, via the OWNRES system, of cases of fraud and irregularity where the amount involved is greater than EUR10,000. This information enables the Commission to describe trends in this area:

10.2.1.1. Number of cases of fraud and irregularity

In all, for the period 1989-2002- on the basis of the data available on 06.06.2003 - the OWNRES system containes 30,184 notifications (16,666 master records and 13,518 updates).

In 2002 alone, the Member States reported 2,119 cases, as against the 1,873 cases notified in 2001, an increase of 13.1%. As the number of cases reported between 1997 and 2001 tended to fall year on year, this rise reverses the trend.

In comparison with 2001, the increase in the number of cases is particularly marked in Belgium (+63.5%), Denmark (+40.3%), Greece (+136.4%), Italy (+48.5%) and Sweden (+88.9%). However, the number of cases reported by the Netherlands and the United Kingdom fell significantly, by 15.6% and 35.4% respectively.

10.2.1.2. The amounts established rose by 35.8% in comparison with 2001.

The notifications received in 2002 involved duties established totalling EUR324,544,459, a rise of 35.8% compared to 2001. This increase confirms the overall upward trend in amounts established since 1998, apart from the exceptionally high figure in 2000 that was due to the New Zealand Milk Products case. Recoveries totalled EUR80,562,638 in 2002, 24.82% of the amount established compared with 21.46% the previous year.

Analysis of the amounts established revealed that in some Member States the amount grows irrespective of any rise or fall in the number of cases. In comparison with 2001 the increase in the amount established is particularly striking in Belgium (+253.4%), Germany (+324.5%), the Netherlands (+465.4%) and Ireland (+79.4%). By contrast, the amounts established fell in Finland (-75.1%), Greece (-97.5%), Italy (-56.7%), Spain (-61.7%) and the United Kingdom (-52.3%).

By comparing the information contained in the reported submitted in 2002 with the data for 2001 it was possible to come up with some explanations for these major fluctuations. In Belgium, 26 of the 484 cases involved imports of bananas from the USA under false AGRIM certificates, and there were 62 cases of cigarette smuggling. There was also one case of irregularities involving anti-dumping duty in connection with imported silicon. The increase in the figure established by Germany was in part due to 28 cases of irregularities involving sugar. The amount established by Greece fell in comparison with 2001 because the previous year, Greece had reported two cases concerning beef and veal involving approximately EUR6,2 million.

In 2001, Finland had reported a large figure relating to imports of petroleum derivatives; in 2002, there was no such discovery. The increase in the amount established in Ireland stems from two cases, worth about EUR0.622 million, of cars imported from the USA. In 2002, Italy reported 100 cases of smuggled cigarettes. The amount established fell sharply by comparison with 2001, when Italy had reported 22 cases of irregularities in connection with bananas involving approximately EUR78,2 millions. The rise in amounts established in the Netherlands derives from 19 cases of cigarette smuggling worth EUR50,03 millions.

In Spain the amount established fell in comparison with the previous year because in 2002 Spain had reported 12 cases of irregularities relating to aeroplanes involving EUR17,85 million. In Sweden the number of cases increased, but the amount of duties involved remained small. As regards the United Kingdom, even after comparing the data for 2001, there appears to be no specific reason that explains the overall fall in the number of cases and amount established. It is possible that there was less activity in 2002. In any case, the Member State will be invited to explain the situation at the next meeting of the Advisory Committee on Own Resources.

10.2.2. Agricultural expenditure (Annexes 2 and 3)

In 2002, Member States reported 3,285 irregularities under Regulation (EEC) N° 595/91 against 2,415 irregularities in 2001. This is an increase of more than 36%. The total amount affected in 2002 was about EUR198 million as against about EUR140 million in 2001, an increase of more than 41%. All the irregularities notified for this sector only correspond however to 0.46% of the agricultural budget. Moreover, the average amount per irregularity has decreased since 1994. Annex 2 gives an overview per Member State of the number of irregularities, the amounts affected and the percentage of the EAGGF expenditure.

In 2001, training was given to staff of all Member States to ensure that 2002 would be the first year in which all communications of irregularities under Regulation (EEC) N° 595/91 were forwarded to OLAF in digital format rather than on paper. Unfortunately, not all Member States are yet using the digital format. At the end of 2002, three Member States (Germany, Greece and Spain) were still using paper format. Among these three, Germany and Spain are responsible for more than 52% (1,709 communications) of the total number of communications.

Another problem is the very late communication of irregularities. Over 2,147 communications were communicated past the deadline [95]. The digital format, however, should make it easier to communicate on time.

[95] Irregularities have to be reported within 2 months following the end of each quarter (Art. 3 and Art. 5 Reg. 595/91)

Chart 10.1 below illustrates how the communications were sent:

Chart 10.1: Irregularities communicated by Member States

>REFERENCE TO A GRAPHIC>

There is, as stated in the 2001 Annual Report, no certainty that the total number of communications received represents the total of frauds and irregularities detected by Member States. One reason for this is the fact that some Member States did not send communications in each quarter but only in one or two quarters. Another reason is the fact that some Member States already reported irregularities for the year 2003 in the first two months of the year 2003. In this period, irregularities from the last quarter of the previous year are normally reported, therefore it is likely that these communications relate to irregularities of 2002. It must also be taken into account that not all communications for the 4th quarter 2002 (deadline 28 February 2003) were sent and received on time. OLAF received from Spain and Germany respectively 300 and 250 communications concerning 2002 in April 2003. History shows that some Member States still report cases 6 months past the deadline. Chart 10.2. gives an idea how the communications were sent throughout the year.

