[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 12.7.2006

COM(2006) 378 final

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

Protection of the Communities’ financial interests – Fight against fraud – Annual report 2005

{SEC(2006)911}{SEC(2006)912}

TABLE OF CONTENTS

Introduction 4

1. Assessment of the 2001-05 overall strategic approach for the protection of the European Communities’ financial interests 5

1.1. An overall legislative anti-fraud policy 5

1.2. A new culture of operational cooperation 8

1.3. Preventing and combating corruption in the institutions 9

1.4. Enhancement of the criminal judicial dimension 10

1.5. Conclusion 11

2. Results of the fight against fraud: statistics concerning fraud and otherirregularities reported by the Member States under sectoral regulations 12

2.1. Traditional own resources 13

2.2. Agricultural expenditure (EAGGF Guarantee) 14

2.3. Structural measures 14

2.4. Pre-accession funds 15

3. Measures taken by the Member States and the Commission in 2005 16

3.1. Measures taken by the Member States 16

3.1.1. New horizontal measures 16

3.1.2. New measures relating to Community own resources 17

3.1.3. New measures relating to agricultural expenditure 17

3.1.4. New measures relating to structural measures 18

3.2. Operational measures adopted by the Commission to fight fraud 18

3.3. Complementary measures for the protection of the Communities’ financial interests 19

3.3.1. State of play with the ratification by Member States of the Convention of 26July 1995 on the protection of the European Communities’ financialinterests and its protocols 19

3.3.2. The Customs Information System (CIS)and the ratification of the Conventionon the use of information technology for customs purposes and of its protocol creating a Customs File Identification Database (FIDE) 20

3.3.3. The Philip Morris International Agreement 21

4. Recovery 21

4.1. National recovery procedures involving civil or administrative proceedings 21

4.2. Recovery by the institutions 25

4.3. The Recovery Task Force and the EAGGF Guarantee Section 26

4.4. Reform of the system of financial monitoring of irregularities in agricultural policy 28

5. Procedures for certifying the accounts 28

5.1. Roadmap for a positive statement of assurance 28

5.2. Procedure for certifying proper implementation of public expenditure in the Member States 29

INTRODUCTION

Protection of the Communities’ financial interests and the fight against fraud is an area in which responsibility is shared between the Community and the Member States. Each year the Commission, in cooperation with the Member States, produces a report setting out the new measures taken to satisfy these obligations, in accordance with Article 280 of the EC Treaty. This report is sent to the European Parliament and the Council and is published.

In the first section of the report, the Commission provides an assessment of its five-year (2001-05) overall strategic approach for the protection of the Communities’ financial interests. Despite the many obstacles, the overall result of the implementation of the objectives and actions programmed is satisfactory.

The second section contains a statistical summary of the cases of irregularities reported under the sectoral regulations.

The third section contains an illustrative selection of the measures taken in 2005 by the Member States and, for the Commission, a description of the efforts made to improve the effectiveness of the European Anti-Fraud Office (OLAF).

It was agreed with the Member States to present two specific themes in the fourth and fifth sections of the report. The fourth section sets out the measures taken to improve recovery of sums not collected or paid unduly. This is the organised financial monitoring that is the only way of remedying the damage caused to the European budget by fraud and other irregularities.

The fifth and final section deals with the question of the certification of Member States’ accounts . The majority of the European budget is managed in cooperation with the Member States. This point includes a brief comparison of the control principles and standards and of the certification systems (where they exist) applied by the Member States.

The report provides only a summary and overview of the measures taken and the results achieved by the twenty-five Member States. The Commission is also simultaneously publishing two working documents[1], one listing the Member States’ contributions and the other on statistics for the irregularities notified by the Member States.

Past years’ reports and the associated Commission staff working documents are available on the OLAF website[2].

1. ASSESSMENT OF THE 2001-05 OVERALL STRATEGIC APPROACH FOR THE PROTECTION OF THE EUROPEAN COMMUNITIES’ FINANCIAL INTERESTS

The protection of the European Communities’ financial interests depends on a culture of strong cooperation between the national and Community levels. The Commission’s aim was to put in place an overall strategic approach in this field that includes all actions contributing to this common objective, in order to ensure convergence between the efforts of the national authorities and the institutions involved in prevention. This includes operational activity, financial follow-up, the application of sanctions, prevention and the preparation of legislation providing a framework for these activities, whether for the first or third pillar.

In its Overall Strategic Approach, adopted on 28 June 2000[3] in the context of the inclusion of Article 280 EC in the Amsterdam Treaty and the creation in 1999 of the European Anti-Fraud Office (OLAF), the Commission adopted its political and general objectives for the period 2001-05. It identified four main strategic guidelines for the protection of the European Communities’ financial interests:

- an overall legislative anti-fraud policy;

- a new culture of operational cooperation;

- an inter-institutional approach to prevent and combat corruption;

- enhancement of the penal judicial dimension.

The implementation of this overall strategic approach was given practical shape in the 2001-03[4] and 2004-05[5] Action Plans.

1.1. An overall legislative anti-fraud policy

The Commission has endeavoured to follow a horizontal and cross-pillar approach to anti-fraud policy, integrating all sectors in which fraud and corruption may appear. Anti-fraud legislation must make provision for follow-up and cooperation, as well as prevention and detection.

In 2001 the Commission announced that it was putting in place an internal Commission “fraud-proofing” mechanism[6] to improve the quality of legislation and the management of contracts in order to make them more “resistant to fraud”. Since 2003 an inter-departmental group has been identifying each year legislative initiatives and model contracts in the process of being drawn up that could present a major risk to the Communities’ financial interests. The European Anti-Fraud Office is consulted ahead of the drafting of such documents. During the period 2004-05 the Office has examined in all 28 initiatives.

The introduction of the euro was accompanied throughout the programming period in question by numerous measures to combat the counterfeiting of euro coins and notes. Among the measures adopted, the Commission enhanced the legal framework for action and intervention, as well as the framework for international cooperation on specific matters.

