COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 24.10.1995 
COM(95) 494 final 
REPORT FROM THE COMMSSIQN 
Irregularities in the Management of Community Structural Funds in the New 
German Lander 

Irregularities in the Management of Community Structural Funds in the New 
German Lander 
Introduction 
In its annual report concerning financial year 19931 the Court of Auditors included 
in chapter 7 ("Regional Sector") a passage (paragraphs 7.87 to 7.107 and 7.113) 
concerning European Regional Development Fund intervention in the new German 
Lander. The Court's findings are based, inter alia, on on-the-spot audits in three of the 
new Lander and East Berlin. The Commission's replies to the Court's observations are 
included in the same edition of the Official Journal. 
The European Parliament adopted on 5 April 1995 its decision giving a discharge 
to the Commission in respect of the implementation of the 1993 budget2. The passage 
concerning the Structural Funds in the accompanying resolution includes the following: 
"The European Parliament 
Calls on the Commission to present, by 30 September 1995, a report on the irregularities 
in the eastern German Lander containing the following information: 
- the percentage of irregularities in relation to the number of cases investigated 
(number and sums involved); 
- the sums subject to the Article 24 procedure; 
- the sums to be recovered and those already recovered; 
- irregularities detected by the Commission and the Court of Auditors, on the one 
hand, and those notified by the national authorities in application of the Regulation on 
irregularities (1681/94);" 
Background 
Following the unification of Germany on 3 October 1990 the Council adopted on 
4 December 1990 a specific Regulation concerning the activities of the Structural Funds in 
the territory of the former German Democratic Republic3. The Regulation recognised that 
the special situation in that territory necessitated transitional measures providing for 
OJn0C327of24.II.94 
OJ n° LI41 of 24.6.95, page 58 
Regulation (EEC) n° 3575/90 (OJ n° L353 of 17.12.90, page 19) 
A 
derogations from the normally applicable rules concerning the Structural Funds, and 
acknowledged that Community action must be flexible during a transitional period. 
The Regulation and the Community Support Framework adopted under it 
provided for the Community to commit expenditure of ECU 3000 million at 1991 prices 
in the new Lander and East Berlin over the period 1991 to 1993, distributed among the 
Funds concerned as follows: 
European Regional Development Fund (ERDF) 1500 MECU 
European Social Fund (ESF) 900 MECU 
European Agricultural Guidance and Guarantee Fund 
(EAGGF) Guidance Section 600 MECU 
The present report addresses the question of irregularities arising in the context of the 
operations co-financed by the Community under Regulation n° 3575/90. (Since 1 January 
1994 the normal Structural Funds regulations have applied to operations in the new 
Lander and East Berlin, which now fall under Objective 1 of the Funds.) 
It is appropriate to recall the unprecedented political, economic and administrative 
situation prevailing in the new Lander at the time of unification. Rapid action was 
essential to improve the economic situation, inter alia by major resource transfers from the 
rest of the Federal Republic and from the Community. Knowledge of economic 
conditions in the former German Democratic Republic was incomplete, as a result of 
which measures of assistance decided upon at the outset were not always appropriate. The 
former administrative structure had disappeared and new structures had to be put in place 
from scratch. Despite a major transfer of officials from western Germany to the new 
Lander, there was an inevitable shortage of knowledge and experience of the new 
applicable rules - including the provisions of the relevant Community law - and of the 
workings of the market economy. 
The implementation of Regulation n° 3575/90, including the matter of 
irregularities, should be seen against this background 
Irregularities - a definition 
For the purposes of the present report the Commission interprets the word 
"irregularity" as meaning a failure to respect a relevant Community rule4. In this context 
three points should be made. First, an irregularity does not necessarily have financial 
This definition is without prejudice to the definition that will be adopted within the framework of 
Council Regulation {EC. Euratom) n° (1995) on protection of the Community's financial 
interests (cf. Art. 1) 
implications. Second, many of the instances in question were more properly administrative 
or accounting problems, or problems of interpretation, associated with the difficult start­
up period in the new Lander. Third, the definition does not extend the concept of 
'irregularity" to cases where it might be alleged that an operation, carried out correctly 
from the viewpoint of financial management, did not constitute good "value for money". 
Preventing such cases depends on effective assessment, monitoring and evaluation rather 
than on financial management and control as such. 