Chart 10.2: Irregularities communicated by Member States in the year 2002

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The 2001 Annual Report stated that there could be a break in the trend of a steady and significant increase in the number of cases over recent years. The figures for 2002 show that the trend of a steady and significant increase in the number of cases is still there. The total cases reported for 2002 are 3,285. These 3,285 cases alone amount to ± EUR198 million compared to ± EUR140 million in 2001, that is an increase of 870 cases and close to 60 million euros. Striking is the fact that the average amount per irregularity is decreasing since 1994. In chart 10.3., the total number of cases per year and the total amount per year are shown. Annex 3 gives an overview over the years 1998-2002.

Chart 10.3: Irregularities communicated by Member States period 1971 - 2002

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The highest number of communications in 2002 was from Spain, Germany and France. In monetary terms, Italy was the Member State that reported the highest level of fraud and irregularities, i.e. almost EUR80 million, followed by Spain with a reported amount of more than EUR59 million. Spain and Italy account for more than 70% of the total amount of fraud and irregularities. The amounts reported by Germany, France, Ireland and the United Kingdom are low. Whilst these four Member States have a relatively high number of cases the amount affected is relatively low. In Annex 2 an overview is given per Member State.

Chart 10.4: Link between total amount and average amount

>REFERENCE TO A GRAPHIC>

Chart 10.4. gives an impression of the relation between the total amount of the irregularities per Member State and the average amount per irregularity by Member State. Almost all Member States have a comparable relation between the total amount and the average amount per case. Striking are however the results for Greece and Spain. Spain reports a large number of cases with a relatively low amount involved. The opposite is true for Greece: the average amount per case is extremely high compared with the total amount involved. An analysis of the nominal data "type of irregularity", and the modus operandi will give a clearer view on these cases.

Member States should report the year of expenditure in their communications. However, only in 26.7% of cases do Member States actually report the year of expenditure. A point of concern is that Member States report a relatively high number of cases, i.e. 25.3%, in which the irregularity or fraud took place 5 or more years ago.

In addition, Member States also report the date of discovery of the irregularity and the date it was reported to OLAF. Chart 10.5. shows an overview of the lapse (in years) between the discovery and the reporting of the irregularity. In two cases the irregularities were discovered more than 20 years ago but only now reported to OLAF. Both cases were qualified as "fraud" and the total amount involved was over EUR4 million. The other cases, which were reported 10 years or more after discovery, were either qualified as "fraud" or were not qualified. The total amount involved was almost EUR13 million.

Almost 90% of irregularities are notified within 2 years following their discovery.

Chart 10.5: Years between the discovery and the reporting of the irregularity

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The very late reporting of a case could implicate that not all necessary actions were taken by a Member State to limit or to reduce the financial impact of an irregularity. This could be the case when for instance a Member State starts their administrative or judicial procedures at the same time as the reporting time. This could also have consequences concerning the recovery possibilities, the "diligence" of a Member State and the Clearance of Accounts procedure.

10.2.3. Structural measures (Annexes 4 and 5)

For what concerns structural measures, Member States are due to report cases of irregularities under Article 3 of Regulations N° 1681/94 [96] and 1831/94 [97] within two months from the end of each quarter. Under Article 5 of the same Regulations they have to submit updates of the cases communicated.

[96] Regulation 1681/94 applies to the Structural Funds, that is to say European Regional Development Fund (ERDF), European Social Fund (ESF), European Agriculture Guidance and Guarantee Fund (EAGGF) - Section Guidance and Financial Instument for Fishery Guidance (FIFG).

[97] Regulation 1831/94 applies to the Cohesion Fund.

The year 2002 has been, in many aspects, a very particular one:

>REFERENCE TO A GRAPHIC>

Firstly, some Member States started reporting cases of irregularity in electronic format.

For the moment, administrations from only 4 countries (Netherlands, Finland, Portugal and Sweden) reported cases digitally. Chart 10.6 provides a quantification of the cases received in electronic format, 98% of which came from the Netherlands.

Secondly, but most important, as the programming period 1994-1999 draws to its closure the number of cases of irregularities reported has dramatically increased from 1,194 of 2001 to 4,656 of last year. Also the amounts affected reported increased from EUR216 million to over EUR614 million. Annexes 4 and 5 show respectively the breakdown of communications per Member State and the general trend of new cases reported per year.

Also in 2002, as in 2001, the majority of cases communicated by Member State concerned Structural Funds (EAGGF Guidance Section, ESF, ERDF, FIFG). With regard to the Cohesion Fund (which amounts to approximately EUR3 billion a year), out of the four beneficiary Member States (Greece, Spain, Ireland and Portugal), only Spain did not report any case of fraud/irregularity. However only four cases were communicated to OLAF involving almost EUR10 million and the irregularities were either detected before the final payment or the amounts were fully recovered.

From the total number of cases communicated, the European Regional Development Fund (ERDF) was the most affected in 2002, both in terms of cases reported (2,716) and of amounts affected (over EUR403 million).

The analysis of patterns across Member States in the previous year was confirmed in 2002 for the European Social Fund (ESF) as the Netherlands communicated the highest number of cases. Germany turned out to be the country having reported the highest number of cases in general, especially concerning the ERDF. In fact, Germany and the Netherlands alone reported more than half of the total both in terms of number of cases and in amounts.

Charts 10.7 and 10.8 help highlighting some interesting aspects of the communications from the different Member States.

>REFERENCE TO A GRAPHIC>

It should be noted that Member States have been ordered according to the budget allocated from the Structural Funds, Denmark being the one with the lowest amount and Spain the one with the highest [98]. The darker line (the one with rhombus markers) shows the amounts affected by irregularities reported by each Member State, while the lighter one (with square markers) reflects the number of cases communicated. Chart 10.7 highlights that, apart from two relevant exceptions (Germany and the Netherlands), there is a clear link between the budget allocated to each Member State and the irregularities communicated.