In a 2002 Communication[7] focusing on improving the recovery of unduly paid agricultural funds prior to 1999, the Commission announced the establishment of a Recovery Task Force (RTF) to clarify the situation of unrecovered debts and to draw up decisions on financial liability under the formal accounts-clearance procedure in the EAGGF Guarantee Section (see point 4.2).

The new Financial Regulation[8], which came into force in 2003, enhanced considerably the protection of the Communities’ financial interests:

- It makes for more effective recovery.

- It makes provision for a move from cash-based to accrual accounting. Since 2005 the Commission has therefore been in compliance with the strictest international accounting standards, has improved its day-to-day management of funds and has reduced to a minimum the risk of errors or irregularities.

- It provides for an information system that makes it possible to exclude from public contracts by means of an administrative decision unreliable candidates and tenderers with criminal convictions or who provide misleading or fraudulent information. A similar mechanism was adopted under the Directive on the coordination of procedures for the award of public works contracts[9]. In the context of its Communication on Transparency[10], the Commission intends to study the possibility of making greater use of the exclusion system and to produce proposals in this respect in the amended proposal concerning the Financial Regulation[11].

In 2004 the Commission adopted proposals amending the basic regulations governing investigations by OLAF[12]. The aim of these proposals was, among other things, to clarify the rules on information exchanges between the Office and Community institutions, agencies and organisations, and to allow the Office to concentrate on its operational priorities and to speed up its investigations, thereby enhancing its effectiveness. The proposals also aimed at strengthening the procedural rights of those under investigation. On the basis of these proposals, the European Parliament and the Council called for a complementary assessment of the performance of the Office, which the Commission presented in October 2004[13]. The Court of Auditors produced a special report on the management of the Office[14], accompanied by several recommendations. In July 2005[15] the European Parliament organised a public hearing on strengthening OLAF. On this occasion, it was noted that the Office’s organisational structure, independent in its investigations while being integrated into the Commission from an administrative point of view, does indeed work.

In the light of these developments, the Commission adopted in May 2006 a proposal supplementing the progress made in its proposal of February 2004, which it has replaced and which has been withdrawn. This proposal deals in particular with governance and the cooperation between the institutions and the Supervisory Committee via the latter's meetings with the representatives of the European Parliament, the Council and the Commission under the structured dialogue. It also makes provision for the establishment of a Review Adviser to formulate opinions for a certain number of cases and is designed to clarify the mandate of the Director-General of OLAF.

Events in 2005. In 2005 the Commission adopted its second report[16] on the application by the Member States of the Black List Regulation[17]. This Regulation provides for the identification of economic operators that present a risk to the Community budget in the field of the EAGGF Guarantee Section, the notification of the Commission and the Member States, and the implementation of preventive measures. The report found that the results of the application of the Regulation had been modest. Via this report, the Commission hopes to provoke a wide-ranging debate with the institutions on the need and possible guidelines for a potential reform of the exclusion mechanism.

1.2. A new culture of operational cooperation

Since 2001 the Commission has made efforts to help the ten new Member States and the candidate countries adopt the acquis in terms of the protection of the European Communities’ financial interests. The ten new Member States, Romania and Bulgaria established national anti-fraud coordination services (AFCOS) to take responsibility for all of the legislative, administrative and operational aspects of protecting the Communities’ financial interests, which have proved very useful. Ten new Member States were brought into the fold without any particular difficulties and took adequate steps to prepare for their new task of protecting the Communities’ financial interests. In order to provide better support for Romania’s and Bulgaria’s accession process, OLAF has reinforced its activities and operational effectiveness by detaching a liaison officer to each of the two countries.

In 2004 the European Community and its Member States signed a Cooperation Agreement[18] with the Swiss Confederation on fraud prevention and all other illegal activities detrimental to their financial interests.

Also in 2004 the Commission proposed the adoption of a regulation concerning mutual administrative assistance[19] that would provide a detailed legal basis and would be horizontal in the sense that it covers all the areas involved in the fight against Community fraud and not yet addressed by sectoral legislation.

Events in 2005. Some international trade transactions carried out in violation of customs rules, including the rules relating to intellectual property, adversely affect the economy and the fiscal interests of the Member States and the customs revenues of the EU budget. Trade with China has given rise to a number of problems in recent years. A cooperation agreement negotiated and signed in 2004 entered into force in 2005, with the aim of improving mutual assistance between the European Community and China in the customs field. The operational side is managed by OLAF.

A permanent technical support infrastructure (POCU), with better cooperation and support for joint customs operations by the Member States, was launched at OLAF. POCU will allow better cooperation for joint customs operations, enabling them to proceed rapidly at a lower cost. The first operation based on the new infrastructure was “Operation Fake” concerning counterfeit goods from China. The operation took place in May 2005 and produced very satisfactory results (see point 3.2).

The regulations in the field of the Structural Funds and the Cohesion Fund requiring the Member States to inform the Commission of cases where there is suspicion that an irregularity has been committed under the sectoral regulations were amended and modernised[20] so as to ensure harmonised implementation. This harmonisation will continue with the amendment of the regulation applicable in the agricultural sector.

The basic rules governing the Advisory Committee for the Coordination of Fraud Prevention were amended by Commission decision[21] so as to adapt them to the changes that had occurred since its establishment in 1994, such as the insertion of Article 280 into the EC Treaty, the establishment of OLAF in 1999, and even the introduction of the euro. The Committee, made up of representatives of the Member States and the Commission, assists the Commission in all matters relating to the protection of the Communities’ financial interests.

1.3. Preventing and combating corruption in the institutions

In accordance with the mission entrusted to it by the Community legislature in 1999, OLAF continued to perform the task of preventing and combating corruption. The European Court of Justice has confirmed on a number of occasions the legality and coherence of the inter-institutional framework for internal investigations, which applies generally to all the institutions, agencies and organisations[22].