Irregularities and administrative problems discovered 
This part of the report gives more detail about iregularities or administrative 
problems found in the new Lander. Most of the cases known to the Commission were 
discovered during on-the-spot checks carried out by the Commission's services under 
Article 23 of Regulation (EEC) No. 4253/88 as amended5. Information in tabular form 
about these checks and the irregularities discovered may be found at Annexes 1 and 2. In 
the course of these checks in the new Lander, the services more particularly responsible 
for the financial management of a given Structural Fund concentrate their attention on 
programmes and projects co-financed by that Fund ; while the on-the-spot checks by 
Financial Control (DG XX) tend to examine more general issues related to the nature and 
adequacy of the overall systems of audit and control in place in the Member States. Some 
joint checks take place in which both Financial Control and one of the managing services 
participate. The programme of visits is coordinated among the services concerned. 
UCLAF undertakes inquiries in certain cases of suspected irregularities and fraud. 
a) in the area of the ESF (controls by DG V) 
In the course of the on-the-spot checks in the new Lander carried out by DG V, 
no cases of serious irregularity were found except for the Flathus programme in 
Thuringen. This case involves a training programme for teachers where it appears that 
only part of the student fees were paid to the schools concerned. UCLAF is pursuing this 
apparent fraud and coordinating the administrative and judicial inquiries in collaboration 
with DG V. 
b) in the area of EAGGF Guidance (controls by DG VI) 
Of the on-the-spot checks in the new Lander carried out by DG VI on financial 
operations co-financed by EAGGF Guidance, two were joint visits involving also 
Financial Control. The main purpose of all the checks was to examine the management 
systems established in the new Lander. Some teething problems were found involving the 
OJ n°L 193 of 31.7.93, page 20 
interpretation and correct application of Community rules by the regional and local 
authorities, which have now been resolved. Real irregularities or fraud by the beneficiaries 
or the responsible administrations leading to the suppression of projects or the recovery of 
sums paid were not found. 
Weaknesses or irregularities discovered included, for example, lack of compliance 
with the rules on publicity and information ; failure to use standard forms for grant 
approvals, control reports, etc.; changes in the indicative financial plan not properly 
recorded in the minutes of the monitoring committee meeting ; and deductions from the 
grant amounts paid out to the final beneficiaries. In relation to this last point the Fund 
Regulation amendments of July 1993 have now provided for the full amount of the grant 
to go through to the final beneficiary6. 
c) in the area of fisheries 
In respect of projects for the processing of fishery products under Regulation 
(EEC) No. 4042/897 DG XIV carried out an on-the-spot check in Mecklenburg-
Vorpommern in October 1994. No irregularity was found, but weaknesses in the 
control,management and administration systems were noted. 
d) in the area of the ERDF (controls by DG XVI) 
During on-the-spot checks in the new Lander by DG XVI, which acted as "lead 
department" for the operations under Reg. n° 3575/90, the following problems have been 
encountered : 
i) numerous cases of failure to respect Community rules on public tendering, 
involving, in particular, failure to publish the market in the Official Journal of the 
European Communities. The Commission suspended the payments concerned under 
Article 24 of Regulation 4253/88. For 27 projects, involving Regional Fund assistance of 
130 mécus, it was possible to substitute other projects. As regards the infringements of 
the public tendering rules, the Commission, given the entirely exceptional circumstances 
obtaining in the new Lander and the fact that the German authorities had expressly 
recognised the infringements, decided in December 1994 not to pursue infringements 
committed up to 31 October 1993. It also decided that any infringement committed after 
that date would be pursued in the normal way and that the repayment of Structural Funds 
credits might be required. 
6 Article 21 (3) of Regulation (EEC) n°4253/88 as amended. 
7 OJn°L388of30.12.89 
ii) German regulations on public finance allow a final beneficiary to include in his 
claims for grant not only expenses for which he can present paid invoices, but also the 
amount which he expects to pay on invoices during the next two months. The 
Commission noted that this practice tended to lead to excessive claims from final 
beneficiaries ; it has therefore obtained that the German authorities should only present 
expenses claims reflecting invoices paid by the final beneficiaries. 
iii) weaknesses in the final beneficiaries' accounting systems, including cases of 
lack of correspondence between information in the central accounting system and 
expenditure found on the spot to have been made, and a case where a recipient was unable 
to present proper specific accounting for an ERDF-assisted project. 
iv) documentation weaknesses. These include instances where the claim for 
assistance was incorrect or incomplete, including cases where the originals of parts of the 
documentation were not available on the spot, as well as other irregularities in respect of 
documentation. 