[98] Luxembourg has not been taken into account given the fact that it reported no irregularities. Figures are those related to the programming period 2000-2006

Such link is even more evident in chart 10.8 where only the total irregular amounts per Member State are shown and the linear trend (dark straight line) stresses it. If Germany and the Netherlands are taken out of the chart, the dependence of the two variables would be even more evident.

>REFERENCE TO A GRAPHIC>

10.3. Cases under investigation by OLAF

It must be born in mind that more detail of OLAF's activity is given in the annual Activity report provided under Regulation N°1073/99.

In 2002, OLAF dealt with 415 new cases, as compared with 381 in 2001. Activity therefore is regularly on the rise and is broken down below by budget area.

>TABLE POSITION>

The second table presents data related to cases that were closed in 2002 and their budgetary impact, reflecting phases of the activity for each budget area. It shows steady increase of activity, not so much as regards the number of cases as from the point of view of amounts. Ongoing investigations are not presented in this table.

>TABLE POSITION>

10.3.1. Traditional own resources

In the field of traditional own resources 155 new investigations were opened, compared with 74 in 2001. These new cases concern mainly frauds on anti-dumping duties of Asian origin (China and South-East Asia). 168 cases were closed in 2002, 98 in 2001, with a budgetary impact of approximately EUR464.9 million: this amount includes EUR375.90 million in agricultural and in the sugar sector EUR29 million for customs duties on the cigarettes, combustible products and alcohol.

The investigations currently under way in the field of anti-dumping duties cover much higher amounts (approximately EUR60 million for two cases concerning imports of television sets and recordable CDs). OLAF increased its efforts in this field, taking into account not only the financial interests of the European Union but also the economic interests which the tariff measures protect, in particular the situation of the Community's industry.

10.3.2. Agriculture

In the field of agriculture expenditure, 36 new cases were opened in 2002 (14 for agricultural subsidies and 22 for direct aid) compared with 105 in 2001 and investigations in the field were still under way at the end of the reporting period.

50 cases were officially closed, representing a financial impact of EUR208.7 million (including EUR153.7 million for direct aid). In this field in 2002, OLAF paid close attention to the problems raised by the long term set aside programme in Greece. This work is now completed and OLAF forwarded its final report to the Greek judicial and administrative authorities, in order that they ensure properly the follow up of the judicial and financial actions of recovery against the companies and persons involved. The financial impact is at least EUR3.4 million and could reach EUR20 million.

In July 2002, OLAF closed a case concerning the export, by a Belgian operator of tinned meat products, unduly declared for export, involving refund during the period from 1996 to 2001. The Belgian authorities launched a recovery procedure for an amount of EUR7 million. The Belgian company is a subsidiary of a Netherlands meat marketing group, for which a similar fraud mechanism had been noted in the Netherlands and which had also been the subject of follow up measures.

10.3.3. Structural funds

In 2002 the Structural Funds sector opened 38 new investigations compared with 66 in 2001 broken down as follows: 42% ESF, 38% ERDF, 16% EAGGF - Guidance and 4% FIFG. In particular, priority was given to serious or transnational cases that may have had a significant impact on Community interests. During the same period 270 investigations (compared with 66 in 2001) were closed, a particular effort having been made to clear the ongoing cases.

The fraudulent mechanisms detected at the time of these investigations concern in particular false invoices, false statements of expenditure connected with the absence of supporting documents. Efforts were made to improve cooperation with national authorities, particularly in relation to spot checks. In the same vein, close cooperation has been developed with the Commission departments involved.

10.3.4. Direct expenditure (Annex 6)

The direct expenditure and external aid sector is managed exclusively by the Commission. The activity in this field increases, despite the decreasing share of these policies from the general budget of the Communities (less than 0.5% since 2001). This is explained by the aim of the Commission of ensuring effective protection in a field where it is a direct administrative authority and where OLAF is, in general, the only investigative body. In 2002, 136 new investigations were opened (compared with 103 in 2001) including 97 in the field of external aid. During the same period, 128 files were closed (122 in 2001) with an impact of approximately EUR28.9 million.

Consequently, the budgetary impact mentioned in this report relates only to the cases that closed in 2002, given that these figures do not give a complete picture of the overall fight against fraud against the budget. Moreover, it can often be the case that the incidence is not connected to the EU budget strictu sensu, but also have consequences for national budgets or budgets of separate institutions.

10.3.5. Internal investigations

Internal investigations cover of course all the sectors of Community activity and they remain a priority activity of OLAF.

In 2002, 50 new investigations were opened, compared with 33 in 2001. 36 cases were closed compared with 13 in 2001, which indicates an increase in the activity which is linked with better cooperation between the European institutions. The budgetary impact of EUR13.72 million, a slight reduction in relation to the previous financial year (EUR20.87 million) has no link with the objective sought which is not mainly financial.

11. Specific analysis: trends

11.1. Traditional own resources

Notification of cases of fraud and irregularities under Article 6(5) of Regulation N° 1150/2000 revealed the following tendencies:

11.1.1. The breakdown of frauds and irregularities by customs procedure and the typology of cases of fraud and irregularity confirm the importance of fraud in the area of goods put into free circulation.

2002 figures (69.37% of the cases and 51.59% of the amounts detected) confirm the leading place of cases involving goods put into free circulation but also show a downward trend: with regard to the number of cases, the fall is 4.04% in relation to 2001 and 10.29% in relation to 2000; regarding the amounts, the fall is 34.9% in relation to 2001 and 41.1% in relation to 2000. The detailed breakdown of frauds and irregularities detected by type of fraud for goods put into free circulation makes it possible to observe the high share - and slightly higher in number of cases as well as in amounts - of undeclared goods.