The memoranda of understanding concluded by OLAF with the Internal Audit Service (IAS)[23] in 2001 and with IDOC[24] in 2004, describing their respective areas of activity, created the conditions for fruitful cooperation between these bodies. Frequent contacts between OLAF and IDOC in 2005 enabled them to coordinate their activities in specific cases.

In the context of the administrative reform, measures were taken to make Commission officials and other servants aware of the principles of sound project management, conflicts of interest and the correct conduct to adopt in cases where there is suspicion of serious wrongdoing likely to be detrimental to the interests of the Communities.

The Commission proposal amending the legal framework for investigations carried out by OLAF, which was adopted on 24 May 2006, covers, among other things, improvements in the information provided to the institutions and the possibility, for internal investigations, of not transmitting the final report to the competent judicial authorities if the offences are not serious enough, if the financial loss is minor and if internal measures may be taken to ensure appropriate follow-up, the report being transmitted to the institution, body or agency concerned.

1.4. Enhancement of the criminal judicial dimension

The Commission included this fourth guideline in its overall strategic approach in order to address the difficulties linked to the incompatibility of the national legal systems and the need to handle complex and often transnational legal matters.

In 2001 the Commission presented to the European Parliament and to the Council a proposal for a directive on the criminal-law protection of the Community's financial interests[25]. This proposal aims to bring together in a Community instrument a number of criminal-law provisions (including the definition of illegal behaviour, liabilities and sanctions, and cooperation with the Commission) that are present in the Convention on the protection of the European Communities’ financial interests[26] and its protocols[27].

The said Convention, its first protocol and the protocol on the jurisdiction of the Court of Justice entered into force in 2002, improving judicial cooperation in various areas. The Commission recommended that the Council invite the Member States to intensify their efforts to strengthen national criminal legislation, reconsider their reservations with regard to the instruments of the Convention and ratify without delay the second protocol. It is currently preparing a second report[28] on the implementation of the Convention and the protocols already in force, which should be adopted late in 2007 and will cover the 25 Member States.

The EU’s desire to advance the principle of mutual recognition, which has become the cornerstone of criminal judicial cooperation, led to intensive legislative activity in the areas covered by Title VI of the EU Treaty. This activity had a positive effect in particular on the protection of the Community's financial interests. For example, the adoption of the framework decision on the European arrest warrant[29] in 2002 makes it considerably easier to arrest an individual and surrender him to another Member State for the purposes of conducting a criminal prosecution or executing a custodial sentence or detention order.

The memorandum of understanding signed by OLAF and Eurojust in 2003 makes provision for mutual exchanges of information and cooperation with a view to protecting the Community’s financial interests. The practical implementing arrangements were adopted by OLAF and Eurojust in 2004. An OLAF-Eurojust liaison group has been set up to put the memorandum into effect. The group held regular meetings in 2005. In this context, Eurojust cooperated with OLAF and national authorities in a number of OLAF cases, taking part in the relevant investigations and prosecutions.

The memorandum signed by OLAF and Europol in 2004 makes provision for the enhancement of exchanges of strategic and technical information, and information exchanges on risk assessment and analysis in areas of common interest. In 2005 OLAF and Europol stepped up their collaboration, particularly on smuggling and euro counterfeiting. The Office also maintains contacts with international authorities such as Interpol and the World Customs Organisation (WCO).

In 2001 the Commission adopted a Green Paper[30] intended to launch debate on the establishment of a European Prosecutor in the interests of combating more effectively criminal activity detrimental to the financial interests of the European Communities. Article III-274 of the Treaty establishing a Constitution for Europe, adopted by the European Council in June 2004 but not yet ratified by the Member States, stipulates that the Council, acting unanimously and after approval by the European Parliament, may establish a European Prosecutor's Office on the basis of Eurojust in order to combat offences detrimental to the Union's financial interests. The Prosecutor’s Office would be empowered to investigate, pursue and send for prosecution the authors of such offences and their accomplices.

Events in 2005. The Commission noted in a communication[31] the consequences of the landmark ruling of the Court of Justice on criminal-law provisions concerning the first and third pillars[32], particularly on the proposal for a directive on criminal-law protection of the financial interests of the Communities. In accordance with this judgment, when recourse to a specific criminal-law provision for the matter in question is necessary to guarantee the effectiveness of Community law, it must be adopted exclusively under the first pillar. This system puts an end to the dual-text mechanism (directive or regulation and framework decision).

1.5. Conclusion

Five years after the launch of the overall strategic approach, a positive assessment can be made of the actions undertaken. As shown in the summary above, significant progress has been achieved in each of the main strategic guidelines for the protection of the European Communities’ financial interests. However, the enhancement of the criminal judicial dimension has slowed down. For example, preparation for the establishment of a European Prosecutor has slowed down temporarily pending ratification of the Constitutional Treaty.

Of all the actions planned for the whole of the programming period, 75% were carried out in full prior to 31 December 2005, while 9% were partially carried out within the stipulated timeframe and are ongoing, 14% were postponed to 2006, and 10% have been provisionally or definitively suspended, largely for reasons outside the Commission’s control.

2. RESULTS OF THE FIGHT AGAINST FRAUD: STATISTICS CONCERNING FRAUD AND OTHER IRREGULARITIES REPORTED BY THE MEMBER STATES UNDER SECTORAL REGULATIONS

Community law requires Member States to notify the Commission of cases of fraud and other irregularities that are detrimental to financial interests in all areas of Community activity[33]. The statistics given in this chapter relate to suspicions of fraud and other irregularities reported by the Member States, as defined by the sectoral regulations. Direct Community expenditure is not concerned[34].The paper published by the Commission at the same time as this report contains a detailed analysis of the statistics obtained from these communications[35]. The following table provides a sectoral breakdown of irregularities reported in 2005 and the amounts concerned[36].