v) in several cases expenditure ineligible for ERDF grant (e.g. recoverable VAT, 
second-hand investment goods) was found to have been included in expenses claims 
forwarded by the designated authorities to the Commission. 
vi) in numerous instances the project realised did not correspond fully with the 
project for which Regional Fund assistance was originally requested. The modifications 
might reflect changes in the market situation for the product to be produced by the 
investment ; considerable delays in the realisation of an investment, involving physical 
changes to it ; or in one case grant paid on an investment project which was not eligible 
for Regional Fund assistance. 
e) By Financial Control 
Financial Control (DG XX) has carried out systems audits and other control 
operations in the new Lander, both independently and in cooperation with one of the 
managing services 
As regards EAGGF Guidance, Financial Control has taken part in three missions 
on the initiative of DG VI and three missions on its own initiative (two of them with DG 
VI and one with DG XIV). 
In respect of the ESF Financial Control has made a control visit to each of the new 
Lander and to East Berlin, in most cases (four out of six) for systems audit purposes. 
5 
These showed that the designated authorities in the Lander generally had insufficient staff 
fully to ensure proper management and control of the ESF operations and had to depend 
on third parties financed under technical assistance. This situation cannot continue 
permanently and must be addressed properly. A problem was found of a certain confusion 
between forecast and real expense, the former sometimes being declared to the 
Commission instead of the latter, contrary to the rules. Thirdly, incorrect or incomplete 
requests for assistance were discovered in the course of the checks in East Berlin and 
Thuringen ; the necessary financial corrections were made. 
Finally, Financial Control has made on-the-spot checks in respect of ERDF co-
financed operations in Sachsen and Thuringen. The former is very recent and conclusions 
have not yet been drawn from it. In the case of Thuringen the following irregularities were 
discovered : inconsistency between declared expenses and the information in the 
accounting system ; missing supporting documents ; the declaration of ineligible expenses; 
and an instance (one of those referred to above in the context of DG XVI's checks) of 
failure to respect Community rules on public tendering. 
In all, Commission services have so far carried out 36 on-the-spot checks in the 
new Lander. 
The Court of Auditors, for its part, carried out checks in East Berlin and in 
Mecklenburg-Vorpommern, Sachsen-Anhalt and Thuringen. The Court's observations 
and the Commission's replies have already been published, as noted above. Based on the 
findings of the Court of Auditors, UCLAF is continuing its inquiries. 
Commission Regulation (EC) No. 1681/94 of 11 July 19948 requires the Member 
States to report to the Commission, on a quarterly basis, any suspected irregularities 
which have been the subject of initial administrative or judicial investigations. No 
irregularities have been reported by the German authorities in respect of the new Lander 
and East Berlin. 
The Commission is pursuing the problem of proper application of this Regulation. 
Dealing with irregularities 
It is necessary to be clear about the respective responsibilities of the Member 
States and the Commission in dealing with irregularities and administrative problems 
affecting the operations co-financed by the Structural Funds. 
OJ No. LI78 of 12.7.94, page 43 
Primary responsibility for preventing irregularities and for taking action against 
those which nevertheless occur lies with the Member States under Article 23(1) of 
Regulation (EEC) n° 4253/88: 
"In order to guarantee completion of operations carried out by public or private 
promoters, Member States shall take the necessary measures in implementing the 
operations: 
- to verify on a regular basis that operations financed by the Community have been 
properly carried out, 
-to prevent and to take action against irregularities, 
- to recover any amounts lost as a result of an irregularity or negligence..." 
Member States are also required to inform the Commission of the progress of 
administrative and judicial proceedings, in application of Reg. n° 1681/94. 
Moreover, in conformity with the principle of assimilation provided for in Article 
209 A of the Treaty, the Member States are required to apply appropriate sanctions in the 
case of fraud affecting the financial interests of the Community to the same degree that 
they take such action in protecting their own financial interests. 
The Commission is always at pains, in its relations with the Member States, to 
emphasise these fundamental Member State responsibilities ; most financial operations 
under the Structural Funds take place in the Member States and are conducted by or 
under the supervision and control of officials at various levels within the Member States. 
