EUROPEAN COMMISSION Brussels, 20.9.2021 COM(2021) 578 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL 32nd Annual Report on the protection of the European Union's financial interests - Fight against fraud - 2020 {SWD(2021) 257 final} - {SWD(2021) 258 final} - {SWD(2021) 259 final} - {SWD(2021) 262 final} - {SWD(2021) 263 final} - {SWD(2021) 264 final}



REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL 32nd Annual Report on the protection of the European Union's financial interests - Fight against fraud - 2020 Table of Contents LIST OF ABBREVIATIONS EXECUTIVE SUMMARY 1.Introduction 2.The EU’s financial interests in 2020 3.The players protecting the EU’s financial interests and main developments in 2020 3.1.The EU legislative framework 3.2.The control framework for the EU’s financial interests 3.2.1.The EU level 3.2.2.Member States’ level 4.Cooperation to fight fraud 4.1.Inter-institutional cooperation at EU level 4.1.1.Cooperation between the Commission (OLAF), the European Parliament and the Council 4.1.2.Cooperation between OLAF and the European Court of Auditors 4.1.3.Working arrangements between OLAF and EPPO 4.1.4.Cooperation between OLAF and Europol 4.2.Cooperation between EU and Member States authorities

4.2.1.Activities of the Advisory Committee for fraud prevention (COCOLAF) 4.2.2.Customs cooperation 4.2.3.Joint customs operations 4.3.Cooperation between EU Member States 4.4.Cooperation with non-EU countries 5.Focus on initiatives adopted, implemented or ongoing in 2020 5.1.The Commission Anti-Fraud Strategy 5.2.Hercule programme: support to EU Member States’ anti-fraud activities 5.3.Revenue: EU level 5.3.1.The VAT e-commerce package 5.3.2.Fight against fraud in customs duties 5.3.3.Fight against illicit trade in tobacco products 5.4.Revenue: EU Member State level 5.5.Expenditure: EU level 5.5.1.Rule of Law - conditionality 5.5.2.The 2021-2027 EU budget 5.5.3.The Recovery and Resilience Facility 5.5.4.Technical support through the Structural Reform Support programme 5.6.Expenditure: EU Member State level 6.Irregularities, fraud and risks

6.1.From detection to risk 6.1.1.VAT fraud – “Study and Reports on the VAT Gap in the EU-28 Member States” (published in 2020) 6.1.2.Irregularities and fraud in revenue 6.1.3.Irregularities and fraud in expenditure 6.2.Additional risks of irregularities and fraud for 2021 and beyond 6.2.1.COVID-19 risks in revenue 6.2.2.COVID-related risks in expenditure 6.2.3.Risks related to the Recovery and Resilience Facility 7.Tools to strengthen the fight against fraud 7.1.ARACHNE 7.2.The Early Detection and Exclusion System (EDES) 7.3.GetI project 7.4.National IT tools to protect the EU’s financial interests 8.Conclusions and recommendations



LIST OF ABBREVIATIONS AFCOS Anti-Fraud Coordination Service CAFS Commission Anti-Fraud Strategy EAFRD European Agricultural Fund for Rural Development ECA European Court of Auditors EDES Early Detection and Exclusion System EPPO European Public Prosecutor's Office ERDF European Regional Development Fund ESF European Social Fund ESIF European Structural and Investment Funds EU European Union IMS Irregularity Management System MFF Multiannual Financial Framework NGEU Next Generation EU OLAF European Anti-Fraud Office PIF Protection of financial interests RRF Recovery and Resilience Facility TFEU Treaty on the Functioning of the European Union TOR Traditional Own Resources VAT Value Added Tax



EXECUTIVE SUMMARY The responsibility of protecting the EU’s financial interests is shared between the EU and its Member States. To exit the crisis caused by the COVID-19 pandemic and support the transition towards a more modern and sustainable Europe, EU Member States have approved a financial package consisting of the 2021-2027 multiannual financial framework (‘EU budget’) of EUR 1.074 trillion, and of a temporary recovery instrument, the Next Generation EU of EUR 750 billion, which will be invested in a green, digital and resilient Europe with new sources of EU revenue. In total, this package amounts to more than EUR 1.8 trillion.

A revamped EU anti-fraud architecture has been set up over the last years to protect EU taxpayers’ money, relying on: a reformed European Anti-Fraud Office (OLAF), the investigative and prosecutorial powers of the European Public Prosecutor’s Office (EPPO), the coordinating role of Eurojust, the analytical capacity of Europol, and close cooperation with and between national authorities. Throughout 2020, this cooperation has been further developed by establishing working arrangements, setting up joint initiatives and operations, and exchanging good practice and training. In 2020 and in the first half of 2021, several key events and measures have further equipped the EU and national authorities to better protect the EU’s financial interests. Among these are: ·The EPPO started its operations; ·A revised regulation made OLAF ready to cooperate with the EPPO and strengthened its investigative powers; ·A general regime of ‘conditionality’ to protect the EU budget was introduced against breaches of the principles of the rule of law that affect the protection of the EU’s financial interests; ·Good progress on implementing the Commission’s Anti-Fraud Strategy was achieved with two thirds of the planned actions implemented and the remaining third ongoing. The number of fraud and irregularities reported by the competent EU and national authorities dropped in 2020 compared with previous years. While certain cyclical effects explain the drop in fraudulent irregularities, the drop in the detection and reporting rate of non-fraudulent irregularities in certain areas of spending cannot easily be explained and are therefore of concern. In addition to known risks, new challenges are emerging. They are linked to new ways of managing and spending EU funds, linked to performance and achieving specific targets, areas of reinforced spending, linked for example to the green and digital transition and to the health sector. Coping effectively with these risks will require new approaches and tools, a renewed and joint European vision for fighting fraud, corruption and other illegal activities affecting the EU’s financial interests. This vision will build on the achievements of recent years, and include a more efficient collection and use of data, improved transparency, better coordinated, coherent anti-fraud efforts by Member States through national anti-fraud strategies, reinforced cooperation within national authorities, between EU Member States and with the EU.

1.Introduction The EU and its Member States share responsibility for protecting the EU’s financial interests and fighting fraud. EU Member State authorities manage the largest share of EU expenditure and collect traditional own resources (TOR). The Commission oversees both these areas, sets standards and checks compliance. In line with Article 325(5) of the Treaty on the Functioning of the European Union (TFEU), the Commission, in cooperation with EU Member States, submits an annual report to the European Parliament and the Council on measures taken to counter fraud and other illegal activities affecting the EU’s financial interests (the ‘PIF report’). For 2020, this report and its accompanying documents meet this obligation. The year 2020 was marked by the COVID-19 pandemic and its impact. The EU institutions have reacted with unprecedented financial and economic policy decisions. They have finalised the negotiations and approved the EU budget for 2021 to 2027 as well as those for Next Generation EU (NGEU) and its flagship programme, the Recovery and Resilience Facility (RRF). The EUR 1.8 trillion budget will help rebuild Europe to make it greener, more digital, more resilient and better fit for the current and future challenges. Protecting the EU’s financial interests will be key in achieving the ambitious objectives of this historic budget agreement. The 2020 PIF report presents: I)an overview of the EU’s financial interests, following the strategic decisions taken in 2020; II)the main players, at EU and national level; III)the cooperation among these players; IV)the most significant initiatives taken; V)the risks to which the EU’s financial interests are and will be exposed, based on the irregularities and fraud detected by EU bodies and national authorities; VI)the tools developed to fight fraud. 2.The EU’s financial interests in 2020

The EU’s financial interests include revenues, expenditures and assets covered by the EU budget and those covered by the budgets of the EU institutions, bodies, offices and agencies and the budgets managed and monitored by them. The revenue side of the budget is made up of customs duties, Value Added Tax and a share of the gross national income of EU Member States. Figure 1 shows the resources available to the EU in 2020. The EU finances its policies through these resources (see Figure 2 ). Although the budget follows a yearly implementation, it is part of the Union's long-term budget, the Multiannual Financial Framework (MFF), which provides the limits for spending for seven years. While 2020 was the last year of the 2014-2020 MFF, it was also the year in which the legal framework for the next long-term budget was defined. The EU budget is spent through three different management modes (see Figure 3 ). To exit the crisis caused by the COVID-19 pandemic and support the transition towards a more modern and sustainable Europe, EU Member States have approved the long-term 2021-2027 EU budget, of EUR 1.074 trillion, and a temporary recovery instrument, the Next Generation EU of EUR 750 billion. In total, this package amounts to more than EUR 1.8 trillion (see Figure 4 ). The Recovery and Resilience Facility (RRF) is at the heart of NGEU with EUR 672.5 billion in loans and non-repayable financial support available between 2021 and 2026. 3.The players protecting the EU’s financial interests and main developments in 2020 Many players look after the EU’s financial interests and work continuously to improve its protection; both by shaping the required legislative framework and by implementing the underlying policies. 3.1.The EU legislative framework The Commission proposes anti-fraud legislation, which is then decided on by the European Parliament and the Council (the ‘co-legislators’).