Table - Number of irregularities and the amounts - 2005

TOTAL 2005 |

Field | Number of irregularities reported | Total financial impact (in € million) |

Own resources | 4 982 | 322 |

EAGGF Guarantee | 3 193 | 102 |

Structural Funds and Cohesion Fund | 3 570 | 601 |

Pre-accession funds | 331 | 17 |

Total | 12 076 | 1 042 |

It is important to distinguish between fraud and irregularities. Fraud is defined as an irregularity that is committed intentionally and constitutes a criminal act that only a judge may define as such[37]. The real financial impact of fraud can be measured only at the end of legal proceedings. As regards own resources, suspicions of fraud account for approximately 20% of the cases of irregularities notified in 2005 and involve an amount of some €95.2 million. For agricultural expenditure, suspicions of fraud account for approximately 13% of the cases of irregularities notified and involving an amount of some €21.5 million, equivalent to 0.05% of the total EAGGF Guarantee Section appropriations. For the Structural Funds, approximately 15% of the irregularities notified and involving an amount of €205 million were attributed to fraud and accounted for some 0.53% of the total appropriations for the Structural Funds and the Cohesion Fund. For pre-accession funds, fraud accounted for approximately 18% of the irregularities notified and involving an amount of some €1.77 million, equivalent to 0.06% of the total appropriations under the PHARE[38], SAPARD[39] and ISPA[40] funds. This estimate is based on the information reported by the Member States, but must be treated with caution.

2.1. Traditional own resources

The number of cases of detected fraud and irregularities communicated (cases >€10 000) increased by 55 % compared with 2004 (4 982 cases in 2005) [41] . The amount affected by irregularities in 2005 is around €322 million, as compared with €212 million in 2004, an increase of 52%.

This increase could be explained, in particular, by better communication by some Member States and by the fact that some Member States have entered into the OWNRES system cases of undischarged transit operations that were subsequently, although belatedly, discharged. The bald increase of 55% does not therefore justify any conclusion as to the actual situation regarding fraud and other irregularities.

Cigarettes are still among the products most affected by irregularities, with most cases reported concerning cigarette smuggling. In 2005 the number of cases relating to the sugar sector also increased. These were essentially cases of non-exportation of sugar exceeding the quantity approved by the Community system. There was also an increase in the number of cases relating to the textile sector, particularly concerning declaration of origin.

[pic]2.2. Agricultural expenditure (EAGGF Guarantee)

In 2005 the number of notified irregularities decreased slightly compared with the previous years (3 193 cases in 2005, 3 401 cases in 2004). On the other hand, their financial impact increased (€102 million in 2005, €82 million in 2004), representing around 0.21% of total EAGGF Guarantee appropriations (€47 819 million for 2005).

[pic]2.3. Structural measures

In 2005 the number of irregularities notified (3 570 cases, including the Cohesion Fund) increased over the previous year (3 339 cases), whereas their financial impact decreased (€601 million in 2005, €696 million in 2004). The financial impact of the irregularities notified in 2005 accounts for around 1.56% of the Structural and Cohesion Fund appropriations (€38 430 million) for 2005. The final impact will not be known until the programmes have been wound up.

[pic]2.4. Pre-accession funds

A notification system for irregularities similar to that for the Structural Funds was established by the Multi-Annual Financing Agreement for PHARE, SAPARD and ISPA funds and for the funds granted to Cyprus and Malta[42].

Table 2.4.: Irregularities and amounts notified by the Member States and the accession countries[43] concerning pre-accession funds – 2002-2005[44].

Year | PHARE[45] | SAPARD | ISPA | TOTAL |

Total | Cases>€500 000 | Cases<€500 000 |

Cases | Amount (€million) | Cases | Amount (€million) | Cases | Amount (€million) |

Initial situation end 2002. Non-recovery cases communicated before 1999, subject to Task Force Recovery audits | 4 228 | 1 212 | 419 | 1 035 | 3 809 | 177 |

Situation end 2004 after TRF audits | 3 690 | 1 059 | 463 | 857 | 3 227 | 202 |

For all 463 cases involving more than €500 000, the audits were completed in the course of 2005. These cases account for non-recovered amounts totalling €857 million.

Progress made in 2005 |

Cases | Amount (€ million) |

A. Audits and bilateral meeting finalised with MS in clearance of accounts procedure (cases > €500 000 each) | 431 | 765 |

B. Audit completed but not yet discussed with MS in clearance of accounts procedure (cases > €500 000 each) | 32 | 92 |

C. Cases < €500 000 not processed/audited by TRF and no clearance of account procedure started | 3 227 | 202 |

In 2006 a formal Commission decision will be adopted under the EAGGF Guarantee clearance of accounts procedure for most cases exceeding €500 000.

4.4. Reform of the system of financial monitoring of irregularities in agricultural policy

By adopting Regulation (EC) No 1290/2005, the Council mapped out the future financing of the common agricultural policy[94]. It decided to set up two separate European agricultural funds, namely the European Agricultural Guarantee Fund (EAGF) to finance, among other things, market measures and direct payments, and the European Agricultural Fund for Rural Development (EAFRD).

The new Regulation reforms the entire system of financial monitoring of irregularities affecting these two new Funds (EAGF and EAFRD) and simplifies the procedure for monitoring recovery in future. Under Articles 32 and 33 of the Regulation, if recovery has not taken place within four years of the primary administrative or judicial finding, or within eight years where recovery action is taken in the national courts (for the EAGF and the EAFRD), or prior to the closure of a rural development programme (for the EAFRD), 50% of the financial consequences will be borne by the Member State concerned and 50% by the Community budget.