On the other hand, the impact of transit fraud (number of cases: + 4.78% in relation to 2001 - amounts detected: + 16.06% in relation to 2001) is higher. A slight increase is also to be noted in fraud in customs warehousing (+ 1.95% in relation to 2001). The heading other procedures is also on the increase; the globalisation of information under this heading, already demonstrated in previous years, distorts the analysis.

11.1.2. The breakdown of cases of fraud and irregularity by type of goods and origin confirms the impact, in particular, of fraud involving cigarettes.

Examination of the 25 most important types of goods involved in fraud cases reveals the same picture as in previous years: in terms of numbers of cases and amounts established, fraud involving cigarettes and bananas accounts for the largest share and is growing. The figures for 2002 also highlight a significant trend of fraud involving sugar and aluminium. Examination of the 25 most common places of origin reveals that products of USA and Chinese origin are still top of the list, and are moving farther ahead of products of Japanese origin. The number of cases recorded under the headings unspecified or unknown remains high, which to some extent undermines the analysis of impact by origin.

11.1.3. Improving the reporting of cases of fraud and irregularity

The notifications by the Member States of cases of fraud and irregularity do not always reflect the true picture. Experience shows that there needs to be real improvement in both the quantity and quality of the information supplied. To encourage the communication of increasingly precise and up-to-date information that reflects both the customs and budgetary reality, the Commission is redoubling its efforts regarding the gathering and analysis of data sent in by the Member States. To this end the Commission has adopted a twin-track strategy:

11.1.3.1. Comparison of amounts entered in the separate account and cases reported under Article 6(5) of Regulation N° 1150/2000.

In March 2002, the Commission asked the Member States to draw up a full list of the amounts entered in their separate accounts at 31 December 2001.

While awaiting the final results, the Commission conducted a preliminary analysis based on the first replies it received in an attempt to find out whether it was possible to establish a link between the amounts entered in the separate account and the cases reported using the OWNRES software. This initial study showed that the methods used by the Member States to generate the two kinds of data made it impossible in many cases to establish a link between them. It was equally true that the proportion of cases where such links could be established varied considerably from one Member State to another. This situation was partly due to differing interpretations of fraud and irregularity which led some Member States to adopt a third category (neither fraud nor irregularity) and not report the amounts concerned. The Commission points out that under Article 6(5) amounts over EUR10 000 entered in the separate account must be reported.

Analysis of the replies from the other Member States is underway and should make it possible to refine the initial conclusions and outline the key reasons for this state of affairs. The objective is to propose technical and operational solutions at national and/or Community level. This question will be examined at the next meeting of the Advisory Committee on Own Resources in July 2003, with a view to proposing technical and operational solutions at national and/or Community level. The Commission will take the measures necessary to ensure that the reporting of cases of fraud and irregularity in 2003 takes account of these comments.

11.1.3.2. Development of a more effective tool for transmitting data to improve the quality of communications.

A number of anomalies and other transmission problems have highlighted the difficulties faced by the Commission and the Member States in managing the data on fraud and irregularity using the OWNRES software. After registering and examining the needs of the users (the Member States and the Commission), the Commission departments concerned have set about installing a more reliable and user-friendly application on the web to make the necessary improvements regarding the methods of transmission and the quality of information. This application will replace the current communication tool, which has proved to be too expensive and inefficient.

The application will not need to be specially installed. The Member States can enter and update reports of fraud and irregularity in real time and the data will be stored immediately. Member States will be able to modify entries at any time. There will be a system to enable encrypted data to be transmitted securely. The system should be put into operation in September 2003, following a presentation seminar organised by the Commission for the Member States.

11.2. Agricultural expenditure (EAGGF-Guarantee)

By the end of April 2003, OLAF had received 3,285 cases for 2002. As mentioned above, not all cases that occurred during 2002 have been communicated yet. Until all communications for 2002 are received by OLAF, it is impossible to give a full picture of the situation. Nevertheless, a number of conclusions can, however, be drawn.

Products involved

The following charts represent figures concerning the products that were involved in fraud and irregularities. Chart 11.1. gives an overview of how often a certain product was involved in an irregularity. The selection is based on the first 2 characters of the Combined Nomenclature (CN-code). In annex 10, an overview is given of these CN-codes. The largest number of reported irregularities, i.e. 1,548 cases, has the code 99, which stands for "unknown". This means that Member States are unable to identify the products in more than 47% of the irregularities. This is remarkable especially when it concerns export declarations as the CN-code is clearly stated. In second place comes code 01, which concerns live animals. Member States reported 561 irregularities with a total amount of EUR6.2 million. Code 00, which stands for "not applicable" concerns irregularities linked to direct aid, for instance the rural environment protection scheme with a total amount involved of almost EUR4.4 million. The following chart gives an overview of the products involved and the number of irregularities.

Chart 11.1: Reported cases and the products or goods involved

>REFERENCE TO A GRAPHIC>

It is more useful, however, to look at the amounts involved. Analysis on the basis of the amounts can help identifying the areas and sectors with higher risks and, more important, help to develop a control and/or investigation strategy so that the limited sources of manpower can be better used.

In chart 11.2., an overview is given of the products in which the highest total amount as well as the average amount per product are reported [99].