Table 1 shows the key legislative acts adopted in 2020 and early 2021. Title Description of the protection of the EU’s financial interests mechanism Council Regulation (EU, Euratom) 2020/2093 of 17 December 2020 laying down the multiannual financial framework for the years 2021 to 2027. The ‘MFF Regulation.’ Harmonised anti-fraud provisions have been agreed for all MFF sectoral acts. Regulation (EU, Euratom) 2020/2092 of the European Parliament and of the Council of 16 December 2020 on a general regime of conditionality for the protection of the Union budget. The ‘Conditionality Regulation.’ The objective of the conditionality mechanism is to protect the EU’s budget against breaches of the principles of the rule of law by EU Member States that affect or seriously risk affecting the sound financial management of the budget or the EU’s financial interests in a sufficiently direct way. Regulation (EU, Euratom) 2020/2223 of the European Parliament and of the Council of 23 December 2020 amending Regulation (EU, Euratom) No 883/2013, as regards cooperation with the European Public Prosecutor’s Office and the effectiveness of the European Anti-Fraud Office investigations. The ‘OLAF Regulation.’ The amended Regulation defines OLAF’s relations with the European Public Prosecutor’s Office (EPPO) to ensure full complementarity between the two bodies, and reinforces OLAF’s investigative capacity. Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility The ‘RRF Regulation.’ Article 22 of that Regulation contains provisions on the protection of the EU’s financial interests. The Court of Justice of the European Union (‘the Court’) ensures the uniform application and interpretation of EU law. In 2020, the Court delivered three decisions in the field of protecting the EU’s financial interests. Case number and description C-603/19, Úrad špeciálnej prokuratúry. In this case, the Court confirmed that Article 325 TFEU does not preclude national law preventing the state from claiming compensation in criminal proceedings for damage caused to it by fraudulent conduct on the part of the accused person resulting in the misappropriation of funds from the EU budget, and under which the state does not have, in those proceedings, any other type of action available to it by which it may assert its right as against the accused. The Court clarified that although Article 325 TFEU obliges EU Member States to take effective measures to recover sums wrongly paid to the beneficiary of an EU subsidy, it does not impose any constraint as regards the recovery procedure. The national court only has to take account of whether an effective legal remedy for acts affecting EU’s financial interests exists in administrative, civil or criminal law. C-743/18, Elme Messer Metalurgs. In this case, the Court had the opportunity to interpret Article 2(7) of Regulation (EC) No 1083/2006, laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund, which defines the concept of ‘irregularity’. The Court interpreted the provision to include within this concept the situation in which the beneficiary of European Regional Development Fund funding fails to achieve, during the relevant period, the level of turnover expected as part of the project eligible for financing because the activities of its sole business partner have been suspended or because that partner has become insolvent. In its judgment, the Court underlined that a demonstration of the existence of a specific financial impact on the EU budget is not required and that it is sufficient that the possibility of such an impact is not excluded. C-496/18 and C-497/18, HUNGEOD and others. The EU public procurement directives authorise EU Member States to adopt national legislation that allows a monitoring authority to initiate of its own motion, on grounds of protection of EU financial interests, a review procedure in order to monitor infringements of public procurement rules. In that regard, the Court stated that, where provision is made for such a procedure, it comes within the scope of EU law since the public contracts, which are the subject of such a procedure come within the material scope of the public procurement directives. Accordingly, the Court held that those review procedures must comply with the general principles of EU law and, in particular, the general principle of legal certainty. 3.2.The control framework for the EU’s financial interests Figure 6 shows the complexity of the EU control framework with a multitude of players at European and national level. 3.2.1.The EU level EU institutions and bodies handle both EU revenue and expenditure. The Commission defines the strategies and translates into policies and initiatives the overall political goals developed collectively by the EU institutions. The Commission’s departments manage specific policies and the related spending programmes which support them. The management of financial resources can follow any of the modes shown in Figure 3 . The Commission is responsible for implementing the EU budget. The European Parliament exercises democratic oversight to ensure that the Commission and the other institutions deal properly with EU funds. The European Parliament, acting on a recommendation from the Council, decides whether to grant the discharge, i.e. the final approval on the budget for a specific year. The European Parliament decides after careful examination by its Committee on Budgetary Control (CONT) of the Commission’s financial accounts. The European Parliament’s resolution on the 2018 PIF report was adopted in the plenary session of 10 July 2020, after having received a favourable vote by CONT on 7 May 2020. The European Parliament’s resolution is a key political document addressing several issues linked to protecting the EU’s financial interests and highlighting areas for improvements. The European Parliament, for instance, encouraged the Commission and the EU Member States to enhance the use of new technologies in managing the funds, strengthen their analytical capacity to improve fraud risk assessment and management, improve the reporting of comparable data and the use of analytical IT tools, and present a legislative proposal for mutual administrative assistance in EU expenditure.

The European Court of Auditors assesses the economy, effectiveness, efficiency, legality and regularity of EU action to improve accountability, transparency and financial management. Every year the European Court of Auditors audits the revenue and expenditure of the EU budget and provides its opinion on the extent to which the annual accounts are reliable, and income and spending comply with the applicable rules and regulations. The annual report for the financial year 2019 was published on 10 November 2020. The European Court of Auditors concluded that the accounts were not affected by material misstatements. As for the regularity of transactions, it concluded that revenue was free from material error. On expenditure, the audit results showed an increased estimated level of error compared to 2018. High-risk (mainly reimbursement-based) expenditure, which is often subject to complex rules, was affected by a material level of error. The European Anti-Fraud Office (OLAF) carries out independent investigations into fraud and corruption involving EU funds and develops EU anti-fraud policy to fight fraud, corruption and any other illegal activity affecting the EU’s financial interests. Snapshot 4: What’s new in 2020 for OLAF? Both OLAF and the European Public Prosecutor’s Office (EPPO) protect the EU budget. While they do so within their respective mandates, the OLAF and EPPO regulations ensure close cooperation between both bodies. This cooperation rests on three strands: i) the EPPO can rely on OLAF’s support and expertise; ii) OLAF can launch investigations that are complementary to EPPO’s, on the request of or in agreement with the latter, to facilitate recovery or adopt administrative precautionary measures; iii) the offices will exchange information before and during investigations, through mutual reporting mechanisms. The revised OLAF regulation also equips OLAF with sharper tools to investigate fraud against the EU budget. For instance, the conduct of on-the-spot checks by OLAF is subject to clearer rules and it benefits from enhanced two-way cooperation with national authorities. OLAF will also be able to access bank account information under the same conditions as those for national competent authorities. These tools now coexist with stronger procedural guarantees for persons concerned by OLAF investigations, and with control mechanisms for their enforcement, such as the Controller of Procedural Guarantees. OLAF’s 2020 operational results are described in its annual report. OLAF underwent a reorganisation in June 2020 to strengthen its investigative capacity, internal controls and financial management, and maximise the potential of the broad range of skills and experience of its staff. The European Public Prosecutor’s Office (EPPO) has powers to investigate and prosecute crimes affecting the EU’s financial interests in the 22 participating EU Member States. It started its operations on 1 June 2021. Snapshot 5: What’s new for the EPPO in 2020? The EPPO was established by Council Regulation (EU) 2017/1939, which entered into force on 20 November 2017. Following the appointment of the European Chief Prosecutor, Ms Laura Codruța Kövesi in 2019, the College of European Prosecutors was constituted in September 2020. It adopted a set of internal rules needed for it to function effectively, including: the internal rules of procedure, the conditions of employment of the European Delegated Prosecutors, and the rules on data protection and Permanent Chambers. On the decentralised level, which consists of the European Delegated Prosecutors located in the EU Member States that participate in the EPPO, nominations by the Member States have been advancing and the formal appointments by the College are ongoing. EPPO’s Central Office moved into its premises in Luxembourg at the beginning of 2021. The Case Management System, a key tool for EPPO’s operations, has been rolled out. During the set up process, the participating EU Member States were consulted on crucial issues, such as the changes needed to integrate the EPPO into the national systems. Croatia, Czechia and France indicated the adoption in 2020 of organisational measures and legislative amendments to complete national preparations so that EPPO’s operations can begin. Sweden appointed a Commission of Inquiry to analyse and propose necessary legislative amendments and other measures needed for Sweden to participate in the EPPO. Eurojust, the European Union Agency for Criminal Justice Cooperation, coordinates the work of national authorities – from the EU Member States as well as non-EU countries – in investigating and prosecuting cross-border crime.