For its part, the Commission, in particular by carrying-out on-the-spot checks, 
seeks to ensure that appropriate management and control systems have been established in 
the Member States and that these function correctly in practice. In respect of irregularities 
discovered, the Commission either requires the Member State to take the necessary 
corrective action (e.g. by presenting a revised declaration of expenses in cases of 
declaration of ineligible expenses) or takes the necessary action itself, which may include 
the reduction, suspension or cancellation of financial assistance through the procedure laid 
down in Article 24 of Regulation n° 4253/88. This point is dealt with in mote detail later 
in this report. 
At the end of an on-the-spot check the Commission normally holds a meeting with 
the responsible authorities in the Member States with a view to reviewing the findings. 
Detailed conclusions are subsequently sent to the Member States and frequently require 
improvements and corrections to be carried out. The Commission also sends the Court of 
Auditors a detailed report on each on-the-spot check. 
In addition to exercising this control function the Commission has made a 
considerable effort to help improve the knowledge of officials dealing with the Structural 
Funds in the new Lander. For example, Financial Control has organised four seminars in 
Germany in which new Lander programme managers participated. DG XVI organised a 
similar seminar in Brussels in June 1995. DG VI has organised three seminars in the new 
Lander. The Commission's on-the-spot checks also have a useful pedagogic function, and 
its participation in all monitoring committee meetings also makes a contribution in this 
area. 
As noted above the Parliament requested the Commission to supply inter alia the 
following information : 
a) the percentage of irregularities in relation to the number of cases investigated 
(number and sums involved) ; 
b) the sums subject to the Article 24 procedure ; 
c) the sums to be recovered and those already recovered. 
As regards point a), the Commission services, in the course of an on-the-spot 
check of the implementation of say an Operational Programme, will first examine the 
overall system through which the funds flow to the final beneficiary, checking that its 
construction is satisfactory on a theoretical basis. It will then select a number of projects 
forming part of the programme, and examine in detail the financial transactions and the 
accounting paperwork leading up to one or more specific expenses declarations to the 
Commission in respect of the Programme. Irregularities or administrative problems may 
be detected, but they cannot meaningfully be expressed in percentage terms. Morever, the 
Commission's checks do not constitute exhaustive financial audits but have more the 
character of a systems analysis together with a check, on a sampling basis, of the correct 
practical application of the systems. It should also be noted that the Commission, in 
drawing up its programme of on-the-spot checks, uses risk assessment in order to direct 
its checking activity to areas where experience leads it to believe that irregularities may be 
more likely to be present. For this reason the incidence of irregularities discovered may 
well be greater than the average situation across the board. It is clear also that while the 
Commission's on-the-spot checks always include the Land authorities concerned, it is 
materially possible for the Commission to visit only a small proportion of all the numerous 
local authorities and beneficiary companies etc. to which payments are finally made. There 
is thus no suggestion that the irregularities in the table at Annex 2 constitute a complete 
statement of all the individual irregularities which are likely to have occurred. Conversely, 
more than one irregularity may have been discovered at a given authority or beneficiary. 
As regards b) and c) above : Article 24 of Regulation (EEC) No. 4253/88 
provides that the Commission may, after a suitable examination in the context of the 
partnership, reduce or suspend assistance in respect of an operation co-financed by the 
Structural Funds if the examination reveals an irregularity or a significant change affecting 
the nature or conditions for the implementation of the operation for which the 
Commission's approval has not been sought. 
The key point here is that under the operational framework of the Structural Funds 
- where the Commission is co-financing multi-annual programmes, not projects - sums 
related to projects affected by an irregularity can generally be re-used in the same 
Operational Programme so long as the programme is still running and subject to 
compliance with the provisions of Reg. No. 1681/94. In the new Lander the main example 
here is that of the projects where the public tendering rules had not been respected (see 
point d) i) on page 4 above). In general no formal operations of decommitment or 
recovery by the Commission are necessary during the life of the programmes ; any 
necessary accounting adjustments are made on the occasion of subsequent commitments 
or payments on the same programme. However, when the time comes to close the 
programmes it may well become clear that commitments or payments have not been fully 
used or relate to projects affected by an irregularity ; the appropriate decommitments or 
recoveries will then be made. The Commission emphasises, more generally, that all 
financial adjustments made necessary by irregularities are duly effected. 