[99] In charts 11.1 and 11.2, the CN Code is used to give an overview of the manner in which a product is involved in an irregularity. The top 12 categories are the following:

Chart 11.2: Total amount and average amount per case

>REFERENCE TO A GRAPHIC>

The highest total amount was found in the irregularities in which the Member States reported an "unknown" for the product. The total amount was ± EUR75 million. The average amount, that is the amount per irregularity, however, was relatively low at about EUR48.750. This shows that reporting an "unknown" does not help to identify the irregularities and, looking at a higher goal, does not help to improve the fight against fraud. The information has no added value.

Where Member States have reported a product, the highest total amount as well as the highest average amount was reported for "edible fruit and nuts, peel of citrus fruits or melons" (code 08). France, Greece, Italy and Portugal reported irregularities in this area. In ± 61% of these cases the irregularity has been qualified as "fraud". The total amount involved was ± EUR35.8 million and the average amount per case was ± EUR730,000.

Second "best" in this chart of irregularities is code 07, "edible vegetables and certain roots and tubers". Five Member States reported irregularities: Germany, France, United Kingdom, Italy and the Netherlands. The total amount involved was ± EUR30 million and the average amount per case was ±EUR500,000. In ± 34% of these cases the irregularity was qualified as "fraud".

Also worthy of mention is code 17, "sugars and sugar confectionery". The total amount of the reported irregularities may not be as high but the average amount per irregularity, however, is relatively high. Germany, Denmark, Spain, France, Great Britain, the Netherlands and Portugal reported irregularities. The average amount per irregularity was ± EUR390,000. None of these cases were qualified as "fraud". These cases were either qualified as an "irregularity" (± 37%) or did not receive a qualification.

The graph also highlights irregularities in which a relatively low average amount is reported. To have an insight in the areas and/or sectors where relatively low amounts are involved could also help in the process of setting priorities concerning controls and investigations. These irregularities concern the following products:

- Code 21: Miscellaneous edible preparations

- Code 18: Cocoa and cocoa preparations

- Code 01: Live animals

- Code 23: Residues and waste from the food industries; prepared animal fodder

- Code 10: Cereals

The average amount per case is less than EUR15,000.

11.3. Structural measures

In paragraph 10.2.3 it was stated that Member States' behaviour in the reporting of irregularities is not consistent. The following analysis tries to give some explanation to that statement.

Chart 11.3 [100] shows the average amount of the irregularities in each Member State and how they are distributed in relation to the overall mean (straight horizontal line). It is quite striking to note the significant differences between Member States and especially the "distance" between the highest average value (Italy, EUR285,006) and the smallest (Sweden, EUR10,063).

[100] Member States are listed in order according to the budget allocated from the Structural Funds (programming period 2000-2006), being Denmark the one with the lowest amount and Spain the one with the highest. Luxemburg has not been taken into account given the fact that it reported no irregularities.

>REFERENCE TO A GRAPHIC>

Furthermore, in chart 11.4, communications have been divided into five classes according to the amount affected by irregularities (EUR4,000 to 10,000; EUR10,001 to 50,000; EUR50,001 to 150,000; EUR150,001 to 1 million; over EUR1 million). The largest number of cases communicated relates to amounts between EUR4,000 and EUR50,000 (first two classes in the chart) and accounts for 66% of the total number of cases reported to OLAF.

>REFERENCE TO A GRAPHIC>

It should be stressed that Sweden (the country with the lowest average value) did not report any cases involving amounts higher then EUR150,000. For Finland and Austria (second and third lowest average amount) reported, respectively, only the 2% and 3% of cases involves amounts higher than EUR150,000. On the contrary, 39% of the cases from Denmark and 26% of the cases communicated by Italy are above EUR150,000, followed by Germany (19%), United Kingdom (17%), the Netherlands (16%) and Spain (15%).

Also the types of irregularity reported differ among Member States. Italy and Germany (to a lesser extent) communicated several cases of "falsification" (of documents, supporting documents, requests for aid, accounts) [101]. Despite the high amounts reported, no other Member State, have encountered the same situation, with almost insignificant exeptions in Spain, Portugal (1 case each) and the United Kingdom (3 cases).

[101] As reported by the Italian authorities, 70% of the cases involving amounts between EUR150,000 and EUR1 million involved "falsifications". 55% of the cases involving amounts higher than EUR1 million were the result of the same problem.

Table 11.5 illustrates some figures concerning the most frequent types of irregularities together with an indicative implicated amount and the indicative average amount:

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It must be noted that due to the reporting method a single case may contain more than one type of irregularity. Therefore it has been specified how many times the type of irregularity has been communicated alone and how many times together with other codes. The implicated amount shown as "indicative" sums up all the values related to that specified code, distorting the real total results. [102]

[102] Therefore the 'total' row has been omitted. The values expressed under "indicative implicated amount" and "indicative average amount" columns are only "virtual".

The exact total amounts are those reported in annex 4.

It is important to underline that the most frequent types of irregularity are the same as in the year 2001.

As with last year, it should be stressed that the «999 - other irregularities» code has a great impact on the overall evaluation. Under this code the irregularities that do not fit any other possible description provided for by the communication system are reported.

However, their weight on the total has decreased since last year (23% in 2002 compared to 28% of 2001 concerning frequency and 23% against 35% for the amounts). Nevertheless, the availability of more precise information in this field would certainly aid interpretation of the statistics concerned.

Finally, it should also be stressed that in relation to the most frequent type of irregularity («325 - no eligible expenditure») the Netherlands reported the highest number of cases (205 of the 613 in the column "Frequency (alone)") and Austria (0), Belgium (0) and Italy (1) communicated the lowest. The United Kingdom used the generic code «999» most frequently (125 on 420), while Italy and Finland used it in only 2 cases.

Overall, the quality of the information communicated by the Member States improved this year in comparison with previous years. However, more effort could be made in terms of consistency and respect of the time limits fixed by sectoral regulations for the transmission of the communications to OLAF. This situation should further improve with the adoption of the electronic system of transmission by more Member States.