Europol, the European Union Agency for Law Enforcement Cooperation serves as a support centre for law enforcement operations, hub for information on criminal activities, and centre for law enforcement expertise. 3.2.2.Member States’ level On revenue, EU Member States are responsible for implementing customs legislation, for carrying out customs controls and for collecting customs duties, excise duties and VAT due at import. Member States’ customs authorities pursue several other objectives such as the application of non-fiscal measures aimed at improving internal EU security, protecting the EU from unfair and illegal trade and the environment. Member States’ customs authorities play a key role in balancing the need to facilitate trade, with faster and seamless import procedures, and the need to apply customs controls, with the support of the EU. The Commission reacted swiftly to the COVID-19 crisis by adopting legislation, issuing guidelines and actively supporting EU Member States and businesses to ensure flexibility for customs debt obligations, to facilitate fast and swift clearance of medical/protective equipment and to prevent counterfeit or unsafe equipment from entering the EU. Member States also made a significant contribution to the EU’s pandemic response in 2020: customs authorities adjusted their customs controls strategies; anti-fraud services in several EU Member States effectively countered fraud in the context of the COVID-19 crisis. This allowed the overall protection of the EU financial interests in 2020 to be maintained at a similar level as in previous years, while ensuring smooth and frictionless trade flows for the EU citizens and businesses. EU Member States also manage about three quarters of the EU budget expenditure, through a number of bodies (managing authorities, paying agencies, audit authorities, certifying bodies), whose number may vary depending on the size of the country, the amount of EU funds to be managed and their degree of decentralisation. Supreme audit institutions play a significant role in supervising the legality and regularity of the activities of national public bodies. As fraud and corruption are criminal acts, national law enforcement, prosecution and judicial services play a fundamental role in the protection of the EU’s financial interests, alongside specialised bodies, such as anti-fraud or anti-corruption offices. This complex system provides for several layers of control (see Figure 7 ). Anti-Fraud Coordination Services (AFCOS): set up based on Regulation (EU, EURATOM) No 883/2013 (‘OLAF Regulation’), AFCOS facilitate effective cooperation and exchange of information, including information of an operational nature, with OLAF. In several EU Member States they effectively play a coordinating and steering role in relation to the fight against fraud affecting the EU’s financial interests. France and Greece reorganised their AFCOS. Given the complexity of the national framework protecting the EU’s financial interests, the Commission has promoted over the past years the voluntary adoption by the Member States of national anti-fraud strategies.

By the end of 2020, 14 Member States reported having adopted such strategies. These strategies, however, can vary in scope and depth and some need to be updated. Among those EU Member States which replied as not having a national anti-fraud strategies in place, five indicated that they have launched a procedure to adopt one (see Figure 8 ). The situation has improved compared with 2019, when 10 EU Member States indicated having adopted a strategy. The implementation of the national Recovery and Resilience plans would represent the opportunity for all other EU Member States to follow and establish anti-fraud strategies based on the Commission’s guidelines prepared in collaboration with EU Member States experts. For EU Member States that have such a strategy already in place, a step forward would be to do an update, taking into account the risks linked to the implementation of the RRF and the COVID-19 crisis. Among the measures adopted in 2020 to protect the EU’s financial interests, Greece, Italy and Romania named the national legislative acts that turned the PIF Directive into national law. Ireland did so in 2021. Romania stated that several other EU directives had also been turned into national law. In the 2019 PIF report on the protection of the European Union's financial interests, the Commission made a set of recommendations to EU Member States on emergency spending and reporting of irregularities. On emergency spending, it recommended: •Keeping checks and monitoring measures to a high level: 22 Member States replied that they had fully implemented this point. Malta and Slovakia reported partial implementation, while Austria and Denmark considered their systems already aligned. •Carefully assessing the use of emergency procurement: 23 Member States reported full implementation. Slovakia reported partial implementation, and Austria and Denmark considered their systems already aligned. •Completing the transition to e-procurement processes: 18 Member States reported full implementation of the transition to e-procurement processes. Six reported partial implementation. Austria has not implemented it, while Ireland did not reply to this question. •Considering the possibility of further strengthening transparency in the use of EU funds, particularly for emergency procurement, 17 Member States replied that they had done so and 8 reported that they had not. Denmark stated that the question was not relevant to them. On the recommendation to report irregularities and to carefully monitor them, 22 Member States reported full implementation and 4 reported partial implementation. 4.Cooperation to fight fraud The complex anti-fraud architecture in place requires close cooperation between the various players. 4.1.Inter-institutional cooperation at EU level 4.1.1.Cooperation between the Commission (OLAF), the European Parliament and the Council In 2020, several meetings of the Committee on Budgetary Control of the European Parliament focused on OLAF’s activities and the Office could present its results. OLAF represented the Commission in several Council working groups and notably in the Working Party on Combating Fraud. On 1 December 2020, OLAF participated with the Commission, the European Parliament, the Council, the European Chief Prosecutor and the OLAF Supervisory Committee in the inter-institutional exchange of views on OLAF, and discussed the new EU anti-fraud architecture, including OLAF's reorganisation and the cooperation with EPPO. This was a high-level event characterised by focused and positive discussions which paved the way for improved cooperation between OLAF, EPPO, Eurojust and Europol. 4.1.2.Cooperation between OLAF and the European Court of Auditors

While the European Court of Auditors (ECA) and OLAF have different mandates, they have a shared mission to protect the EU's financial interests and ensure sound financial management of the EU budget. The ECA informs OLAF of any suspicion of fraud or other illegal activity that it detects in its audit work or that is reported to it. In 2020 OLAF received six such notifications from ECA, which all led to the opening of investigations. Following the Administrative Arrangement concluded in May 2019, OLAF and the ECA have improved their cooperation by organising a joint annual workshop, sharing their training programmes, know-how and risk analysis. The 2020 annual workshop had to be postponed to 2021 due to the COVID-19 pandemic. 4.1.3.Working arrangements between OLAF and EPPO The legal framework governing EPPO and OLAF provides for working arrangements between the two bodies to lay down the practical aspects of their relationship. The working arrangements were agreed in November 2020 and signed on 5 July 2021. Overall, the arrangements set out the necessary mechanisms to ensure efficient reporting, non-duplication and complementarity of the investigative activities of the two offices. They provide for close cooperation by establishing practical ways to exchange information and the technical aspects for mutual indirect access to their case management systems. 4.1.4.Cooperation between OLAF and Europol In autumn 2020 OLAF and Europol signed working arrangements, which resulted in the establishment of a secured channel of communication (SIENA) and in the appointment of an OLAF Liaison Officer at Europol. 4.2.Cooperation between EU and Member States authorities 4.2.1.Activities of the Advisory Committee for fraud prevention (COCOLAF) The Advisory Committee for Coordination of Fraud Prevention (‘COCOLAF’) brings together the Commission (represented by OLAF) and Member State experts. It provides a forum for discussing the main developments in the fight against fraud and the preparation of this report. Its work is structured around four working groups and a plenary session. In 2020, meetings were held virtually on the following topics: •OLAF investigations in the EU Member States; •fraud risks and mitigating measures in the context of the COVID-19 crisis; •possible uses of the Early Detection and Exclusion System (EDES) to protect the EU’s financial interests in shared management; •capacity-building actions to identify and prevent fraud and corruption in the European Structural and Investment Funds; •main fraud and irregularity trends and patterns; •the new anti-fraud triangle: AFCOS, OLAF and EPPO. 4.2.2.Customs cooperation Given the cross-border nature of customs fraud, it is essential that EU Member States’ customs authorities cooperate to prevent, investigate and prosecute breaches of customs and agricultural legislation. Exchanges of information can take place at EU level between EU Member States or among them and the Commission, or at international level with non-EU countries. Exchanges of information at EU level are made under either the Mutual Assistance Regulation or the customs risk management system for risk-related information, while those with non-EU countries are based on specific agreements (see Section 4.4). An evaluation of Regulation 515/97 started in 2019 and is now nearly finalised. Relevant stakeholders in EU Member States, Commission departments and agencies and other organisations gave their views on the implementation of the Regulation and its relevance in combating customs and agricultural fraud. Stakeholders, in particular EU Member States, are generally satisfied with the Regulation as it currently stands, and consider that it meets its objectives and remains a good instrument to tackle the new challenges arising in the fight against fraud.