Conclusion 
This brief report has sought to give an account of the kinds of irregularity and 
administrative problem arising in the new Lander of Germany during the implementation -
during a unique period - of Regulation no.3575/90. The differing responsibilities of 
Member State and Commission for dealing with irregularities has been explained, and the 
rôle of the Commission has been made clear. The Commission will continue, in respect of 
Structural Fund operations in the new Lander as in the rest of the Community, to play 
with full seriousness its own rôle in reducing irregularities to a minimum and in dealing 
appropriately - or requiring the national authorities to deal appropriately - with those 
which occur. This includes making, or requiring, the necessary financial adjustments. The 
Commission would emphasise again, however, the need for the Member State itself to 
spare no effort in preventing irregularities and dealing with them if they occur. 
ANNEX 1 
COMMISSION ON-THE-SPOT CHECKS IN THE NEW LANDER 
ERDE 
1. 5-10 October 1992 
2. 1-5 February 1993 
3. 22-26 March 1993 
4. 21-25 June 1993 
5. 28 Feb.-4 March 1994 
6. 18-22 April 1994 
7. 6-9 June 1994 
8. 4-8 July 1994 
9. 26 - 30 September 1994 
10. 30 Jan.-3 Feb. 1995 
11. 15-18 May 1995 Sachsen 
Thuringen 
Mecklenburg-Vorpommern 
Sachsen-Anhalt, Brandenburg, Berlin 
Mecklenburg-Vorpommern 
Sachsen-Anhalt 
Thuringen 
Sachsen 
Berlin, Thuringen 
Berlin 
Sachsen 
EAGGF-Guidapçe Section 
1. 6-8 April 1992 
2. 8-10 April 1992 
3. 1-5 June 1992 
4. 7-11 September 1992 
5. 14-21 April 1993 
6. 21 -23 April 1993 
7. 10 - 14 May 1993 
8. 7-11 February 1994 
9. 30 Jan.-3 Feb. 1995 
10. 13-17 March 1995 
11. 29-31 May 1995 
12. 31 May-2 June 1995 Brandenburg 
Mecklenburg-Vorpommern 
Sachsen-Anhalt 
Thuringen 
Thuringen 
Sachsen 
Mecklenburg-Vorpommern 
Berlin, Sachsen-Anhalt 
Brandenburg 
Sachsen-Anhalt 
Mecklenburg-Vorpommern 
Sachsen-Anhalt 
E&E 
1. 14-18 September 1992 
2. 24-29 January 1993 
3. 8-12 March 1993 
4. 5-7 July 1993 
5. 13-17 September 1993 
6. 27 Sept.-10 Oct. 1993 
7. 2-6Novemberl993 
8. 21 -23 September 1994 
9. 7- 11 November 1994 
10. 21-24 November 1994 
11. 7-12 March 1995 
12. 2-5 May 1995 Berlin 
Brandenburg, Mecklenburg-Vorpommern 
Thuringen 
Berlin 
Berlin 
Sachsen-Anhalt 
Thuringen 
Berlin 
Sachsen 
Sachsen 
Sachsen 
Mecklenburg-Vorpommern 
Fisheries 
1. 10-13 October 1994 Mecklenburg-Vorpommern 
JO 
ANNEX 2 
page 1 
TYPES OF IRREGULARITY DETECTED 
Type of 
irregulari 
ty* 
A 
B 
C 
D 
E 
F 
G 
H 
I 
J 
K 
L Berlin 
ERDF 
1 
1 
1 EAGGF 
1 
1 ESF 
1 Brandenburg 
ERDF 
3 
1 
1 EAGGF 
2 
1 
1 
1 ESF Mecklenburg-
Vorpommern 
ERDF 
2 
3 
2 EAGGF 
1 
1 ESF Sachsen 
ERDF 
2 
2 
3 
4 
1 
4 EAGGF 
1 ESF Sachsen-Anhalt 
ERDF 
2 
3 
2 EAGGF 
•3 
2 
1 
1 ESF Thuringen 
ERDF 
3 
4 
2 
1 EAGGF 
1 ESF 
2 
1 
* See attached key 
ANNEX 2 
page 2 
KEY 
Types of irregularity 
A. Application for aid incorrect or incomplete. 
B. Supporting documents missing or incorrect. 
C. Other irregularities in documents. 
D. Ineligible expenditure. 
E. Infringement of rules for the award of public contracts (excluding ERDF1). 
F. Implementation of the measure not in accordance with the rules. 
G. Accounts not submitted. 
H. Other accounting irregularities. 
I. Missing or late declaration. 
J. Failure to meet deadlines. 
K. Non-legitimate expenditure. 
L. Other irregularities. 
For the ERDF, see para, d) i) of the Report. 
/v 

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