12. Financial monitoring

The Commission is responsible for monitoring the recovery by the Member States of amounts unduly paid and lost resources. The year 2002 is in line with preceding years. However, to the exception of agriculture where the Commission is already implementing specific measures, the amounts recovered in 2002 amounted to approximately one fourth of the new amounts concerned by fraud and other irregularities in the area of traditional own resources and that of direct expenditure, and almost 40% in structural actions. Given the lengthy procedures, especially judiciary procedures at national level, and taking into account that total amounts to be recovered are much lower than 1% of the sectoral budget, this result is rather encouraging. The Commission however is not satisfied with it and expects improvements to result from the revision of management and control methods as well as from efforts targeting the burden of the past.

12.1. Traditional own resources (Annex 7)

Article 8 of Decision 2000/597/EC, Euratom delegates the collection of traditional own resources to the Member States. [103] The Commission monitors the way in which the Member States perform this task to ensure the amounts are recovered in accordance with Community legislation on customs and financial matters [104]. To this end, the Commission has developed an overall monitoring strategy that allows it to evaluate action taken by the Member States and take remedial measures where necessary. [105]

[103] Council Decision 2000/597/EC, Euratom of 29.9.2000 (OJ L 253, 7.10.2000).

[104] The Community Customs Code, Decision 94/728/EEC and Regulation (EC, Euratom) N° 1150/2000.

[105] For details of the strategy see the reporter on the protection of financial interests and the fight against fraud for 2000.

There are three main principles in this strategy: a sample survey of the ongoing processing of cases, the write-off procedure for amounts of own resources above EUR10,000 that are considered irrecoverable and application of the principle of financial responsibility for certain errors made by national administrations.

12.1.1. Sample survey

In view of the very large number of reports of cases of fraud and irregularity (hereinafter fraud reports and mutual assistance forms), to help it monitor recovery the Commission set up a system for analysing the data known as the B Sample, which involves a detailed examination of certain especially difficult cases reported in the context of mutual assistance.

The aim of the procedure is to monitor recovery operations in a certain number of representative cases until final clearance. Two reports of this type, B94 and B98, have been produced. [106] A third such report was supposed to appear in 2001, but the original sample had to be changed as four cases of irregularities regarding origin no longer needing processing, following a the ruling of the Court of First Instance on Turkish TV sets [107]. A new sample was subsequently selected but this required additional information to be gathered. The third report, report B2003, should appear at the end of 2003.

[106] Commission reports on the recovery of traditional own resources in cases of fraud and irregularities (Sample B 94, COM(97) 259 final, 9.6.1997, and Sample B98, COM (1999) 160 final 21 April 1999).

[107] Joined cases T-186/97, T-187/97, T-190/97 à T-192/97, T-210/97, T-211/97, T-216/97 to T-218/97, T-279/97, T-280/97, T-293/97 and T-147/99, Kaufring AG et al. v Commission, 2001 [ECR] II - 01337.

12.1.2. The write-off procedure

The Member States take the necessary measures to make available traditional own resources, except in cases where recovery proves impossible for reasons not attributable to the Member State concerned. Write-off cases (amount >10,000 EUR) are reported to the Commission for examination. Where the Member State demonstrated due diligence when attempting to recover the amount, the amount can be written off. Where this is not the case, the Member State is held responsible under Article 8 of Decision 2000/597 and Articles 2 and 17 of Regulation No 1150/2000. Examining the diligence of the Member States is a highly effective way of convincing national administrations to take recovery very seriously, as they can be held financially liable in the event of non-recovery. Analysis of cases under Article 17(2) also provides the Commission with an opportunity to make observations on the establishment of own resources, the way in which the separate account is kept and whether national legislation complies with Community law.

In 2002, six Member States (Germany, Spain, Italy, Ireland, United Kingdom, Netherlands and Portugal) submitted 87 requests for amounts to be written off to the Commission under Article 17(2) of Regulation N° 1150/2000 for a total of EUR103,018,053.43. In all, however, 88 cases were examined. The results, in financial terms, of the review of the 88 cases (11 from Germany, 7 from Spain, 35 from Italy, 1 from Ireland, 6 from the United Kingdom, 27 from the Netherlands and 1 from Portugal) are as follows:

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For the year 2002, at 10 April 2003, 52 cases had already been referred (15 from the Netherlands, 20 from Spain, 1 from Ireland, 6 for Austria, 10 for the UK) for a total amount of EUR22,658,845.11.

12.1.3. Application of the principle of financial responsibility

12.1.3.1. The financial responsibility of the Member States for their administrative errors

The Own Resources Decision requires the Member States to take all possible measures to collect traditional own resources. As this responsibility is remunerated (25%) and to ensure the sound and efficient management of public funds, Member States are financially liable for any lack of diligence on the part of the Member States that results in a loss of resources. This approach means that the Commission holds the administrations financially responsible for their own errors. [108]

[108] These cases are identified on the basis of Articles 220(2)(b) (administrative errors that could not be reasonably detected), 221(3) (statute-barring as a result of inactivity on the part of the customs service), Articles 869 and 889 of the rules implementing the Community Customs Code or where the customs service has failed to comply with the Community Customs Code and thereby created legitimate expectations on the part of the operator.

In 2002, four Member States (the United Kingdom, France, Austria and Italy) made available to the Community budget own resources that they had been unable to recover from the debtors owing to errors made by their own administrations. The total amount transferred by the four Member States came to EUR7,471,501. Other Member States, while understanding the principle of financial responsibility, are continuing to submit counter arguments. To resolve this question of different interpretations of Community law, the Commission brought a test case regarding financial responsibility before the Court of Justice on 8 November 2002 (Case C-329/02).