Customs authorities can also cooperate with each other and exchange information and best practice through joint actions, seminars, training courses, project groups, working visits, and cross-border operations financed by the EU action programmes: Customs 2020 and Hercule III. 4.2.3.Joint customs operations Joint customs operations (‘JCOs’) are targeted actions limited in time that aim to combat fraud and the smuggling of sensitive goods in specific areas at risk and/or on identified trade routes. In addition to its investigations on cases of revenue fraud and counterfeiting, OLAF coordinates large-scale JCOs involving EU and international operational partners. OLAF’s support is tailored to each JCO and may include the use of permanent technical infrastructure, IT and communications tools, in particular the Virtual Operations Coordination Unit (VOCU) for the secure exchange of information, as well as dedicated strategic analysis, administrative and financial support. Table 2 shows JCOs in which OLAF was involved in 2020. Operation Description SILVER AXE V Coordinated by Europol and targeting illicit imports of prohibited pesticides, one of the most profitable businesses for international fraudsters (estimated to represent up to 13.8% of all pesticides sold in the EU). Operation Silver Axe is now in its fifth year, and has so far led to seizures of 2 568 tonnes of illegal pesticides. OPSON IX Worldwide operation led by Europol and Interpol targeting counterfeit/substandard food and beverages, food frauds and economically motivated adulteration. OLAF led an action specifically targeting trafficking in counterfeit wine and alcoholic beverages. 1 158 199 litres of wine seized, mostly champagne and 109 267 litres of various alcoholic beverages, that infringe intellectual property rights. SHIELD Organised by Europol and focused on counterfeit and substandard oncological medicines and hormonal substances, including a targeted action on counterfeit/illegal/misused medicines, doping substances, food supplements and all medical supplies used in the fight against COVID-19. Coordinated by OLAF with the participation of 13 EU Member States. Detection of 58 cases of various irregularities with illicit and substandard oncological medicines, hormonal substances and food supplements. DEMETER VI Global operation (73 participating countries) to monitor and control illicit cross-border movements of waste and illegal trade in ozone depleting substances (ODS) and refrigerant gases (HFCs); coordinated by the World Customs Organization (WCO). OLAF contributed with risk-based information and intelligence to the identification and monitoring of suspicious shipments destined to the EU. 98 682.95 tonnes of ODS and 41.97 tonnes of HFCs were detected and intercepted. STOP Coordinated by the WCO, it mobilised 99 customs administrations all over the world with OLAF’s support. It targeted the traffic of illicit products related to the COVID-19 pandemic. 307 215 524 units of illicit medicine and 47 891 628 units of medical supplies (masks, gloves, test kits, thermometers) as well as 2 762 386 litres of sanitiser gel were seized. ARKTOS Coordinated by FRONTEX together with the Finnish and Latvian national Authorities, targeting excise fraud, particularly tobacco smuggling, document fraud and illegal immigration at selected border crossing points on the EU eastern land borders. OLAF, Interpol, Eurojust, Europol, Poland, Estonia, Lithuania and Slovakia participated. 37 million illegal cigarettes and over 1.8 tonnes of tobacco were seized. LUDUS Coordinated by OLAF under the Joint Customs Police Operation led by Europol and the Spanish Guardia Civil, National Police and Customs. The action targeted counterfeit and hazardous toys for the European market. The evaluation of the results is ongoing. 4.3.Cooperation between EU Member States Member States cooperate in the fight against fraud, sometimes financed by the Hercule programme (see Section 5.2). Some of these projects are briefly described in Table 3 . Organising country Project name Other participating countries reference Bulgaria Enhancing the cooperation and the control models in preventing fraud, linked to customs regimes 4200 and 4000, affecting the EU system of own resources. Romania, Greece, Turkey p. 14 Slovakia Training for customs officers on X-ray scanner image interpretation and customs control process. Bulgaria, Croatia, Estonia, Finland, Greece, Hungary, Latvia, Lithuania, Poland, Romania p. 15 Latvia Advanced X-ray image interpretation training. Estonia, Lithuania p. 23 4.4.Cooperation with non-EU countries Cooperation with non-EU countries to prevent, detect and combat breaches of customs legislation is based on agreements on mutual administrative assistance (MAA). Currently, there are agreements in force with more than 80 countries, including major EU trade partners, such as the United States, China and Japan. In 2020, negotiations with the United Kingdom and Uzbekistan were finalised, and were ongoing with Australia, Indonesia and eastern and southern Africa (ESA5). Free-trade agreements usually contain an anti-fraud clause, which allows for a temporary withdrawal of tariff preference for a product in cases of serious customs fraud and persistent lack of sufficient cooperation to combat it. In 2020, negotiations were concluded with the United Kingdom; and were ongoing with Australia, Chile, New Zealand and Indonesia. 5.Focus on initiatives adopted, implemented or ongoing in 2020 5.1.The Commission Anti-Fraud Strategy The Commission’s Anti-Fraud Strategy (‘CAFS’), adopted in April 2019, and its action plan including 63 actions, play a significant role in preventing the possible misuse of EU money. Good progress in implementing the actions was achieved in 2020. By June 2021, two thirds of the actions had been implemented, while for the remaining third implementation was ongoing. The strategy has two priority objectives: (i) to improve data collection and analysis and (ii) to improve coordination, cooperation and processes. In line with the first objective, OLAF intensified its analytical work, for example, on a COVID-19 related fraud risk assessment (see Section 6.2.2), shared with Commission departments, and on irregularities and fraud in the EU funding of health infrastructure (see Snapshot 13 ). In line with the second objective of the CAFS, good progress was made on a number of actions aimed to increase coordination and cooperation between Commission departments and to equip the Commission with a more effective system of anti-fraud oversight. Most notably, contacts and cooperation between Commission departments have been intensified, in particular through the setting up of groups composed of Commission representatives within the Fraud Prevention and Detection network (FPDNet) led by OLAF. These groups are set up by management mode or by theme, such as the group on internal cases and on fraud risk management, both launched in spring 2021. In the CAFS, the Commission has also committed to improve monitoring of the follow-up given to OLAF recommendations, which are essential for bringing the money back to the EU budget and fraudsters to justice. Therefore, in 2020, the Commission and OLAF dedicated considerable efforts to make such monitoring as efficient as possible, taking stock of about 1 400 financial recommendations issued between January 2012 and June 2019. In total, the sum of recommended amounts for recoveries for 2012-2020 is equivalent to more than EUR 6 billion with more than a half linked to customs cases.

5.2.Hercule programme: support to EU Member States’ anti-fraud activities The 2014-2020 Hercule III programme promoted actions to counter fraud, corruption and any other illegal activities affecting the EU’s financial interests. In 2020, the last year of its implementation, a budget of EUR 16.44 million was made available for: ·Actions to strengthen the operational and technical capacity of national and regional authorities in the Member States, and IT support (74% of the programme’s budget); ·Training activities, conferences, seminars and staff exchanges mainly addressed to staff employed by law enforcement agencies in the EU Member States and partner countries, as well as comparative research studies and scientific publication activities (26% of the budget). The COVID-19 pandemic had a major impact on the general implementation of the programme. Most of the training activities planned for 2020 were either postponed to 2021 or delivered virtually where possible. Most grant contracts were extended in duration, allowing the beneficiaries to continue implementing their projects. Beneficiaries of Hercule III grants awarded in 2017-2019 reported substantial successes achieved with the help of equipment and training funded under the programme. 5.3.Revenue: EU level 5.3.1.The VAT e-commerce package Due to the COVID-19 crisis, Member States and businesses were facing difficulties in progressing with the IT developments needed to implement the VAT e-commerce rules by 1 January 2021. Therefore, the entry into force of the VAT e-commerce package was postponed by six months. The customs rules applicable to e-commerce were also adapted to enable the smooth implementation of the VAT e-commerce rules. The Commission also adopted in September 2020 the Customs action plan, proposing actions to tackle the challenges of e-commerce and step up the fight against VAT and customs fraud, such as undervaluation, mis-description of goods and false declarations of origin. On 18 February 2020, the Council adopted a legislative package to request payment service providers to send information on cross-border payments originating from EU Member States and on the beneficiary (‘the payee’) of these cross-border payments. Under this package, payment service providers offering payment services in the EU will have to monitor the payees of cross-border payments and send information on those who receive more than 25 cross-border payments per quarter to EU Member States’ authorities. This information will then be centralised in a European database, the Central Electronic System of Payment Information (CESOP) and will then be made available to anti-fraud experts in EU Member States via the Eurofisc network. The objective of this new measure is to give EU Member States tax authorities the right instruments to detect possible e-commerce VAT fraud carried out by sellers established in another Member State or in a non-EU country. The sending of data must start on 1 January 2024. 5.3.2.Fight against fraud in customs duties The COVID-19 pandemic has strongly impacted customs, which had to fulfil its core tasks despite the difficult situation. At the start of February 2020, the Commission opened a crisis alert in the customs risk management system, to streamline and centralise the exchange of risk-related information linked to COVID-19. EU Member States have been very responsive and information sharing has reached exceptional levels. In May 2020, the Commission adopted the guidelines on prioritising risks for customs controls, which provide for temporary measures to support EU Member States. They describe the main risks that have to be addressed as a priority, depending on the impact of the crisis on those countries. The Commission carries out, on-the-spot or remotely, monitoring and control visits to ensure the correct application of the customs and TOR legislation. Where cooperation and progress made in tackling outstanding issues are considered insufficient, corrective measures are applied. As stated in the 2019 PIF report, such corrective measures have already been applied by the Commission against the United Kingdom in relation to undervalued textiles and footwear from China (see Snapshot 1 ). The Commission took further steps in 2020 to quantify similar TOR losses occurred in all EU Member States and sent them preliminary calculations of potential TOR losses related to imports of possibly undervalued textiles and footwear from China that took place on their territory. In addition, the Commission quantified potential TOR losses with regard to the evasion of anti-dumping duties for solar panels and informed the EU Member States concerned. 5.3.3.Fight against illicit trade in tobacco products The fight against the illicit tobacco trade is an important component of the EU policy for protecting the EU’s financial interests. Throughout 2020, the Commission continued implementing the second action plan to combat illegal tobacco trade. Most key actions were either underway or completed by the end of the year. Within the EU, the Commission assisted EU Member States in rolling out the new tobacco traceability system launched in 2019. Considerable progress has been made in analysis and intelligence. For instance, the independent tobacco laboratory handled more than 150 requests in 2020. A study to identify a methodology to measure the illicit tobacco market was completed in 2020 and published in early 2021.