5. PROCEDURES FOR CERTIFYING THE ACCOUNTS

5.1. Roadmap for a positive statement of assurance

Although it acknowledged the progress made by the Commission and the Member States in improving their budgetary control systems, for the eleventh consecutive year the Court of Auditors could only deliver a partially positive statement of assurance for payment appropriations under the Community budget. The main problem, according to the Court’s reports, relates to the funds whose management is shared with the Member States. In Opinion No 2/2004,[95] the Court of Auditors proposed a Community internal control framework, based on common standards and principles, which could provide a reasonable assurance that revenue collection and expenditure had been executed in accordance with the legislation in force, while at the same time taking into account the equilibrium between the cost and the advantages of internal control. Obtaining a positive DAS is one of the Barroso Commission’s strategic objectives.[96] To that end, following the Court’s opinion, the Commission adopted in June 2005 a roadmap which makes a number of proposals for an integrated Community control framework.[97] In this document, the Commission referred to the proposal made by the European Parliament at the time of the 2003 discharge in which it suggested a provision on the ex ante publication in a formal statement, and an ex post annual statement of assurance on the legality and regularity of the underlying transactions from the political authority and highest-ranked manager in each Member State (the Finance Minister). This roadmap was accompanied by a gap assessment between the internal control framework within Commission departments and the control principles set out in Court of Auditors’ Opinion No 2/2004[98] (“gap assessment”).

On the basis of these Commission documents and the discussions of a group of experts from the national administrations of the Member States, the ECOFIN Council adopted conclusions on 8 November 2005 in which it took the view that “the existing statements at the operational level may constitute a significant level of assurance for the Commission and ultimately for the Court of Auditors and should prove useful and provide a satisfactory cost-effectiveness ratio and be taken into account by the Commission and ultimately by the Court of Auditors in order to obtain a positive statement of assurance”. The Council called on the Commission to provide an assessment of the controls and the value of the existing statements.

Taking into account the conclusions of the Council, in January 2006 the Commission adopted an action plan for an integrated control framework[99] in which it stated that it was important that the Member States “ensure that their management of appropriations in the name of the Commission reduces the risk of irregularities in expenditure to an acceptable level and are in a position to demonstrate this to national and Community auditors”. Since the management of 80% of Community expenditure is shared with the Member States, the emphasis is on simplifying legislation for the 2007-2013 programming period, on harmonising the control principles and standards applied by the Commission and the Member States by sharing the results of the control and promoting profitability, and on making use of the existing management declarations of operational agencies in the Member States, which are a major source of assurance for the Commission and, ultimately, for the Court of Auditors too.

5.2. Procedure for certifying proper implementation of public expenditure in the Member States

The Commission and the Member States judged that it was in both their interests to collect information on the existing certification systems for the proper implementation of public expenditure in the Member States in order to extract best practice. Moreover, this exercise could be used to examine application of the principle of equivalent protection enshrined in Article 280 of the Treaty.

On the basis of the replies to the questionnaire sent to the Member States, it was possible to obtain a picture of national practices in this field, which are presented below in the form of a table.

This table provides a summary of the answers given by the Member States. A more comprehensive summary containing the detail of the answers can be consulted in the Commission working paper published at the same time as this report.

Certification of national accounts by an internal body[100] | Certification of national accounts by an external body[101] |

BE | No | No[102] |

CZ | Yes | No[103] |

DK | Yes | Yes |

DE | No | Yes |

EE | Yes | Yes |

EL | No | No |

ES | No | No[104] |

FR | No | Yes |

IE | Yes | Yes |

IT | No | Yes |

CY | No | Yes |

LV | Yes | Yes |

LT | Yes | Yes |

LU | Yes | Yes |

HU | Yes | Yes |

MT | No | Yes |

NL | Yes | Yes |

AT | No | No[105] |

PL | No | Yes |

PT | No | Yes |

SL | No | Yes |

SK | Yes | Yes |

FI | Yes | Yes |

SE | No | Yes |

UK | Yes | Yes |

Certification by an internal body

Approximately half of the Member States who replied to the questionnaire possess an internal certification procedure to ensure the legality and regularity of public expenditure[106]. Among them, only Latvia stated explicitly that this certification also concerned funds allocated by the European Community and managed by the national public administration. It should nevertheless be pointed out that, often the certification is delivered at management level and not by an internal auditor proper[107]. In a significant number of cases, the bodies responsible for delivering the certification also issue an opinion on the total amount likely to be recovered by the paying agencies[108]. Certification by an internal body is sometimes delivered at national level[109]; in other cases, it is delivered at the level of the management department or agency[110]. The individual cases of the United Kingdom and Slovakia, where there are several levels of certification (national level, regional level and by fund), should also be noted. These certifications issued by an internal body are submitted to the national parliaments in some cases only[111].

Some Member States[112] have an internal auditing system to ensure the legality and regularity of the national accounts even in the absence of a legal obligation for certification by an internal body. Among them, two indicated that these audits concerned Community funds[113].

According to the responses of the Member States who possess an internal control and audit system, the most widespread standard appears to be INTOSAI.

Certification by an external body

A large majority of Member States declared that they had a legal obligation to obtain from an external body an annual certification that ensured the legality and regularity of public expenditure. The only exceptions were Spain, Italy and Austria. However, it should be noted that, in the case of Greece, Spain and Italy, the Court of Auditors delivers an annual report rather than a certification.

In most cases, this external body is a public body corresponding to the highest state auditing body. Certifications are delivered at national level in most countries[114]. They concern the entire budget[115] and, in all cases, are submitted to the national parliaments, particularly to certify the legality and efficiency of the management of national accounts. Only in some Member States do the certifications provide an opinion on the total amounts likely to be recovered[116].

Control of Community funds (funds in shared management)

In their replies to the questionnaire the Member States indicated that more than half of the national certification bodies provided for in Article 3 of Regulation (EEC) No 1663/1995 for the EAGGF Guarantee Section fulfil the necessary conditions for recognition by the national authorities as certifiers of national accounts[117]. In cases where they do not fulfil the conditions, the Member States explain this by the absence of a legal basis and by the fact that the bodies were established with the specific objective of managing and controlling Community funds. In all such cases, with the exception of Estonia, the Netherlands and Sweden, these bodies also give their opinion on the amounts likely to be recovered by paying agencies.

In the case of the Structural Funds, only a small proportion of national services responsible for issuing the certificate of validity on the winding-up of a programme, as provided for in Article 38 of Regulation No 1260/1999 and Article 15 of Regulation No 438/2001[118], are apparently also responsible for the certification of national accounts[119].

Most Member States[120] have indicated that the certification bodies give an opinion on the amounts likely to be recovered.

Conclusions

The majority of national rules make provision for certification on the national accounts to be obtained from an independent external body, almost always the Supreme Auditing Institution (SAI) at national level. In most cases, the audits carried out by the SAI concern the entire budget, and the audit reports or certifications of accounts are submitted to the national parliaments.

The obligation to obtain a certification delivered by an internal body is not so widespread. Around ten Member States only make such provision. As a result, the situation is more diverse than in the case of certifications by an external body. In a few cases the certification is delivered not by an auditor but at the level of the department in charge of management.

The Commission considers that these documents, in cases where they also concern Community funds, could provide an additional degree of assurance demonstrating the correct usage of European funds. The Court of Auditors could also consider the possibility of taking them into consideration to guarantee the legality and regularity of the accounts of the European budget. [pic][pic][pic]

[1] “List of measures taken by the Member States” and “Statistical analysis of irregularities”.

[2] http://europa.eu.int/comm/anti_fraud/reports/index_en.html.

[3] Communication from the Commission - Protecting the Communities' financial interests - Fight against fraud – For an overall strategic approach (COM(2000) 358 final).

[4] Communication from the Commission - Protecting the Communities' financial interests - Fight against fraud - Action Plan for 2001-2003 (COM(2001) 254 final).

[5] Communication from the Commission - Protecting the Communities' financial interests - Fight against fraud - Action Plan for 2004-2005 (COM(2004)544 final).

[6] Communication from the Commission concerning the fraud-proofing of legislation and contract management 7 November 2001 (SEC(2001)2029 final).

[7] Communication of the Commission – Improving the recovery of Community entitlements arising from direct and shared management of Community expenditure (COM(2002) 671 final).

[8] Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities (OJ L 248, 16.9.2002).

[9] Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts (OJ L 134, 30.4.2004) put into place an information system that makes it possible to exclude tenderers with criminal convictions from public contracts.

[10] Communication to the Commission from the President, Ms Wallström, Mr Kallas, Ms Hübner and Ms Fischer Boel: Proposing the launch of a European Transparency Initiative (SEC(2005)1300).

[11] The Commission adopted on 18 May 2006 an amended proposal for a Council Regulation amending Regulation (EC, Euratom) No 1605/2002 on the Financial Regulation applicable to the General Budget of the European Communities (COM(2006) 213 final).

[12] Proposals for a Regulation amending Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999 relating to the investigations carried out by the European Anti-Fraud Office (OLAF) (COM(2004) 103 and 104).

[13] Commission staff working document, Complementary evaluation of the activities of the European Anti-Fraud Office (OLAF) (SEC(2004) 1370). See also Commission Report, “Evaluation of the activities of the European Anti-Fraud Office (OLAF)” (COM(2003) 154 final).

[14] Court of Auditors’ Special Report No 1/2005 concerning the management of the European Anti-Fraud Office (OLAF), together with the Commission's replies (OJ C 202, 8.8.2005).

[15] Hearing of 12 and 13 July 2005 entitled “Strengthening OLAF: revision of the Regulation on the European Anti-Fraud Office”.

[16] Report from the Commission to the European Parliament and the Council on the application of Regulation (EC) No 1469/95 (COM(2005) 520).

[17] Council Regulation (EC) No 1469/95 of 22 June 1995 on measures to be taken with regard to certain beneficiaries of operations financed by the Guarantee Section of the EAGGF (OJ L145, 29.6.1995).

[18] Council Decision concerning the signature of the Agreement between the European Community and its Member States, of the one part, and the Swiss Confederation, of the other part, to counter fraud and all other illegal activities affecting their financial interests (COM(2004)559 final and OJ C 244, 1.10.2004).

[19] Proposal for a Regulation of the European Parliament and of the Council on mutual administrative assistance for the protection of the Community’s financial interests against fraud and any other illegal activities (COM(2004)509 final).

[20] Commission Regulation (EC) No 2035/2005 of 12 December 2005 amending Regulation (EC) No 1681/94 concerning irregularities and the recovery of sums wrongly paid in connection with the financing of the structural policies and the organisation of an information system in this field (OJ L 328, 15 December 2005), and Commission Regulation (EC) No 2168/2005 of 23 December 2005 amending Regulation (EC) No 1831/94 concerning irregularities and the recovery of sums wrongly paid in connection with the financing of the Cohesion Fund and the organisation of an information system in this field (OJ L 345, 28.12.2005).

[21] Commission Decision of 25 February 2005 amending Decision 94/140/EC setting up an advisory committee for the coordination of fraud prevention (OJ L 71, 17.3.2005).

[22] The European Court of Justice, in its decision in Case C-167/02 P, confirmed on 30 March 2004 the judgment of the Court of First Instance in Case T-17/00 of 26 February 2002 declaring the appeal by 71 members of the European Parliament inadmissible. The appeal sought to annul the Decision of the Parliament of 18 November 1999 amending its rules of procedure, which authorised the European Anti-Fraud Office (OLAF) to carry out its internal investigations also within the European Parliament. In 2003, in Cases C-11/00 and C-15/00, the Court ruled that OLAF could investigate cases of suspected fraud and irregularities within the European Central Bank (ECB) and the European Investment Bank (EIB) on the grounds that Regulation (EC) No 1073/1999 was applicable. The Court also annulled the decisions of the ECB and the EIB aimed at reserving the right for such investigations to be carried out internally.

[23] OLAF-IAS Memorandum of Understanding of 25 July 2001 (SEC(2003) 884/2).

[24] Commission Decision C (2004) 1588 final/4 of 28 April 2004.

[25] COM(2001) 272 final (OJ C 240E, 28.8.2001), amended in 2002 as a result of the comments of the Court of Auditors and the European Parliament (COM (2002) 577 final).

[26] 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).

[27] First Protocol to the Convention on the protection of the European Communities’ financial interests (OJ C 313, 23.10.1996). Protocol 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, (OJ C 151, 20.5.1997). Second Protocol to the Convention on the protection of the European Communities’ financial interests, Joint Declaration concerning Article 13(2) – Commission Declaration concerning Article 7 (OJ C 221, 19.7.1997).

[28] Report from the Commission - Implementation by Member States of the Convention on the Protection of the European Communities' financial interests and its protocols, COM(2004) 709.

[29] Council Framework Decision 2002/584/JHA on the European arrest warrant and the surrender procedures between Member States (OJ L 190, 18.7.2002).

[30] Green Paper on criminal-law protection of the financial interests of the Community and the establishment of a European Prosecutor (COM(2001) 715).

[31] Communication from the Commission on the implications of the Court’s judgment of 13 September 2005 (COM(2005) 583 final).

[32] Judgment C-176/03 Council v Commission .

[33] See in particular Article 3(1) of Council Regulation (EEC) No 595/91 of 4 March 1991 (OJ L 67, 14.3.1991), Commission Regulation (EC) No 1681/94 of 11 July 1994 (OJ L 178, 12.7.1994) and Commission Regulation (EC) No 1831/94 of 26 July 1994 (OJ L 191, 27.7.1994) as regards expenditure and Article 6(5) of Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000 (OJ L 130, 31.5.2000) as regards traditional own resources. A similar obligation exists for countries eligible for pre-accession funds.

[34] The OLAF Operational Activity Report deals with this matter. It can be consulted at the Office’s website: http://ec.europa.eu/comm/anti_fraud/reports/index_en.html.

[35] SEC (2006)...

[36] The statistics given in this chapter relate to expenditure in respect of which the Member States have reported fraud and other irregularities.

[37] See the definition in Article 1 of the Convention on the protection of the European Communities' financial interests of 26 July 1995 (OJ C 316, 27.11.1995).

[38] Poland-Hungary: assistance for economic restructuring, Regulation (EC) No 3906/89, OJ L 375, 23.12.1989.

[39] SAPARD (Agricultural Pre-accession Instrument), Regulation (EC) No 1268/1999, OJ L 161, 26.6.1999.

[40] ISPA (Structural Pre-accession Instrument), Regulation (EC) No 1267/1999, OJ L 161, 26.6.1999.

[41] The figures published in the 2004 report have been updated.

[42] Regulation (EC) No 555/2000 (OJ L 68, 16.3.2000).

[43] Bulgaria and Romania.

[44] The figures published in the 2004 report have been updated (the allocation of cases per year was corrected and ten new cases concerning the years 2002 to 2004 were notified in 2005).

[45] This column includes reports from Cyprus and Malta under Regulation (EC) No 555/2000.

[46] SEC (2006)... The Member States were asked to provide information only on measures that are more than a mere implementation of Community law. Since the Commission's report comes out annually, the lack of any new measures in 2005 in certain Member States cannot be interpreted as reflecting the general level of protection of financial interests in those countries. On the contrary, it may be the result of a higher level of activity in the preceding period.

[47] Ireland, unlike the Commission, considers that “all measures concerning taxes must be taken under the appropriate article of the Treaty, i.e. unanimously”. Consequently, it continues to maintain its reservation concerning the inclusion of VAT in the Article 280 report as, in its view, this is not the appropriate article for the notification of measures for combating VAT fraud.

[48] And in particular those of Commission Regulation (EC) No 438/2001 of 2 March 2001 laying down detailed rules for the implementation of Council Regulation (EC) No 1260/1999 as regards the management and control systems for assistance granted under the Structural Funds (OJ L 63, 3.3.2001) and of Council Regulation (EC, Euratom) No 2988/95 of 18 December 1995 on the protection of the European Communities’ financial interests (OJ L 312, 23.12.1995).

[49] Joint Ministerial Decision No 190622/16.12.2005.

[50] See references to point 1.4.

[51] SEC(2006)…

[52] Convention on the use of information technology for customs purposes, drawn up on the basis of Article K.3 of the Treaty on European Union (Official Journal C 316, 27.11.1995).

[53] Council Act of 8 May 2003 drawing up a Protocol amending, as regards the creation of a customs file identification database, the Convention on the use of information technology for customs purposes (OJ C 139, 13.6.2003).

[54] The CIS is based, on the one hand, on Council Regulation (EC) No 515/97 of 13 March 1997 on mutual assistance between the administrative authorities of the Member States and their cooperation with the Commission to ensure the correct application of law on customs and agricultural matters (OJ L 82, 22.3.1997) and, on the other, on the Convention of 26 July 1995 on the use of information technology for customs purposes, drawn up on the basis of Article K.3 of the Treaty.

[55] For more information, see also the OLAF website at http://europa.eu.int/comm/anti_fraud/fide/i_en.html.

[56] Cyprus, Germany, Hungary, Lithuania, Slovenia and Slovakia.

[57] SEC (2006) …

[58] Belgium, Germany, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Portugal and Finland.

[59] SEC (2006) …

[60] Belgium, Germany, Estonia, Greece, France, Ireland, Italy, Cyprus, Latvia, Austria, Portugal, Finland and Sweden. In Poland, this is possible in tax cases; in the United Kingdom, in agricultural cases.

[61] Slovakia.

[62] Belgium, Czech Republic, Estonia, Greece, France, Ireland, Latvia, Lithuania, Austria and Poland.

[63] Germany, Estonia, Cyprus, Italy, Austria, Portugal, Sweden and the United Kingdom. In France and Finland, the law and case law demand more than just good faith and require the change of situation to have been unforeseeable by the debtor.

[64] Belgium.

[65] Austria.

[66] Sweden.

[67] Portugal. Portuguese law, however, does not require that all these conditions be fulfilled; where one of the factors giving rise to a legitimate expectation is particularly telling, this can offset the fact that another condition has not been met.

[68] Denmark, Cyprus, Poland, Sweden.

[69] Czech Republic, Lithuania, Hungary, Netherlands and Slovakia.

[70] In Sweden a debt cannot be recovered from a bona fide third party. In France, Italy, Finland, Scotland and Slovenia, bona fide third parties can oppose recovery that would injure them, though this is subject to certain conditions. In Spain they can do so if they were unaware of Community law because it had not been transposed into Spanish law. In Belgium they can oppose recovery in the agricultural sphere. In Poland and Slovakia they can do so where they have a claim to goods to be seized. In Austrian law the amount recovered may be reduced if necessary to protect a bona fide third party (e.g. for wages paid).

[71] Belgium (Walloon Region), Estonia, Greece, Latvia (in the area of the Structural Funds), Austria and Poland (for agriculture), and Slovakia.

[72] Cyprus and the United Kingdom.

[73] Finland and the United Kingdom.

[74] Greece, Portugal and Finland.

[75] Ireland, Hungary and Finland.

[76] Estonia, Greece, Netherlands, Portugal and Finland.

[77] Czech Republic, Italy, Cyprus, Latvia, Austria, Poland, Slovakia and Sweden.

[78] Belgium, Spain, Ireland, Italy and Austria (in some cases).

[79] Belgium, Germany, Cyprus, Ireland, Latvia, Lithuania, Austria, Finland, Sweden and United Kingdom. No suspensory effect: Czech Republic, Greece, Spain, France, Italy, Netherlands, Poland, Portugal and Slovakia.

[80] Spain, Greece, Luxembourg, Czech Republic.

[81] A number of Member States reported that tax or customs debts take precedence: Czech Republic, Spain, France, Ireland, Cyprus, Lithuania, Hungary, Netherlands and Slovakia.

[82] Malta and Lithuania.

[83] Denmark, Greece, Spain, France, Hungary, Netherlands, Austria, Poland, Portugal, Slovenia and Slovakia.

[84] Latvia, Finland and United Kingdom.

[85] Belgium, Czech Republic, Netherlands and Sweden.

[86] Malta and Lithuania, where the mechanism does not exist at all.

[87] Denmark (for the Social Fund), Estonia, Portugal.

[88] Belgium, Austria and Finland.

[89] Czech Republic, Greece, Latvia and Netherlands.

[90] France, Italy, Poland, Slovenia and Slovakia.

[91] Denmark (for agriculture) and Hungary.

[92] See reference at point 1.1.

[93] Council Regulation (EC) No 1290/2005 of 21 June 2005 on the financing of the common agricultural policy (OJ L 209, 11.8.2005). See point 4.3.

[94] Council Regulation (EC) No 1290/2005 of 21 June 2005 on the financing of the common agricultural policy (OJ L 209, 11.8.2005).

[95] Opinion No 2/2004 of the Court of Auditors of the European Communities on the “single audit” model (and a proposal for a Community internal control framework) (OJ C 107, 30.4.2004).

[96] Strategic objectives 2005-2009 (COM(2005) 12 of 26 January 2005).

[97] Communication from the Commission to the Council, the European Parliament and the European Court of Auditors on a roadmap to an integrated internal control framework (COM(2005) 252).

[98] Commission working paper concerning the gap assessment between the internal control framework in the Commission services and the control principles set out in the Court of Auditors’ “proposal for a Community internal control framework” Opinion No 2/2004 (SEC(2005) 1152).

[99] Commission Action Plan towards an Integrated Control Framework (COM(2006) 9).

[100] Internal body: individual, department or service dependent on the management and/or payment service for the budget to be certified.

[101] External body: individual, department or service that is independent of the management and/or payment service for the budget to be certified. The annual reports adopted by external bodies and submitted to the national parliament are regarded as account certification systems.

[102] The certification of accounts by an external body does, however, exist for the budget of certain regions.

[103] There is no obligation for certification, but the Czech Republic's supreme audit institution submits to the Parliament its opinion on the implementation of the budget and the final state of the accounts. However, these opinions do not have the status of an audit.

[104] There is no obligation for certification, but the Court of Auditors taxes the general state account and the other public sector accounts, and also manages the public sector in terms of legality and rationality (efficiency and economy).

[105] Even if Austria’s Court of Auditors is not obliged to provide certification of the reliability of federal and provincial accounts, the Court checks that the utilisation of public funds is in compliance with the principles of reliability, legality, regularity, economy, efficiency and effectiveness.

[106] Denmark, Estonia, Ireland, Latvia, Luxembourg, Hungary, Netherlands, Slovakia, Finland and United Kingdom.

[107] Certification is delivered by an internal auditor in Estonia, Netherlands and Slovakia only.

[108] Denmark, Estonia, Latvia, Lithuania, Luxembourg, Slovakia and United Kingdom.

[109] Czech Republic, Lithuania, Luxembourg, Hungary and Netherlands.

[110] Estonia, Ireland, Latvia and Finland.

[111] Czech Republic, Lithuania, Slovakia and United Kingdom.

[112] France, Italy, Cyprus, Lithuania, Malta, Greece and Portugal.

[113] Lithuania, Greece and Malta.

[114] The only exceptions are Belgium (federal and regional level), Germany (certifications at a federal and regional level), Finland (certifications at the level of the accounting office) and United Kingdom (certifications at national level and at project level).

[115] In the case of Poland, certification by an external body is limited to agricultural expenditure.

[116] Cyprus, Estonia, Hungary, Lithuania, Latvia, Luxembourg, Slovakia and United Kingdom.

[117] Czech Republic, Greece, France, Cyprus, Latvia, Lithuania, Luxembourg, a few Austrian provinces, Poland, Slovenia, Slovakia, Finland and the United Kingdom.

[118] In addition to the certificate issued by an independent person or body when a programme is wound up, the paying authority certifies all the declarations of expenditure that are presented to the Commission several times a year.

[119] Italy (for national co-financing), Lithuania, Netherlands and Slovakia.

[120] Denmark, Germany, Ireland, Italy, Latvia, Lithuania, Luxembourg, Hungary, Austria, Slovenia, Slovakia, Finland and United Kingdom.