In all, 27 cases were opened in 2002. At the end of 2002, there were 114 cases open, involving in principle EUR50,861,860 as against EUR50,933,636 in 2001. The slight drop in the amount is mainly due to the fact that the new cases of financial responsibility opened in 2002 were offset by the stripping out of the amounts involved in the Turkish televisions case and the withdrawal of a file.

12.1.3.2. External financial responsibility

Moreover, throughout 2002, the Commission has continued to develop the external aspect of the principle financial responsibility with a view to increasing the liability of partners to international trade agreements that the Union has concluded or will conclude with non-member countries. Progress is still slow owing to the attitude of Member States and certain non-member countries. Following discussions in the Council between the Commission and the Member States, on 6 June 2002, the Member States finally agreed that the financial liability clause should be included in the directions for negotiation with Albania and the ACP countries. The wording was established subject to the outcome of horizontal discussions that the Commission undertook to begin with the Member States and that took place in the Council's Customs Union Group on 31 January and 10 March 2003. Bearing in mind the results of these discussions, which were extremely fruitful from a technical point of view but did not cover the political dimension as expected by most of the Member States, the Commission is considering ways of making the best progress on this matter.

12.2. (EAGGF Guarantee Section): Expenditure

In 2002, Member States communicated, pursuant to Regulation 595/91, 3,285 irregularities for a total amount of EUR 198,079,000 (see Annex 2).

The situation as regards recovery in 2002 (see Annex 8) is presented as follows:

- the overall sum to be recovered was EUR2,177,477,000, for the communications prior to 2002;

- to this amount, EUR171,579,000 were added relative to the communications received during 2002;

- the amounts relating to the cases for which a legal procedure is current account for overall approximately EUR738,466,000, with regard to the period prior to 2002;

- finally in the same period, the amounts declared irrecoverable pursuant to Article 5, par. 2 of Regulation 595/91, and which are waiting for a formal decision within the framework of the procedure of auditing of accounts, were EUR149,798 000.

On 3 December 2002, the Commission adopted a second communication on "the improvement of the recovery of the debts of the Community resulting from direct management and from the shared management of Community expenditure" [COM(2002) 671 final ].

With regard to the EAGGF Guarantee sector, the Commission concluded that an important arrear still exists concerning the information on the recovery of the amounts unduly paid, with regard to the cases of irregularities communicated by the Member States under Regulation 595/91. In order to clarify the situation and to prepare formal decisions on the financial consequences [109], the Commission decided to create a Task force on "Recovery" (hereafter mentioned "TFR").

[109] In accordance with Article 8(2) of Regulation 729/70.

The Task Force, which is a joint action of OLAF and of DG AGRI, will examine all the cases of irregularities related to the EAGGF-Guarantee communicated by the Member States for 1995, 1996, 1997 and 1998 and for which the final recovery situation of the unduly paid amounts has not yet been notified.

Except for Italy, the communications for the years previous to 1995 have already been the subject of a previous review which began in 1999; the final conclusions are currently examined within the framework of the procedure of auditing of accounts. For Italy, the Task Force will also examine all the EAGGF Guarantee cases communicated for the years prior to 1995, to clarify the real situation of the recovery of the amounts unduly paid.

The Task Force will prepare formal decisions on the financial consequences for all the communications from all the Member States done before 1999. These formal decisions on each Member State will be taken separately within the framework of the procedure of Auditing of Accounts [110].

[110] As provided for by Regulations 729/70 and 1258/1999 (which apply to the expenditure carried out as from 1 January 2000), as Commission Regulation 1663/95 establishing the detailed rules for the application of Regulation 729/70 with regard to the procedure of auditing of the EAGGF Guarantee accounts.

12.3. Structural measures (Annex 9)

In 2002, Member States communicated pursuant to Regulations 1681/94 (financing of the structural policies) and 1831/94 (financing of the Cohesion Fund) 4,656 cases of irregularities for an overall amount of EUR614,094,000 (see annex 4).

The situation as regards recovery in 2002 (see annex 9) is presented as follows:

- an amount of EUR337,656,000 remains to be recovered concerning the communications of irregularities, pursuant to Regulations 1681/84 and 1831/84, received before 2002;

- to this amount, EUR368,287,000 were added relating to the communications received during 2002.

In the field of the Structural Funds, i.e. measures part-financed under multi-annual programmes, the crucial phase with regard to the financial follow-up are that of the closure of the intervention in question. As regards the 1994-1999 programming period, the closure of the programmes has started, the deadline for the presentation of the balance being on 31 March 2003. A considerable number of cases which were communicated under Article 3 of Regulation 1681/94 have normally to be the subject of a discharge except for the actions suspended for legal reasons. The Commission will finish the exercise of closure in 2003. The results of the closure are already apparent under the communications of 2002. Almost 40% of the amounts affected by the irregularities were the subject of recovery; for the majority of cases, by means of withdrawing the amount of the request from the balance submitted to the Commission.

The new Regulation 448/2001 makes it an obligation for the Member States to notify the Commission, once a year, of the balance of pending recoveries. This facilitates the financial follow-up and the charging to the Member States of the amounts lost because of their negligence.

12.4. Direct expenditure (including external aid)

The direct expenditure sector of the budget is managed mainly by the Commission and the European Office for the fight against fraud has special responsibility in this area. In cases of direct expenditure, fraud and irregularity investigated by OLAF where it is not considered appropriate to launch criminal proceedings, the Office ensures that important elements arising either during the course of investigations or from the final investigation reports are communicated to the authorising Directorate General (DG) for the expenditure in question so that appropriate safeguard measures and/or recovery action may be initiated in a timely manner. OLAF also supports the authorising DG throughout the financial follow-up and recovery process with the provision of advice and additional explanations as necessary.

Where, however, OLAF's investigations lead it to believe that further criminal action should be taken in a case or where criminal proceedings are already in progress, it ensures that the necessary steps are taken for the Commission to bring such action (or equivalent measures under the law of the country concerned) with a view to securing the recovery of unduly paid funds.

In this area, 50 direct expenditure fraud/irregularity cases [111] were referred to the Follow-up unit in OLAF during the reporting period. Most cases are still ongoing because of protracted legal proceedings, some of a criminal nature. In the reporting period, 6 cases were closed; of which (only) 3 cases had a financial impact ('financial follow up') [112]. The total of actual financial recoveries in the reporting period amounted to EUR3,485,222. Many of the fraud/irregularity cases in question involved (as has been the situation in 2001) unauthorised expenditure, false or inflated claims for payment of expenses, or the non-delivery/fictitious delivery of contracted projects, goods or services.

[111] 26 cases external aid; 19 cases direct expenditure and 5 cases Anti-Corruption.

[112] Of the latter in 2 cases nearly everything has been recovered (EUR 5.832,00).

As regards the investigations conducted on all EU policies by the European Office for the fight against fraud, attention must be drawn to the fact that the figures do not take account of cases which required no financial follow up upon closure. Hence the differences in case numbers and financial impact between the present figures and those shown above regarding the investigations by the Office.

The data, extracted from the internal database (Case management system) are periodically reviewed and updated.

STATISTICAL ANNEXES

ANNEX 1 Traditional own resources (updated 06 June 2003)

Number of cases of fraud and irregularity reported by the Member States [113] 1998 - 2002 (Amounts in euros)

[113] Member States must notify cases of fraud and irregularity where the amounts exceed EUR10 000 in accordance with a Community obligation laid down in Article 6(5) of Regulation n° 1150/2000 of 22 May 2000.

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ANNEX 3

(update 07/05/2003)

EAGGF GUARANTEE

IRREGULARITIES COMMUNICATED BY THE MEMBER STATES

YEARS 1998 - 2002

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- The concept "irregularity" includes fraud. The qualification as fraud, meaning criminal behaviour, can only be made following a penal procedure.

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ANNEX 4

STRUCTURAL ACTIONS

IRREGULARITIES COMMUNICATED BY THE MEMBER STATES UNDER REGULATIONS N° 1681/94 AND 1831/94

2002

Update 01/07/2003

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- It includes 1 communication concerning the Cohesion Fund** It includes 2 communications concerning the Cohesion Fund

ANNEX 5

STRUCTURAL ACTIONS

TREND OF THE IRREGULARITIES* COMMUNICATED BY THE MEMBER STATES UNDER REGULATIONS 1681/94 AND1831/94 AND THEIR IMPACT ON THE BUDGET

1997- 2002

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*The concept of "irregularity" includes "fraud". The classification of fraud, meaning criminal behaviour, can only be made following a criminal procedure.

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ANNEX 6

DIRECT EXPENDITURE

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ANNEX 7 Traditional own resources (updated 6 June 2003)

Cases of fraud and irregularity reported by Member States for 2002 (Amounts in euros)

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ANNEX 9

STRUCTURAL ACTIONS

SITUATION OF THE RECOVERY IN THE CASES COMMUNICATED UNDER REGULATIONS N° 1681/94 AND 1831/94

(Amounts in 1.000 EUR)

Update 01/07/2003

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ANNEXES

ANNEXE TITLE I

FOLLOW UP OF THE 2001-2003 ACTION PLAN

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ANNEXE TITLE II :

- Implementation of Article 280 by the Member States in 2002 -

Measures taken by the Member States to protect the Communities' financial interests

Texts contributing to the implementation of Article 280 of the EC Treaty - principal legislative, regulatory and administrative developments

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2. Texts contributing to the implementation of the Convention on the Protection of the Community's financial interests

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3. Organisation of departments for the protection of the Communities' financial interests

The following overview tables represent staff assigned to different types of controls in the respective sectors (own resources, agricultural expenditure, structural actions) during the reporting period, estimated in full-time equivalent. [114]

[114] Member States were asked to limit their estimates to staff that is effectively responsible for the execution of these controls, i.e. excluding supporting personnel (secretariat, archives,...).

3.1 Traditional own resources

The first table below represents staff assigned by Member States to each of the control functions (ex ante, ex post and anti-fraud) in the field of traditional own resources.

Having regard to possible differences between Member States as regards the interpretation of the definitions given in the questionnaire, the following results should be interpreted with caution.

Table 3.1. Own resources : manpower assigned by each Member State to the three types of control [115]

[115] In the field in question:

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3.2. Agricultural expenditure (expenditure financed by the EAGGF-Guarantee section)

The following table represents staff assigned by Member States to each of the control functions (ex ante, ex post and anti-fraud) in the field of agricultural expenditure.

Having regard to possible differences between Member States as regards the interpretation of the definitions given in the questionnaire, the following results should be interpreted with caution.

Table 3.2. Agricultural expenditure : manpower assigned by each Member States to the three types of control [116]

[116] In the field in question:

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3.3. Structural measures

The following table represents staff assigned by Member States to each of the control functions (ex ante, ex post and anti-fraud) in the field of structural measures.

Having regard to possible differences between Member States as regards the interpretation of the definitions given in the questionnaire, the following results should be interpreted with caution.

Table 3.3. Structural measures : manpower assigned by each Member State to the three types of control [117]

[117] In the field in question:

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4. Co-ordination between departments within the Member State

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