Since the entry into force of the FCTC Protocol to Eliminate Illicit Trade in Tobacco Products (FCTC Protocol) in 2018, OLAF, in close cooperation with Commission departments and EU Member States, is an active player on the multilateral stage. International cooperation focused on securing the supply chain of tobacco products. OLAF, in view of the second meeting of the parties scheduled for November 2021, is acting as a ‘Key Facilitator’ for the working group on tracking and tracing. OLAF also provides its expertise as an active member of the working group on assistance and cooperation. 5.4.Revenue: EU Member State level To better protect EU revenue, some EU Member States adopted specific measures, as shown in Table 4 . Member State Description Revenue area Belgium National Operational plan 2020 Customs and tax fraud Croatia Enhanced controls in the port of Rijeka Customs Implementation of the General Audit Support (GAS) System at the Croatian Tax Administration Tax fraud Czechia Accelerating the process of establishing a customs debt Customs Estonia Fight against fuel fraud Customs Greece Measures that aim at reducing smuggling Customs and tax fraud Hungary 2021 plan for post-release checks Customs and tax fraud Italy Implementation of control arrangements in application of Decision 491/2020 Customs Latvia Registration of websites or mobile applications in commercial passenger transport Tax fraud Check lottery Tax fraud Segmentation of taxpayers Customs and tax fraud Lithuania Joint Operation JAD HANSA Customs and tax fraud The Netherlands Prevention by customs of fraud relating to COVID-19 Customs Portugal Implementation of common financial risk criteria and standards (FRC) Customs Interconnection between the Automatic Selection System and the Low Value Merchandise Import System (e-commerce) Customs Slovenia Update of the Slovenian risk analysis Customs and tax fraud 5.5.Expenditure: EU level The adoption of the spending package for the 2021-2027 EU budget and NGEU is accompanied by the necessary provisions to ensure that the EU’s financial interests are sufficiently protected. 5.5.1.Rule of Law - conditionality Regulation (EU, Euratom) 2020/2092 of the European Parliament and of the Council introduces a general regime of conditionality to protect the EU budget. It aims at protecting the EU budget against breaches of the principles of the rule of law that affect (or seriously risk affecting) its sound financial management or the EU’s financial interests in a sufficiently direct way. It is therefore linked to the EU budget. Based on this regulation, the Commission may propose to the Council appropriate measures to protect the EU budget or the EU’s financial interests, such as suspension and termination of payments, as well as prohibition of new legal commitments and financial corrections. The regulation complements other procedures established by EU legislation to protect the EU budget, including OLAF and EPPO’s investigations. The Commission will continue using all the instruments available to effectively protect the EU budget, including e.g. the Early Detection and Exclusion System, checks and audits or financial corrections. The Commission will apply the conditionality mechanism from 2021 onwards, when it considers that other instruments are not more effective to protect the EU budget. In July 2021 the Commission published the second annual Rule of Law report, which presents a synthesis of both the rule of law situation in the EU and an assessment of the situation in each EU Member State. The Rule of Law report monitors significant developments, both positive and negative, relating to the rule of law in EU Member States. The report covers four pillars: (i) the justice system, (ii) the anti-corruption framework, (iii) media pluralism and (iv) freedom, and other institutional issues related to checks and balances. It is a separate instrument from the Regulation on a general regime of conditionality for the protection of the Union budget and represents an important source of information for the Commission. 5.5.2.The 2021-2027 EU budget The legislative framework which is being developed in relation to the 2021-2027 EU budget will bring some significant changes and simplification in the management of EU funds, in particular in ESI Funds observing an increased: ·share of payments based on performance rather than costs; ·use of simplified cost options and lump sums. The approval of the 2021-2027 EU budget also requires the definition of the specific regulations for each spending programme. Dedicated anti-fraud provisions have been agreed to ensure that the necessary rights and access required are granted for the authorising officer responsible, OLAF and the Court of Auditors to comprehensively exercise their respective competences and ensure that any third parties involved in the implementation of EU funds grant equivalent rights. In the case of OLAF, such rights must include the right to carry out investigations, including on-the-spot checks and inspections, as provided for in Regulation (EU, Euratom) No 883/2013. These provisions would also apply to non-EU countries participating in EU programmes. 5.5.3.The Recovery and Resilience Facility Following the Commission’s proposal for a Regulation establishing the RRF of May 2020, the Commission published in September 2020 guidance to EU Member States for preparing the national recovery and resilience plans, which was updated following the political agreement between the Parliament and the Council in December 2020.

The European Council in July and December 2020 underlined the importance of sound financial management and the protection of the EU’s financial interests for this new instrument. In line with the RRF Regulation, in the assessment of the national recovery and resilience plans, the Commission is checking that EU Member States put in place internal control systems to manage the facility ensuring that the funding received is used in compliance with EU and national law, and allow, in particular, to prevent, detect and correct conflict of interest, fraud, corruption and double-funding. During the implementation of the RRF, EU Member States must ensure sound financial management of these funds and recover amounts unduly spent. In particular, EU Member States must collect standardised categories of data in respect of final recipients of funds, contractors, sub-contractors and beneficial owners for audit and control and ensure access to these data for the Commission, OLAF, ECA and EPPO (where applicable). The Commission will make available to the EU Member States an information and monitoring system including a single data mining and risk-scoring tool to access and analyse the relevant data. With the requests for payment under RRF, EU Member States must include a management declaration, a summary of audits carried out, including weaknesses identified and any corrective actions taken. Following payment, the Commission will carry out risk-based controls. All in all, a comprehensive set of measures has been included to strengthen the protection of the EU’s financial interests and in the first months of 2021 EU Member States have been working closely together with the Commission to reflect this in their recovery and resilience plans, submitted in the second quarter of 2021. The Commission will closely monitor the implementation of these plans. 5.5.4.Technical support through the Structural Reform Support programme In 2020 technical support was provided through the Structural Reform Support programme for a number of actions in the fight against corruption and fraud. Projects have been started with authorities from a number of EU Member States to: ·raise awareness and standards in fighting bribery in international business transactions; ·develop risk assessment and behavioural insights framework for better managing corruption risks; ·strengthen coordination on corruption prevention and detection; ·improve fraud risk detection related to grants; and ·increase the effectiveness of implementing and monitoring anti-corruption actions. 5.6.Expenditure: EU Member State level In 2020, several EU Member States adopted measures to better protect the resources coming from the EU budget and spent under shared management. These cover a wide range of initiatives, such as sectoral strategies, reinforcing the cooperation among the bodies concerned, strengthening the fight against corruption or preventing conflict of interest. A selection of these initiatives are shown in Table 5 , while further measures on anti-fraud IT tools are described in Section 6.5. Member State Measure Budgetary sector Austria Audit strategy Agriculture, Fisheries, Cohesion policy and Fund for the most deprived Preventing irregularities through a high density of checks Cohesion policy Belgium Measures to reinforce checks Cohesion policy Measures to reinforce integrity and counter conflicts of interest Agriculture, Fisheries and Cohesion policy Bulgaria Ordinance for defining irregularities, which justify the imposing of financial corrections and the corresponding percentage of corrections pursuant to the Management of the resources from the ESIF Act All expenditure areas Croatia Implementation of anti-fraud policy for operational programmes Cohesion policy Czechia Update of procedures for checking ownership structures and conflicts of interest Cohesion policy Denmark Action plan on the common agricultural policy (CAP) Agriculture Anti-fraud strategy of the Danish Fisheries Agency Fisheries Finland Anti-fraud cooperation between national authorities under the ESIF All expenditure areas Germany Anti-fraud measures (North Rhine-Westphalia ERDF programme) Cohesion policy Hungary Anti-corruption package All expenditure Luxembourg Administrative measure to fight against fraud Cohesion policy Poland Strengthening control mechanisms and means of monitoring public contracts financed by EU funds by amending the rules governing public procurement control All expenditure areas Anti-corruption policy at the Agency for Restructuring and Modernisation of Agriculture Agriculture Portugal Audit of anti-fraud measures adopted by operational programmes for the programming period 2014-2020 Cohesion policy Slovakia Establishment of an anti-corruption department at the level of the Ministry of Agriculture and Rural Development Agriculture ISO 37001 Certificate - Anti-Corruption Management System and Code of Conduct Cohesion policy Slovenia Cooperation in proceedings before national courts Cohesion policy Measures taken by the Agency for Agricultural Markets and Rural Development Agriculture Spain Cooperation Agreement between the Spanish AFCOS and Guardia Civil All expenditure areas Consolidation of the cooperation among the national, regional and local anti-fraud authorities All expenditure areas 6.Irregularities, fraud and risks 6.1.From detection to risk

The EU’s financial interests can be adversely impacted by: ·A diminution of the resources of the EU budget, adversely affecting the possibility to finance its policies; ·An increase in the costs associated to an item of expenditure; ·A waste of the resources financing projects of low quality or not delivering the expected results; ·A misapplication of such funds for purposes other than those for which they were originally intended (beneficiary or project not entitled to the financial support). When the adverse impact on the EU budget is the result of a breach of rules, it is defined as ‘irregularity’. In case of intentional behaviour, such as any act or omission relating to the use or presentation of false, incorrect or incomplete statements or documents or to non-disclosure of information in violation of a specific obligation, such behaviour amounts to ‘fraud’. Therefore, an irregularity may be the result of an incorrect interpretation of a rule, while fraud is the result of a deliberate breach of a rule. Other illegal behaviours may affect the EU’s financial interests, such as, active or passive corruption and misappropriation of EU funds or assets by a public official directly or indirectly entrusted with their management. Fraud against the EU budget can also be made for committing other crimes in the context of predicate offences. Even if not directly linked to the protection of the EU budget, the EU legal framework on anti-money laundering and counter-terrorist financing is relevant in this context. Organised crime is a significant threat to European citizens, business and state institutions, as well as to the economy as a whole. Organised crime groups are present across all EU Member States and use their large illegal profits to infiltrate the licit economy and public institutions, including via corruption, eroding the rule of law and fundamental rights, and undermining people’s right to safety as well as their trust in public authorities. Fraud is becoming increasingly appealing for organised crime. Corruption is a central part of the modus operandi of organised crime groups. Under the current EU anti-corruption rules, EU Member States are required to criminalise both active and passive corruption of public officials, establish adequate sanctions and ensure that persons corrupting officials are held criminally liable. In 2019, the EU introduced new legislation protecting whistle-blowers and requiring the creation of safe channels for reporting corrupt practices. The annual Rule of Law report examines the situation of EU Member States also in relation to anti-corruption policies. The control framework put in place at European and national level (see Section 3.2) aims at preventing, detecting and correcting these risks. Member States have a frontline responsibility for managing about 80% of the expenditure budget and for collecting almost all the revenue. EU Member States should report to the Commission cases of irregularities (including potential cases of fraud) that they have detected. Based on these notifications (‘reported fraud’ or ‘reported irregularities’), the Commission can identify the most recurrent fraud risks and patterns. The following sections briefly outline the main trends in past detection of irregularities and fraud, as reported by the EU Member States. These trends point to risks that may be relevant for future action. Past detections can be seen as indicators of inherent risks and vulnerabilities in the management systems that have been exploited by fraudsters. Without significant improvements in prevention, there are risks that similar irregularities and fraud will take place also in the future. Snapshot 13 – Detecting fraud Detecting fraud is far more difficult than detecting a ‘simple’ irregularity, where no deliberate attempt to defraud is made. While the latter usually may stem from a vulnerability in the first layer of control, the former, even when exploiting existing weaknesses, is the result of a specific action committed by individuals and/or organisations, with malevolent intent and methods varying from the simplest to the most complex schemes. The detection and reporting of fraud proves that the overall control system put in place at national and EU level works. 6.1.1.VAT fraud – “Study and Reports on the VAT Gap in the EU-28 Member States” (published in 2020) EU Member States are losing billions of euros in VAT revenues because of tax fraud and inadequate tax collection systems. The ‘VAT Gap’ (difference between expected VAT revenues and VAT actually collected) impacts the EU’s financial interests. The overall VAT Gap in EU Member States was approximately EUR 140 billion in 2018. Based on the Commission’s projections, the VAT Gap has probably declined in 2019 and could fall below EUR 130 billion or 10% of the total VAT liability. Individual performances of EU Member States still vary significantly from the 2018 median of 9.2%. The VAT Gap declined for 21 Member States, most significantly in Hungary (-5.1%), Latvia (-4.4%), and Poland (-4.3%). The biggest increase was seen in Luxembourg (+2.5%), followed by marginal increases in Lithuania (+0.8%) and Austria (+0.5%).

6.1.2.Irregularities and fraud in revenue The number of reported cases compared with the five-year average declined for both fraudulent and non-fraudulent irregularities related to EU revenue. The related amount increased for fraudulent irregularities but decreased for non-fraudulent irregularities. Budgetary sector Fraudulent irregularities Non-fraudulent irregularities FDR IDR N EUR (million) N EUR (million) % % Traditional Own Resources 451 108 4 003 382 0.43% 1.54% The overall situation in 2020 appears to be less affected by the COVID-19 pandemic than could be expected. The variation of the number of cases reported as fraudulent or non-fraudulent and of the related amounts is rather within the usual range of the annual fluctuation (see box on the right). However, some EU Member States have been impacted harder than others (see Section 5.3.1). Inspections by anti-fraud services was the most successful method of detecting fraudulent cases and related amounts in 2020. Post-release controls and release controls have been almost equally important for detecting organised duty evasion crime and new fraud patterns. Non-fraudulent irregularities were primarily detected by means of post-release controls. In monetary terms, around 43 % of total estimated and established amounts were discovered during a post-release control and 29 % were related to a tax audit, the latter gaining importance in 2020 as a method of detection. Most cases reported in 2020 as fraudulent or non-fraudulent affecting EU revenue relate to undervaluation, incorrect classification/mis-description of goods or smuggling. Footwear, textiles, vehicles, electrical machinery and equipment were the types of goods most affected by fraud and irregularities in number of cases and in monetary terms. 6.1.3.Irregularities and fraud in expenditure Over the last five years, the number of reported irregularities (fraudulent and non-fraudulent) related to EU expenditure for the programming period 2007-2013 decreased, while those linked to the 2014-2020 EU budget have been increasing, consistently with the implementation cycles. Reported irregularities related to annual spending (direct aid to farmers and market support measures) remained stable. Budgetary sector Fraudulent irregularities Non-fraudulent irregularities FDR IDR N EUR (million) N EUR (million) % % Agriculture 255 28.4 3 016 162.4 0.02% 0.11% Rural development 127 19.2 2 086 96.9 0.14% 0.70% Support to agriculture 117 6.5 903 62.1 0.02% 0.15% Both/Unclear 11 2.7 27 3.4 - - ESI Funds 281 225.1 2 297 490.2 0.40% 0.88% Cohesion and regional 221 213.7 1 685 432.1 0.52% 1.05% Social policy 56 8.7 554 51.8 0.07% 0.40% Fisheries 4 2.7 54 6.2 0.36% 0.82% Other 0 0 4 0.2 0.00% 0.02% Pre-accession 28 3.4 98 4.8 0.18% 0.25% IPA I 17 2.9 49 3.7 n.a. n.a. IPA II 11 0.5 49 1.1 0.03% 0.06% Direct expenditure 41 9.1 1 285 53.2 0.03% 0.28% TOTAL 605 266.0 6 696 710.6 0.19% 0.51% Agriculture - During the past five years (see box below), reporting of fraudulent irregularities related to rural development for 2014-2020 has had a slow start - which might indicate insufficient detection efforts in EU Member States - and decreased for the programming period 2007-2013 - as expected. Reporting of fraud was rather stable for support to agriculture (including direct aid to farmers and market measures). In proportion to payments received by the EU Member States, rural development seems to be more affected by fraud than direct aid to farmers. The latter is entitlement-based and systems in place support prevention. Market measures absorb less financial resources, but the incidence of reported fraud in proportion to payments is even higher than for rural development (see Figure 14 ). Reported fraud concerns, in particular, national support programmes for the wine sector (investment measures, promotion, especially in non-EU markets, and restructuring and conversion of vineyards), the fruits and vegetables sector (aid for producer groups for preliminary recognition, especially investment measures). Also the ‘Promotion’ sector seem to have a higher incidence of fraud, both on EU markets and on non-EU markets. In agricultural spending, as in many other areas of spending, there is a risk of falsification of documents. For rural development, falsification may concern, for example, invoices, declarations of equipment as new while it is second-hand, offers in the context of procurement, information about compliance with conditions for receiving the aid. For the other forms of support to agriculture, falsification may relate, for example, to invoices or lease agreements, or to requests for aid, which may include false information about the eligible area at disposal, compliance with other conditions for aid, etc. There is also the risk of the creation of artificial conditions. For example, beneficiaries may artificially split agricultural holdings and request aid through several linked companies, to avoid degressive aid rates or limits in terms of area or animals. For rural development, a significant number of fraudulent irregularities concern incomplete implementation of the action, pointing to significant risks in this sector. On market measures, high financial amounts were recorded in several cases of conflict of interest combined with other breaches linked to promotion and investigated by OLAF.

Cohesion and fisheries policies - During the past five years, the number of detected and reported fraudulent and non-fraudulent irregularities for the programming period 2007-13 for the European Structural and Investment Funds (ESIF, i.e. the Cohesion Fund, European Regional Development Fund, European Social Fund and Fisheries Funds) dropped in line with the implementation cycle (see box on the right). The number of irregularities reported for 2014-2020 has been rising. However, for non-fraudulent irregularities this increase was limited, highlighting an exceptional drop in the number of detected irregularities (and related financial amounts) in comparison to the previous programming period. The gap is significant for all funds, but in particular for the European Regional Development Fund. ESIF projects on research and technological development, innovation and entrepreneurship are the most frequently affected by the reported fraudulent as well as non-fraudulent irregularities. EU Member States are reporting an increasing number of fraudulent irregularities related to measures to improve employability. Also fradulent irregularities concerning infrastructure intended to provide basic services to Europeans (such as energy, environment, transport and ICT) and social, health and education infrastructure are increasingly reported. The highest financial amounts related to non-fraudulent irregularities are associated with infrastructure projects, in particular TEN-T motorways and roads (core network). In proportion to payments, the fisheries policy seem to be an area highly affected by fraud and irregularities. Measures for productive investments in aquaculture and investments in processing and marketing appear among the riskiest operations. Technical assistance and the development of new markets and promotional campaigns also seem vulnerable. Figure 15 shows the most frequently detected types of irregularities in relation to fraudulent irregularities for projects financed under the programming period 2014-2020. They were: incorrect, missing, false of falsified supporting documents, infringement of contract provisions, eligibility and infringement of public procurement rules. Breaches in relation to ethics and integrity and double-funding appeared in 5% and 1% of the detected cases, respectively. With the increasing use of simplified cost options, risks move further to the actual and correct implementation of the action. This must be considered in control strategies. In relation to non-fraudulent irregularities, infringements of public procurement rules represent the most significant share (see Snapshot 18 for risks linked to public procurement). Direct expenditure – Detected fraudulent irregularities related to direct expenditure by the Commission have fallen since 2016 and remained rather stable over the last three years. In relation to non-fraudulent irregularities, 2020 was the year in which the lowest figure was recorded for both number of cases and amounts concerned. The most recurrent types of irregularities concern the eligibility of expenditure and under-performance/non-performance. Specifically in relation to fraudulent irregularities, issues linked to the supporting documentation is the second most recurrent type after ‘eligibility.’ In 2020, the policy areas most concerned by the irregularities were research and innovation, communication networks, content and technology and international cooperation and development. 6.2.Additional risks of irregularities and fraud for 2021 and beyond In recent history, the year 2020 has been unprecedented due to the COVID-19 pandemic. In this context, the Recovery and Resilience Facility also changes the situation in terms of risks. New objectives and significant changes in the environment must swiftly trigger actions by EU Member States and the Commission to identify and assess additional risks of irregularities and fraud. 6.2.1.COVID-19 risks in revenue The year 2020 was marked by the COVID-19 pandemic and by the sharp drop in import flows. Trade within the EU-27 was hit hard. A significant fall in imports (-11.6 %) was observed compared with 2019. The drop in import volume and a significant shift towards e-commerce caused by the COVID-19 pandemic has led not only to changes in the number of customs declarations to be cleared but also to a shift in customs workload and work patterns. The reaction of national authorities to those challenges and the speed with which the customs authorities were able to adapt to new circumstances are only partially comparable, as the changing rules of lockdowns have changed greatly over the course of the year among EU Member States and within specific regions in some EU Member States. Based on the overall figures, it seems however that the variation of the total number of reported irregularities (fraudulent and non-fraudulent) and of the related amounts is rather within the usual range of the annual fluctuation and therefore, probably less affected by the COVID-19 pandemic. However, customs fraud appear to have affected EU Member States to differing degrees during the COVID-19 pandemic. Whereas the detection rates of Belgium, Bulgaria, Germany, Croatia, Hungary, Poland, Slovenia and Sweden were the highest in 2020 compared to the previous five years, the detection rates in Italy, the Netherlands, Austria, Portugal and Slovakia were the lowest . For COVID-19 related goods, a slight increase in the amounts reported as irregular was observed in 2020, in particular for goods such as protective garments. However, analysis shows that the impact of irregularities affecting COVID-19 related goods appear to have remained relatively low in 2020 (6% of the total number of irregularities reported in 2020 and 3% of the related amounts). 6.2.2.COVID-related risks in expenditure The COVID-19 pandemic has pushed the EU institutions and the EU Member States to enable the EU budget to support the response to the crisis, adding the necessary resources and flexibility. The EU has strict rules to protect its budget from fraud. However, fraudsters are swift in adapting their operations. A number of key potential risks related to the COVID-19 outbreak may bring new opportunities to them.

First, there are risks related to managing the emergency, which requires simplified procedures. The abuse of simplified procedures may lead to less competitive public procurement and direct award, which increase the risk of conflict of interest and corruption and make controls more difficult. Emergency procedures may lead to lower quality of tender specifications, making it easier for fraudsters to inflate costs or reduce quality during implementation. Urgent operations may receive EU funding after they have been completed outside the management and control framework for EU funds (retroactive financing). While the services of consulting companies can be of great assistance, increased reliance on them may present fraud risks. Increased demand and disruption of supply chains during emergencies may lead to contractual relationships with unreliable counterparts. Other risks are due to pressure on the authorities in charge of managing EU funds. Delays in the current operational programmes due to the COVID-19 pandemic, new needs related to emergency spending, and the start of the next programming period can be stress factors benefiting fraudsters using networks of (shell) companies offering the same services in multiple projects in different operational programmes (risks of conflict of interest, double-funding, etc.), or inflating costs through fake intra-network transactions. Such pressure may add to the challenge of assessing applicants’ declarations, which increases the risk of inflated costs and of funding to companies with no financial and operational capacity. It may also lead to a reduction in the use of guarantees, or a decrease in the quantity or quality of controls, also hampered by travel restrictions. Another risk may be related to beneficiaries unduly invoking ‘force majeure’ to justify non-compliance with contractual obligations in the implementation of programmes. This may even facilitate fraudulent bankruptcies, falsely pretending the crisis caused them. These risks may apply to 2020, requiring adaptation of the control strategies related to the operations implemented during the peak of the sanitary emergency, and to 2021 and beyond, requiring prevention through specific mitigating measures and targeted action to detect future irregularities and fraud. 6.2.3.Risks related to the Recovery and Resilience Facility In relation to the Recovery and Resilience Facility, Regulation (EU) 2021/241 singles out, in particular, four specific risks against which EU Member States must take appropriate measures: i) fraud, ii) corruption, iii) conflicts of interest, and iv) double-funding. These risks are defined as ‘serious irregularities’ in the regulation. The RRF will bring a large amount of money to some EU Member States that already have a weak absorption capacity of European Structural and Investment Funds. This will add pressure on the management and control system. Most EU Member States need to develop new IT tools to collect and manage the information to implement the RRF. Interoperability between different national systems may not be ensured. In implementing the RRF, EU Member States will need to ensure an effective and efficient internal control system and to develop a reliable IT infrastructure to collect: a) information about the achievement of milestones and targets; and b) standardised categories of data (on final recipients, contractors, sub-contractors and beneficial owners). The Commission will make available an information and monitoring system, including a single data mining and risk-scoring tool, to access and analyse this data and information for generalised application by the EU Member States. The Commission, OLAF, the Court of Auditors and, where applicable the EPPO can use the information and monitoring system within the scope of their mandates. Snapshot 18 – Focus on the healthcare sector Following the COVID-19 outbreak, EU funding to strengthen national healthcare systems increased and will increase further in the next programming period, including national plans related to the RRF. Therefore, the impact of risks materialising is higher, vulnerabilities must be identified and risks mitigated. Projects to improve the healthcare infrastructure are complex, requiring the procurement of services, works and supplies of medical and ordinary equipment. Broadly speaking, risks of irregularities and fraud are related to the (i) restrictions to competition (by limiting information, excluding or discouraging potential tenderers, non-transparent selection or evaluation, collusion); (ii) changes to contracts after award; (iii) implementation shortcomings; (iv) inflation of costs. On restrictions to competition, the openness of the procedure may be undermined by irregularities related to the ‘how,’ ‘what’ or ‘timing’ of the publication of the contract notice, which is meant to inform all potential bidders. This may be the result of undervaluation of the estimated value of the contract or the artificial splitting of contracts. The number of potential bidders may be unduly reduced through excessive or discriminatory requirements concerning the tenderer. Furthermore, contracting authorities may unduly group in the same contract, works, supplies or services that are usually offered by different economic operators (artificial grouping). Other possible malpractices concern technical specifications, which are too narrow or even referring to a specific brand. Unclear or changing terms and conditions may make participation more difficult. Insufficient documentation of the evaluation process and vague or irregular award criteria may make the evaluation non-transparent. Contracts may be awarded to operators that do not meet the criteria. On the other hand, the exclusion of certain operators may be unjustified. Competition may be defeated by collusion, including cooperation among bidders or between bidders and contracting authority. Contracts may be changed after the award. The contract can be different from the tender specifications already at the first signature or it may be changed during implementation. If such changes had already been part of the tender specifications, other operators could have made better offers and could have won. Furthermore, these changes can generate extra-profits for the economic operator, because of cheaper/less materials or less works, for the same price or because of additional supplies or works, for a higher price. Existing contracts may be amended or additional contracts may be unduly awarded to the current contractor, directly or after a negotiated procedure without publication. Shortcomings in implementation may take various forms. This can have serious consequences in healthcare facilities. They may be accompanied by documents that do not match with actual implementation on the ground. Irregularities may also be due to expenditure that does not lead to the expected improvements in the delivery of health services. For example, the beneficiary may not or may rarely use the medical equipment funded by the project, equipment may be used for commercial purposes, contrary to the objectives of the funding, etc.

Excessive prices may be paid for medical equipment. Requests for reimbursements may include costs for ineligible supplies or activities. The project may cover only new medical equipment, while the actual spending may be for ineligible second-hand equipment (with an inflated price, as if it was new). Double-funding is another potential risk. 7.Tools to strengthen the fight against fraud The Commission will build on its existing tools and develop new ones to tackle the challenges that have arisen during the COVID-19 pandemic and new ways of managing EU funding. 7.1.ARACHNE The Commission encourages the use of ARACHNE, an integrated IT tool for data mining and data enrichment. It has been developed by the Commission to support managing authorities in their administrative controls and management checks in Structural Funds (European Social Fund and European Regional Development Fund). It has also been extended to the European Agricultural Fund for Rural Development (EAFRD) projects and will be used for all agricultural funds following the CAP reform. ARACHNE establishes a comprehensive database of EU projects implemented under the Funds, provided by managing authorities and paying agencies, and enriches these data with publicly available information in order to identify, based on a set of risk indicators, the projects, beneficiaries, contracts and contractors which might be susceptible to risks of fraud, conflict of interest and irregularities. The tool provides highly valuable risks alerts to enrich management verifications, but it does not supply any proof of error, irregularity or fraud. ARACHNE can increase the efficiency of projects selection, management checks and further strengthen fraud identification, prevention and detection. In view of the risks highlighted in Section 6, a generalised and systematic use of tools like ARACHNE would allow stepping up the fight against fraud, irregularities, conflict of interest and double-funding. 7.2.The Early Detection and Exclusion System (EDES) The Commission manages the Early Detection and Exclusion System (EDES). EDES is referred to in Articles 135 to 145 of the Financial Regulation applicable to the EU budget. It is a tool to strengthen the protection of the EU's financial interests against unreliable entities and persons by excluding such economic operators from participation in EU funds award procedures under direct and indirect management. Prohibited practices include a broad range of behaviours that affect professional integrity (e.g. fraud, corruption and grave professional misconduct) and bad performances (such as significant deficiencies in the implementation of contracts). In particular, EDES allows for: ·the early detection of entities or persons, which pose a risk to the EU’s financial interests; ·the exclusion of such economic operators from obtaining EU funds under direct and indirect management and/or the imposition of a financial penalty; ·the registration of the above information in the EDES Database which is accessible to the community of financial actors in charge of the implementation of Union’s funds; ·in the most serious cases of exclusion, the publication of the names of the entities or persons concerned, on the Commission’s internet site. EDES allows for a centralised assessment of exclusion situations, while protecting the fundamental rights of persons and entities concerned, in particular their right to be heard. The singularity and strength of the EDES system lies in the power given to the EU institutions and bodies to act “in the absence of a final national judgment or, where applicable, a final administrative decision.” The imposition of sanctions can be based on established “facts and findings” stemming from audits, checks or controls performed under the responsibility of the competent authorising officer, investigations carried out by the OLAF or non-final administrative decisions of national authorities or international organisations. The decision to impose a sanction on unreliable economic operators may be adopted by the relevant authorising officer only after first obtaining a formal recommendation from the centralised inter-institutional panel. 7.3.GetI project The GetI project aims at boosting the analytical capacity of OLAF staff working both on operational and strategic tasks, by improving the accessibility and visualisation of information, speed and flexibility in querying data.

The diversity of data formats and the volume of unstructured data has generated in recent years the need for an environment, tools and functions that facilitate the analytical work. Through a collection of open sources and commercial software, GetI aims at automating many time-consuming tasks and deploying modern technologies, such as artificial intelligence. 7.4.National IT tools to protect the EU’s financial interests In 2020 EU Member States communicated the development of several IT tools (see Table 8 ) to strengthen the protection of the EU’s financial interests which will be of particular importance in tackling the challenges that have arisen with the COVID-19 pandemic and new ways of managing EU funding. Member State Tool Budgetary sector Bulgaria Use of a centralised electronic platform in public procurement All expenditure Czechia Update of procedures for checking ownership structures and conflicts of interest Cohesion policy Denmark Merging data to identify cases of double-financing Cohesion policy Estonia Launch of a cybercrime information and notification website Horizontal Enhancement of the Public Procurement Register All expenditure Germany Fraud risk self-assessment for the Federal ESF and ERDF programmes Cohesion policy Hungary Use of ARACHNE and EDES Cohesion policy and Fund for the most deprived Lithuania Acquisition of the analytical software and hardware to implement anti-money laundering and counter-terrorist financing measures Horizontal IT tools and regulatory measures Agriculture The Netherlands Enhanced digital subsidy application Agriculture Risk-scoring tool: selection of lots susceptible to fraud Agriculture Romania Digitalised checks of ESIF competent bodies to make checks more efficient in the area of public procurement Cohesion policy Spain Direct access by AFCOS to the databases of the Spanish Social Security All expenditure Sweden Better procurement statistics All expenditure 8.Conclusions and recommendations The health crisis caused by COVID-19 has had and will continue to have great economic and social impacts on our lives. The EU response, through the resources provided for the next EU budget and Next Generation EU represent the biggest recovery plan in Europe since the Marshall Plan. A revamped EU anti-fraud architecture is in place to protect EU taxpayers' money, relying on: ·the investigative and prosecutorial powers of the EPPO; ·the coordinating role of Eurojust; ·the analytical capacity of Europol; and ·a reformed OLAF equipped with the tools to work with the EPPO and to carry out even more effective investigations. A close and effective cooperation with national authorities is needed as they are adapting to cope with new risks and new ways of managing EU funds. The management of the RRF and a significant part of the spending programmes for 2021-2027 will be performance-based and EU Member States will bear an increased share of responsibility. These exceptional changes do not speak in favour of a ‘business as usual’ approach. Increased efforts and measures are needed for a European recovery, which call for a renewed and joint European vision for fighting fraud, corruption and other illegal activities affecting the EU’s financial interests. This vision could be built around the following elements: ·A more efficient collection and use of data, fully exploiting the opportunities offered by IT interconnectivity, data mining and risk-scoring tools. The use of pan-European tools would further increase this efficiency and target more effectively risky areas. ·Improved transparency for beneficiaries (including contractors, sub-contractors and beneficial owners) of public (European and national) funding. ·Better coordinated, holistic anti-fraud efforts at EU Member State level, based on developing and implementing national anti-fraud strategies. ·More cooperation within national authorities, between EU Member States and with the European level. Recommendation

EU Member States which have not joined the EPPO should consider doing so. EU Member States which have not adopted a national anti-fraud strategy should consider doing so. National strategies adopted in the past and not adapted to the new significant risks should be swiftly updated. Revenue EU and national customs policies made a significant contribution to the EU’s COVID-19 response in 2020 ensuring smooth trade flows for Europeans and protecting the EU’s financial interests. Some EU Member States were faster and more flexible in adjusting their control activities. The degree of divergence at national level and the differing length of confinement measures as well as country-specific challenges had an impact on EU Member States’ capacity to adapt to the harsh reality of 2020. It is now essential to explore all avenues for ensuring that the customs union and EU Member States’ customs authorities operate optimally, remain flexible and resilient in times of crisis and better anticipate problems. This implies, above all, a new emphasis on ensuring greater availability and use of data and data analysis for customs purposes as well as the development of an appropriate set of foresight and common crisis management tools. Therefore, further steps towards risk assessment, standardised checks and EU-wide and international coordination and cooperation in detecting irregular cases are required, taking into account that fraud and the spreading of specific fraud mechanisms are not constrained by national borders. Recommendations EU Member States are invited to assess the risks and shortcomings of the national customs control strategies revealed through the COVID-19 pandemic, and to report lessons-learned and remedial measures taken in order to: - improve flexibility for the type of customs checks; - diminish the potential impact of unexpected future events; - ensure the implementation of uniform controls within the EU. Furthermore, Member States are invited to assess the financial risks that might not have been sufficiently addressed during 2020 and to establish catch-up plans for carrying out appropriate customs checks where due to confinement measures such customs checks had to be cancelled or postponed e.g. checks at operators’ premises and physical checks before releasing goods into free circulation. Expenditure Risks can only be mitigated if they have been identified. A lost opportunity in terms of risk identification weakens EU Member States and exposes them to the full extent of the risks both in terms of impact and likelihood. It is therefore critical in the current circumstances that EU Member States perform in-depth and targeted risk assessments. This will contribute to strengthening rules on internal control frameworks. Recommendation If not already done, EU Member States are invited to launch targeted risk management exercises linked to the impact of COVID-19 and the upcoming implementation of the Recovery and Resilience Facility. In this respect, transparency as regards the use of the public resources is key. It does not only constitute a deterrent element, but also involves civil society, contributing to improving taxpayer’s trust in how public authorities manage public money. Data analysis to identify and target suspicious transactions has become an essential part of the fight against fraud and its importance will continue to grow in the coming years. Recommendation The way in which underlying data, as well as those concerning detected irregularities and fraud, are collected and used, needs to be further improved. The Commission will further develop the Irregularity Management System. National authorities will need to report quality data that is reliable. In terms of data mining and risk-scoring capabilities, a pan-European IT tool would: