COMMISSION REPORT - Evaluation of the activities of the European Anti-fraud Office (OLAF) - Parliament and Council Regulation (EC) No 1073/1999 and Council Regulation (Euratom) No 1074/1999 (Article 15)

CONTENTS

Progress in the fight against fraud: key aspects of the reform

Mandate and method

Structure of the evaluation report

1. THE OFFICE'S OPERATIONAL TASK: A NEW APPROACH 6

1.1. Operational tasks

1.1.1. Internal investigations

1.1.2. External investigations

1.2. Operational partnership

1.2.1. Partnership with the Member States

1.2.2. Legal assistance and judicial expertise

1.2.3. Coordination of Community action

1.2.4. Cooperation at the international and European Union level

2. THE COMMISSION'S GENERAL TASKS: A SPECIFIC EXPERTISE

OF THE OFFICE

2.1. Anti-fraud strategy

2.2. Prevention

2.2.1. Fraud-proofing

2.2.2. Rules of professional ethics

2.2.3. Enlargement

2.3. Anti-fraud legislation

2.4. The strengthening of the legal dimension

2.5. The instruments of technical assistance

2.6. The representation and cooperation function

3. AN INDEPENDENT AND INTERNAL SERVICE: HYBRID STATUS

3.1. Organisation and staff

3.1.1. Internal organisation of the Office

3.1.2. Staff of the Office

3.2. Budget of the Office

3.3. Information and communication activities

3.3.1. Information

3.3.2. Communication activities

3.3.3. Access to documents

3.4. Review of the investigation function

3.4.1. Administrative review

3.4.2. Political review

3.4.3. Judicial review

3.5. Political responsibility and relations with the Supervisory Committee

3.5.1. Political responsibility of the Commission

3.5.2. Relations with the Supervisory Committee

OUTLOOK

Consolidating reform

Towards the establishment of a European Public Prosecutor

ANNEXES - Inventory of recommendations

Progress in the fight against fraud: KEY ASPECTS OF THE REFORM

The Treaties give the Community and the Member States the shared responsibility for protecting Europe's finances. The Commission has major powers for combating fraud, corruption and other illegal activities to the detriment of Community interests. To that end the Commission has gradually pooled its powers in an anti-fraud unit. This also met concerns expressed by Parliament and the Council. It generated a series of adaptations to consolidate the mechanism set up from 1988 on, when the Unit for the Coordination of Fraud Prevention (UCLAF) was set up in the Secretariat-General under the authority of the President of the Commission.[1] This consolidation gradually made it possible to adapter the scale of the antifraud department's activities, bringing in the reinforcement of the protection of other Community interests and the preparation of initiatives to combat certain other forms of transnational economic crime such as counterfeit and pirated goods and counterfeiting of the euro.

[1] It was in order to promote the development of a consistent antifraud policy that the Commission set up UCLAF (Commission report on tougher measures to fight against fraud affecting the Community budget: COM(1987) 572 final), which was to focus on interdepartmental coordination to reinforce legal instruments, intensify cooperation with the Member States and improve the efficiency of an internal organisation scattered over several different Directorates-General. Since 1992 the Court of Auditors, in its special report No 2/92 on the control of the export refunds paid to major companies selected in the dairy sector (OJ C 101, 22.4.1992) had recommended "the creation of an independent Community unit for ad hoc controls", a memorandum from the President of the Commission on fraud prevention (SEC(1992) final 2045) specified the tasks of the anti-fraud unit, with certain operational tasks focusing on cases involving several financial instruments being added to existing coordination tasks. In 1995 overall responsibility for work in the fight against fraud was entrusted to the anti-fraud unit, "responsible for all operations relating to the fight against fraud", and henceforth responsible for "all activities relating to the fight against fraud", in particular "the protection of the financial interests of the Community, the conception of the fight against fraud in all domains, the development of the infrastructure necessary for the fight against fraud ..., the collection of information concerning cases of fraud and the processing of such information" (Commission Communication on The fight against fraud - Organisation in the Commission (SEC(1995) 249 final). Since 1995, the legislature has produced a horizontal legislative base, including a definition of irregularities (1st pillar) and a concept of fraud (3rd pillar), the latter including a series of criminal offences (see in OJ C 316 of 27.11.1995, the preamble to the Convention on the protection of the financial interests of the European Communities, according to which "fraud affecting Community revenue and expenditure in many cases is not confined to a single country and is often committed by organised criminal networks" and, in OJ L 292 of 15.11.1996, recital 7 to Council Regulation (Euratom, EC) No 2185/96, which also includes the activities of criminal networks). The existence of a broad definition of fraud enabled the Commission to give a consistent definition of the powers of its anti-fraud unit in terms both of operations and of the preparation of policy documents and draft legislation, as it was converted on 1 May 1998 into a Task Force for the Coordination of Fraud Prevention, and to specify its role in internal investigations (Memoranda from the President, Mrs Gradin and of Mr Liikanen of July and December 1998: C(1998) 2049 et C(1998) 3232).

The establishment of the European Anti-fraud Office (OLAF), which, falls within the context of the crisis that prompted the Commission's resignation in March 1999, reflects this approach. The reform, launched at the Commission's initiative, proceeded at the pace set by the Heads of State or Government at the Vienna European Council in December 1998, and came to fruition before the Cologne European Council in June 1999. To facilitate interinstitutional cooperation, the German Presidency set up a high-level political group in January 1999, including representatives of the Presidency, Parliament and the Commission.[2] Completed in less than six months, the reform was also the fruit of a consensus to restore confidence in the sensitive matter of protecting Europe's public finances and preventing fraud.[3]

[2] Three institutions formed the High-level Group set up by the German Presidency of the European Council - the European Parliament (Officers of the Budgetary control Committee), the Presidency of the ECOFIN Council and the Commission (Mr Van Miert, Ms Gradin, Mr Monti).

[3] See first report of the Committee of Wise Men, which concluded there was a need to review the fraud prevention machinery (report of 15 March 1999 on fraud, mismanagement and favouritism in the European Commission, followed by a second report, dated 10 September 1999, on the reform of the Commission, analysis of practices in force and proposals to remedy mismanagement, irregularities and fraud).

The Commission and the legislature agreed to give the new Office, now to be maintained in the Commission, functional independence to exercise the investigation powers conferred on the Community, without this affecting the balance of responsibilities between the Member States and the Community. At the same time, the Office was given an interinstitutional task of combating serious conduct undermining the credibility of the European public service and the institutions.

The European Anti-fraud Office is thus a fundamental stage which extends a dynamic process for the protection of financial interests that began in 1976 (draft Eurocrime Treaty).[4] The reform of 1999 reflects the various stages of the development of the anti-fraud service to improve the effectiveness and visibility of an investigation structure specialising in the fight against crime to the detriment of the Community's financial interests.

[4] OJ C 222, 22.9.1976.

MANDATE AND METHOD

Article 15 of Parliament and Council Regulation (EC) No 1073/1999 and Council Regulation (Euratom) No 1074/1999 of 25 May 1999 on investigations carried out by the European Anti-fraud Office [5] provides: "During the third year following the entry into force of this Regulation, the Commission shall transmit to the European Parliament and the Council a progress report on the Office's activities, accompanied by the Supervisory Committee's opinion, together, where appropriate, with proposals to modify or extend the Office's tasks". To carry out its statutory obligation, the Commission set up a high-level interdepartmental group by its Decision of 15 January 2002.[6] This group established its methodology and worked regularly on preparation of this report, focusing on a review of the legal framework governing the Office's activities.

[5] See also recital 20.

[6] PV(2002) 1551. See also SEC(2002)33/2.

Evaluation work proceeded from the full set of basic instruments governing the Office [7] and the relevant sectoral legislation [8] and from a broad documentary base including the Commission Reports on the protection of the Communities' financial interests and the fight against fraud, [9] and reports by the Supervisory Committee, the Court of Auditors, Parliament and the Council, in particular on the occasion of the discharge for the annual budget, and the Office itself. Certain of these reports, which more particularly concern the detailed examination of operational activities, are a vital source of evaluation material. The existence of these reports meant that the group was able to concentrate on the rules and regulations and the status and functions of the Office. This report does not set out to analyse figures or trends as this quantitative evaluation is already available in the Office's and the Commission's reports.

[7] Commission Decision 1999/352/EC, ECSC, Euratom of 28 April 1999 establishing the Office (OJ L 136, 31.5.1999, p. 20), Parliament and Council Regulation (EC) No 1073/1999 and Council Regulation (Euratom) No 1074/1999 (OJ L 136, 31.5.1999, p. 1 and 8), Interinstitutional agreement concerning internal investigations carried out by the Office (OJ L 136, 31.5.1999, p. 15) and model Decision.

[8] Regarding the sectoral legislation, there can be no exhaustive identification of legal bases and means of intervention available to the Office in the context of this evaluation. The specific protection legislation accompanying each of the Community policies and instruments has evolved piecemeal and never been brought into a single compendium.

[9] Most recently COM(2000) 718 final, COM (2001) 255 final, COM (2002) 348 final.

The object of the evaluation exercise is to come to an overall assessment of the Office's activities, supplementing the analyses conducted by the Office itself and the Supervisory Committee, [10] by examining its functions, the means available and the difficulties encountered. Account is taken of the impact of anti-fraud activities on the protection of the Communities' interests, sound implementation of the budget and healthy and rigorous financial management. The exercise takes account of the impact of the reform on prevention, cooperation and deterrence/enforcement. There is also reference to the subsidiarity and proportionality principles, respect for fundamental human rights, transparency, and the cost-effectiveness ratio (economies of scale). The interinstitutional dimension of the Office's activities (credibility of the institutions and of European integration) was also taken into account. This overall assessment should provide a means of weighing up the pros and cons of the structure that emerged from the 1999 reform.

[10] Supervisory Committee: reports published in OJ C 360 of 14.12.2000 for the period July 1999-July 2000, in OJ C 365 of 20.12.2001 for the period July 2000-September 2001 and in OJ C 234 of 30.9.2002 for the period September 2001-July 2002. Office: reports of 23.5.2000 (period from 1 June 1999 to 31 May 2000), 18.10.2001 (period from 1 June 2000 to 31 May 2001) and 17.10.2002 (year ending June 2002), amplified by this report.

This exercise covers the period from June 1999 to December 2002 and thus includes the transition from the old Commission anti-fraud unit to the Office and all the uncertainties that this entailed.[11] This does not preclude a meaningful initial assessment of ongoing activities for the attainment of the objectives set by the legislature, which the Commission plans to achieve in stages by means of the new operational strategy for the period from June 2000 to the end of 2005.[12]

[11] Legal and political constraints, time needed to appoint senior management and recruitment restrictions, management of cases of the current anti-fraud unit mobilising significant resources, delays in launching the new methodology.

[12] Commission overall strategy for the fight against fraud and the protection of the Communities' financial interests of June 2000. COM(2000) 358 final. See also the action plan for 2001-2003. COM (2001) 254 final.

STRUCTURE OF THE EVALUATION REPORT

The structure of the report is based on an analysis of the 1999 reform and the Office's activities, subdivided depending whether they are operational tasks or more general tasks connected with the development of political strategy and legislative initiatives.

The reform rests on innovative elements to boost the reliability and effectiveness of investigations. Conferring an interinstitutional investigation task on the Office and transferring the Commission's operational powers of investigation to it were accompanied by major institutional innovation: the granting of functional independence in operational activities intrinsically connected with the investigation function (Part I).

Another aspect of the new mechanism is the fact that the same service combines functionally independent investigation activities with activities for the preparation and implementation of Commission measures affecting its fundamental prerogatives, in particular in legislative matters (Part II).

The Office's independence in its investigation function and its attachment to the Commission express its functions based on innovation and continuity and are the guiding principles for the governance of the Office in the context of a hybrid status (Part III).

This overall evaluation exercise also concerns the longer-term trend towards stronger criminal-law protection of financial interests. That is why the future outlook, in particular through work on the European Prosecutor and the Convention on the future of the European Union, have been considered and analysed (The Outlook).

In the annexes, there is a stock-taking of the recommendations made in the report (Annex I). For ease of comprehension, they are classified on the basis of the level of the action required to give effect to them (Annex II).

*

1. THE OFFICE'S OPERATIONAL TASK: A NEW APPROACH

In its operational function the Office exercises the new powers conferred on it by the legislature and the interinstitutional agreement of 25 May 1999 (internal investigations) and the longer-standing powers conferred on the Commission (external investigations). In the performance of its investigation function the Office enjoys functional independence. It covers internal and external administrative investigations (operational function). It also covers to some extent the partnership with the Member States, judicial assistance and the relationship between the Office's functions and those of its counterparts in the Community and elsewhere (operational partnership).

1.1. Operational tasks

The Office was entrusted with the exercise of the responsibilities given to the Commission as regards on-the-spot checks and inspections in the Member States or third countries (external investigations) and the power to conduct investigations in all European Community institutions and bodies (internal investigations).

The independence of the investigation function conferred on the Office is provided for in legal terms by Articles 3, 4 and 5 of Commission Decision 1999/352/EC, ECSC, Euratom establishing the Office and Articles 11 and 12 of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999 concerning investigations conducted by the Office.

The Office exists primarily to perform operational tasks, in particular the investigation function as defined by Article 2 of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999. The Office's investigation results, which can be used in criminal proceedings, will then serve in appropriate cases as the preparatory phase in prosecutions in national courts (see at 1.2.2 below).

Article 2(1) of the Commission Decision establishing the Office defines the scope of the investigation function. Article 2(4) provides that the Office can be entrusted with investigation missions in other fields by the Commission or the other institutions or bodies. This power has not yet been exercised.

1.1.1. Internal investigations

The European Anti-fraud Office has the power to conduct internal administrative investigations in all the European Community institutions and bodies. This interinstitutional function is the major innovation of the 1999 reform. It is the follow-up, in particular, to a Commission communication of 1997 and to special report No 8/98 of the Court of Auditors, [13] which pointed out that the fact that the old Unit for the Coordination of Fraud Prevention had no power to carry out investigations in Community institutions other than the Commission "has to be considered as a serious weakness in the legal and organisational framework of the fight against fraud".

[13] Commission Communication: Better action against professional incompetence, financial irregularities, fraud and corruption. SEC(97) 2198. Special Report by the Court of Auditors on the Commission's services specifically involved in the fight against fraud, notably UCLAF. OJ C 230, 22.7.1998.

* Scope of the internal investigations

The scope of internal investigations is defined by provisions enacted by the legislature or agreed by the European Parliament, the Council and the Commission in the interinstitutional Agreement of 25 May 1999. [14]

[14] An interinstitutional agreement is a practice-based Community legal instrument which organises cooperation between two or several institutions by pragmatic methods within their respective powers. This practice is a contractual procedure which gives concrete expression to reciprocal duties of sincere cooperation and mutual trust between the institutions concerned. In the present case, it expresses the wish for there to be an instrument to monitor the reform and to support and regulate it pending appropriate provisions in the Staff Regulations. In practical terms it improves the application of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999. Politically, it officialises the commitment of the three signatory institutions and sets an objective of extending it to the other institutions and bodies, via the invitation of the political level. Methodologically, it provides a model for the smooth operation of interinstitutional cooperation and coordination. And it makes for better legibility and transparency.

Under Article 1(3) of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999, the purpose of internal investigations is "fighting fraud, corruption and any other illegal activity affecting the financial interests of the European Community" and "investigating to that end serious matters relating to the discharge of professional duties such as to constitute a dereliction of the obligations of officials and other servants of the Communities liable to result in disciplinary or, as the case may be, criminal proceedings, or an equivalent failure to discharge obligations on the part of members ... or members of the staff of institutions, bodies, offices or agencies not subject to the Staff Regulations ...".

The interinstitutional agreement of 25 May 1999 abolished the link with the protection of financial interests and thus extended the scope of internal investigations to all activities to protect Community interests against serious illegal conduct (see point 1.2.3, disciplinary bodies). To ensure homogeneous protection, Parliament, the Council and the Commission invited the other institutions and bodies to join the interinstitutional agreement and adopt the common system in accordance with the model Decision annexed to it.[15] Article 2(1) of the Commission Decision establishing the Office defines the material scope of internal investigations in a way corresponding to the interinstitutional agreement.

A non-homogeneous mechanism

[15] For the Council: Decision 1999/394/EC, Euratom (OJ L 149, 16.6.1999, p. 36). For the Commission: Decision 1999/396/EC, Euratom (OJ L 149, 16.6.1999, p. 57). For Parliament, the Decision of 18 November 1999 was incorporated in the Rules of Procedure (Annex XI).

The Commission notes that apart from the three signatories, no other institutions or bodies have actually joined the agreement.

Most of the institutions and bodies, on the other hand, have adapted their internal machinery. But an initial analysis shows that there does not seem to be a uniform interpretation of the new legal mechanism provided for by Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999 (Article 4(6)) and by the interinstitutional agreement. Differences, not motivated by specific requirements as provided by paragraph 2 of the agreement, have been observed with regard to the mechanisms of certain institutions and bodies, such as the fact that officials cannot convey information direct to the Office but are obliged to pass through an internal authority or the fact that the Office's internal investigations are confined to professional misconduct to the detriment of the Communities' financial interests. The scope of these mechanisms is sometimes more restrictive than provided for by the model Decision (see R.1).

Disputes

There were several disputes about the establishment of the new interinstitutional internal investigation mechanism. Seventy-one Members of Parliament challenged the Decision concerning the internal investigations taken by their institution, on the grounds that it would undermine parliamentary immunity and independence. In this action there was first an interlocutory order and then a judgment of the Court of First Instance, given on 26 February 2002, [16] holding that the action was inadmissible since the authors of the actions had not demonstrated that they were individually affected by the decision challenged. The grounds given for the judgment state that, although the rules governing internal investigations as such are equally applicable to members of the European Parliament, the risk cannot be excluded a priori that, in conducting an investigation, the Office might perform an act prejudicial to the immunity enjoyed by every Member of the Parliament. However, if that were to occur, any Member of the Parliament faced with such an act could, if he considered it damaging to him, avail himself of the judicial protection and the legal remedies provided for by the Treaty. [17] The European Central Bank (ECB) and the European Investment Bank (EIB) each adopted an internal Decision which the Commission, after analysis, considered incompatible with Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999. Court actions so far, in the current state of proceedings pending in the Court of Justice (CJEC), have prompted an opinion of the Advocate-General, presented on 3 October 2002, recommending the annulment of the ECB and the EIB Decisions.[18]

[16] Case T-17/00R and T-17/00. There is currently an appeal to the Court of Justice against the judgment of the Court of First Instance.

[17] Paragraphs 72 and 73 of the judgment.

[18] ECB Decision 1999/726/EC of 7 October 1999 on fraud prevention (OJ L 291, 13.11.1999, p. 36); Decision of 10 November 1999 of the Management Committee of the EIB concerning cooperation with the Office. Cases C-11/00 and C-15/00.

These disputes are a useful source of evaluation, from which it can be seen that the consistency of the new interinstitutional mechanism does not allow any form of exclusion, as it is intended to cover all the institutions and all the bodies set up by or under the EC and Euratom Treaties without exception. The Cologne European Council asked all the institutions and bodies to join the interinstitutional agreement so that the investigations would be carried out under equivalent conditions in all of them.

The Commission considers that it is essential to attain the goal laid down by the legislature and the institutions of putting an interinstitutional dimension on internal investigations to ensure uniform protection of the integrity of the institutions.

Recommendation No 1 (R.1)

The Commission invites all the institutions and bodies to accede quickly to the interinstitutional agreement of 25 May 1999, signed by the European Parliament, the Council and the Commission.

The Commission calls on the institutions and bodies to adopt an internal decision in line with the model decision annexed to the interinstitutional agreement.

* Exercise of internal investigation powers

The Office's powers of internal investigation of the Office are exercised under Article 4 of the Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999. These powers include:

- subject to Article 4(4), [19] "immediate and unannounced access to any information held by the institutions, bodies, offices and agencies, and to their premises";

[19] This paragraph provides for information to the institutions and bodies concerned "whenever employees of the Office conduct an investigation on their premises or consult a document or request information held by such institutions, bodies, offices and agencies".

- the possibility to "take a copy of and obtain extracts from any document or the contents of any data medium";

- the right to "request oral information" from members of the institutions and bodies, from managers of offices and agencies and from the staff of the institutions, bodies, offices and agencies;

- the right to carry out on-the-spot checks and inspections, under the conditions and according to the procedures provided for by Regulation (Euratom, EC) No 2185/96, on economic operators (see at 1.1.2 below) holding information concerning the facts under investigation;

- the right to "ask any person concerned to supply" information that the Office considers useful.

In accordance with the Regulations and the Decisions of the institutions and other bodies, the exercise of these powers of internal investigation must fully respect individual rights (presumption of innocence, respect for privacy and for defence rights, right to an impartial investigation). This aspect has been raised in the ongoing disputes, in successive reports by the Office's Supervisory Committee and by the European Mediator.

That is why, with a view to ensuring greater control over internal investigation procedures and a high level of guarantee for all those concerned with such proceedings, the Commission considers that internal provisions should be adopted by the Office to produce a corpus of administrative rules governing the implementation of internal investigation measures (see at 3.4.1 and 1.1.2 below).

Recommendation No 2 (R.2)

The Commission recommends that in its Manual of Internal Procedures the Office establish a corpus of administrative rules for the implementation of measures of internal and external investigation.

* Internal investigation methods

Variations in the procedural guarantees which accompany internal investigation activities have been observed. This is the case in particular of procedures for information by the Office (see at 3.3 below, information and communication activities) and procedures whereby the Office receives information in connection with internal investigations.

Procedures for provision of information to the Office

The obligation to inform the Office, in accordance with Article 2 of the model Decision annexed to the interinstitutional agreement of 25 May 1999, must, according to the agreement, [20] be consolidated in the Staff Regulations. The Commission's proposal for a Council Regulation laying down the Staff Regulations of Officials and the Conditions of Employment of Other Servants of the European Communities contains an Article incorporating this obligation to inform the Office so as to make it directly applicable to Community staff. The proposal is under examination; [21] the anticipated outcome is to be compatibility between the Staff Regulations and the model decision. It must also be made clear that the provisions governing the Office [22] do not restrict its powers in relation to Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999 and the Interinstitutional Agreement and model decision.

[20] Information goes direct to the Office under Article 2 if any "official or servant of [the institution or body] becomes aware of evidence which gives rise to a presumption of the existence of possible cases of fraud, corruption or any other illegal activity detrimental to the interests of the Communities, or of serious situations relating to the discharge of professional duties ...". See seventh recital to the Interinstitutional Agreement as regards amendment of the Staff Regulations.

[21] COM(2002) 213 final. See in particular Article 22a of the proposal.

[22] Article 86.

Development of internal investigations

The Commission notes, on the basis of the data available from the latest reports of the Office and the Supervisory Committee, that internal investigations are developing. This new situation reflects the priority given to internal investigations to protect the integrity and credibility of the European public service and the expansion of the Office's powers beyond the Commission into the other institutions and bodies.

* Relationship between internal investigations and certain administrative procedures

In the context of reform of the Commission, provisions have been enacted to secure compliance with ethical obligations and the principles of sound financial management by Community officials and other staff. These provisions must be coordinated with those relating to the exercise of internal investigations by the Office (see at 1.2.3 below, disciplinary bodies and bodies specialising in dealing with financial irregularities).

* Specific question of immunities

Officials and other servants of the Communities cannot plead their immunity to resist the Office's planned administrative investigations, as this is part of the Communities' power of organisation, but the problems of waiver of immunity arise when criminal proceedings are brought against Community officials or servants by national law-enforcement authorities following internal investigations by the Office.

Some national authorities have argued that the procedures set up for waiving the immunity of an official/servant so that judicial authorities can commit him for trial in the context of investigations by the Office are cumbersome. The practice is that judicial authorities wishing to bring criminal proceedings on the basis of an investigation by the Office generally apply to the Office, which forwards the request to the institution or body concerned. According to the national judicial authorities, the response via the Office is always slow.

The Commission considers that it would be worth simplifying the current practice by stating clearly which authority would have the power to waive the duty of discretion (Article 19 of the Staff Regulations) or to waive immunity when the final investigation report is referred to the judicial authority.

1.1.2. External investigations

Until 1995, the regulations governing Community on-the-spot checks and inspections were broadly seen as directed towards verifying proper accounts, the sound implementation of Community law, the effectiveness of Community funds management systems in the Member States and Commission's the role as guardian of the Treaties. Each Commission Directorate-General responsible for a specific field had to prepare its own policy guidelines and legislative framework. Each of them determined, and still determines, the checks and inspections to be undertaken on the basis of sectoral Regulations. The purpose of these checks and inspections, based on routine or on risk analysis, was and still is to detect any administrative malfunctioning or irregularities rather than to detect facts or irregular behaviour liable to give rise to administrative or criminal proceedings against individuals (anti-fraud investigation). The absence of a specifically anti-fraud purpose of sectoral regulations was not, however, likely to fully preclude the use of sectoral bases for detecting economic or financial offences.

Since 1995, Commission anti-fraud action has become more sophisticated and was consolidated by horizontal legislation (first and third pillars) incorporating means of administrative investigation making it possible to ascertain the reality and complexity of the facts and the criminal dimension of serious behaviour prejudicial to the financial interests of the Communities. This new mechanism, more specifically directed towards fraud prevention, rests on an enhanced partnership with the Member States in accordance with the subsidiarity principle and shared responsibility for the protection of the Community's financial interests.

In 1999, to boost the reliability and effectiveness of Community intervention in the Member States, the Commission and the legislature intended also applied the principle of the Office's functional independence to external investigation activities. But this major innovation does not affect the distribution and balance of responsibility between the national and Community levels. Nor does it affect the Commission's general responsibility for the protection of financial interests and anti-fraud policy (Article 280 of the EC Treaty), this responsibility being closely bound up with its function of implementing the budget under Article 274.

The concept of external administrative investigation as defined in Articles 2 and 3 of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999 is a rather broad one. It covers two operational realities, namely investigations directed by the Community and investigations conducted at the national level at the Community's request or with its involvement. The Regulations not only define the concept of external administrative investigation but also emphasise the criminal-law purpose of such investigations. Reports drawn up by the Office can constitute a preparatory stage for prosecutions in the national courts.

Under Community law as it stands in the various sectors, the Commission considers it essential to maintain the possibility for the Office of using the various existing legal bases to carry out its operational activity in specific situations by conducting investigations itself or asking for a national investigation to be opened under sectoral regulations on the basis of relevant information in its possession, with which it can always be associated. The fact that these investigation tools (horizontal anti-fraud Regulation and sectoral Regulations for monitoring the application of Community legislation and auditing accounts) are available means that the Office can adapt the effectiveness of anti-fraud action in accordance with its priorities and the specific situation, but also in accordance with the powers available to the national authority that is its local partner.

The Commission considers that the Office must carefully adapt its operational activity and develop its intelligence resources (strategic and operational intelligence) so as to make the best use of the existing legal instruments in the absence of a specific cooperation instrument. It must also upgrade its capacity to act in full independence, without interfering with the other tasks conferred on it by the Commission in the field of cooperation with the Member States for the purposes of Article 280(3) of the EC Treaty and also in respect of the competencies of the various Commission departments concerning matters of administrative and financial follow-up to investigations, including penalties. It is clear that these functions are exercised in the context of the Commission's powers and not necessarily of the Office's independence in the performance of operational tasks, which focuses on the investigation function (see in particular at 1.2.1, 1.2.4 and 2.5 below).

* Scope of external investigations

Community legislation defines the scope of external investigations in the light of the aims and purposes of each instrument.

Under Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999 (Article 1(1) and Article 3), the Office exercises the power conferred on the Commission to carry out on-the-spot inspections and checks in the Member States and, in accordance with the cooperation agreements in force, in third countries in accordance with cooperation agreements with them, to establish whether the activities being investigations are indeed irregular, without encroaching on the Member States' powers in matters of criminal prosecutions under Article 2 of those Regulations.

When external investigations are launched at the instigation of the Office or at the request of a Member State, they are intended, according to Article 2 of Regulation (Euratom, EC) No 2185/96, [23] "for the detection of serious or transnational irregularities or irregularities that may involve economic operators acting in several Member States" and to detect irregularities, "where ... the situation in a Member State requires on-the-spot checks and inspections to be strengthened in a particular case in order to improve the effectiveness of the protection of financial interests and so to ensure an equivalent level of protection within the Community". Incidentally, the Office, in liaison with the national authorities, can initiate investigation missions in third countries, in accordance with agreements in force, on the basis of Regulation (EC) No 515/97, [24] to detect offences or operations contrary to the regulations referred to by that Regulation.

[23] Council Regulation (Euratom, EC) No 2185/96 of 11 November 1996 concerning on-the-spot checks and inspections carried out by the Commission in order to protect the European Communities' financial interests against fraud and other irregularities. OJ L 292, 15.11.1996, p. 2. Vade-mecum on the application of the Regulation by Commission staff: October 1997.

[24] See in particular Article 20 of the Regulation on mutual assistance between the administrative authorities of the Member States and cooperation between the latter and the Commission to ensure the correct application of the law on customs and agricultural matters. OJ L 82, 22.3.1997, p. 1.

External investigations concern "any infringement of a provision of Community law resulting from an act or omission by an economic operator, which has, or would have, the effect of prejudicing the general budget of the Communities or budgets managed by them, either by reducing or losing revenue accruing from own resources collected directly on behalf of the Communities, or by an unjustified item of expenditure" (Article 1(2) of Regulation (EC, Euratom) No 2988/95), including irregular operations or offences within the meaning of the mutual assistance scheme (see Article 20 of Regulation (EC) No 515/97).

They may apply "to the natural or legal persons and the other entities on which national law confers legal capacity who have committed the irregularity" and "to persons who have taken part in the irregularity and to those who are under a duty to take responsibility for the irregularity or to ensure that it is not committed". They can also apply to any other economic operators holding relevant information in connection with the facts covered by the on-the-spot checks and inspections (see Article 7 of Regulation (EC, Euratom) No 2988/95 [25] and Article 5 of the Regulation (Euratom, EC) No 2185/96).

[25] Council Regulation of 18 December 1995 on the protection of the European Communities financial interests. OJ L 312, 23.12.1995, p. 1.

Article 9 of Regulation (EC, Euratom) No 2988/95 refers to the on-the-spot checks and inspections that the Commission may conduct under sectoral regulations. The legal bases provided by these regulations cover all areas of activity by the Office - the Communities' own resources, the Structural Funds, the common agricultural policy, the commercial policy and customs. [26]

[26] Regulation (EC, Euratom) No 1150/2000. See Article 18. OJ L 130, 31.5.2000, p. 1. Regulation (EC) No 1260/1999. See Article 38. OJ L 161, 26.6.1999, p. 1 and Commission Regulations (EC) Nos 438/2001 (OJ L 63, 3.3.2001, p.21) and 448/2001 (OJ L 64, 6.3.2001, p. 13) laying down certain detailed rules for the application of Regulation (CE) No 1260/1999. Regulation (EEC) No 595/91.See Article 6. OJ L 67, 14.3.1991, p. 11. Regulation (EC) No 515/97, supra. See Article 18.

The scope of these provisions was not affected by Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999. Unlike internal investigations, the 1999 reform did not widen the scope of external investigations.

The Commission considers it useful today to continue the debate on the scope of these regulations, as it has observed certain gaps on the basis of the work of the Office. These concern cooperation with the national authorities, to be strengthened from the point of view of information exchanges (see below at 1.2.2) and administrative assistance (indirect taxation, money laundering and possibly other areas), and, with regard to investigations directed by the Office, the legal means available to the Community to strengthen the protection of financial interests as regards direct expenditure. [27]

[27] A proposal for a Regulation is in preparation to cover administrative assistance and the mutual exchange of information between the Commission and the Member States in the fields of VAT and of laundering. The advisability of preparing a Regulation to implement various administrative measures in the field of direct expenditure is being examined.

Recommendation No 3 (R.3)

The Commission will propose initiatives, in accordance with its overall anti-fraud strategy and its work programme [28] to:

- expand the facilities for cooperation/assistance, particularly as regards transnational VAT, money-laundering and possibly other areas, including the possibility for the Community to ask the Member States' enforcement and investigation services to conduct antifraud investigations;

- reinforce Community antifraud investigation powers (Regulation (Euratom, EC) No 2185/96) as regards direct expenditure.

[28] Commission legislative and work programme for 2003. COM (2002) 590 final/2.

* Exercise of external investigation powers

In their respective areas of concern the sectoral Regulations confer the power on Commission staff to conduct on-the-spot checks and inspections in national control organisations responsible for adopting fund management systems or collecting own resources, to ensure the proper application of the regulations and an assistance function in investigations conducted by the national authorities.

Regulation (Euratom, EC) No 2185/96 gives Community investigators their own powers corresponding to those enjoyed by national investigators. The same applies to administrative investigation missions conducted by the Office in third countries under Regulation (EC) No 515/97. Article 7(1) of Regulation (Euratom, EC) No 2185/96 provides that "Commission inspectors shall have access, under the same conditions as national administrative inspectors and in compliance with national legislation, to all the information and documentation on the operations concerned which are required for the proper conduct of the on-the-spot checks and inspections. They may avail themselves of the same inspection facilities as national administrative inspectors and in particular copy relevant documents". An illustrative list of what can be done in on-the-spot checks and inspections then follows. [29]

[29] On-the-spot checks and inspections can concern: professional books and documents such as invoices, lists of terms and conditions, pay slips, statements of materials used and work done, and bank statements held by economic operators; computer data; production, packaging and dispatching systems and methods; physical checks as to the nature and quantity of goods or completed operations; the taking and checking of samples; the progress of works and investments for which financing has been provided, and the use made of completed investments; budgetary and accounting documents, and the financial and technical implementation of subsidised projects.

In the evaluation of Regulation (Euratom, EC) No 2185/96 in 2000, certain difficulties of implementation were noted, in particular the refusal of economic operators to cooperate in terms of access to buildings or documentation (obstruction). [30]

[30] In particular the economic operators indirectly concerned. Commission staff working paper; SEC(2000) 844.

The Commission notes that to remedy this type of difficulty, the Office considers that more effective Community machinery may have to be envisaged, on the basis of Community competition law and national provisions, to facilitate the success of checks and inspections involving economic operators who oppose the performance of administrative investigations in order to gain time.

Recommendation No 4 (R.4)

The Commission recommends the Office to undertake a comparative analysis of rules applicable to obstructions so that the institution can prepare an initiative if appropriate.

* External investigation methods

External investigation procedures, depending on the legal basis, are determined both by Community sectoral legislation, which provides for the conditions in which Commission staff may take part in or be associated with a national investigation, or by horizontal Community legislation (Regulation No 2185/96), or by national law.

Certain Community measures exist, such as Article 9 of Regulation (Euratom, EC) No 2185/96, which provides that "the Member State concerned ... shall give Commission inspectors such assistance as they need to allow them to discharge their duty" and "take any necessary measures, in conformity with national law". In addition, Article 7(2) of that Regulation empowers the Commission to ask Member States to "take the appropriate precautionary measures ... in particular in order to safeguard evidence".

* Relationship between Community action and national procedures

The Office exercises its external investigation powers in accordance with the subsidiarity and proportionality principles. To ensure complementarity and compatibility of its activity with those of the national authorities, it operates on the ground in close partnership with the Member States (see below at 1.2.1). The independence conferred on the Office in the investigation function does not always apply in this area. Action is subject to the dual requirement of legality and effectiveness.

The legality requirement

When on-the-spot checks and inspections are conducted, the Office must abide by the laws and regulations of the Member States, [31] including when it draws up its final report, which must be in accordance with national requirements (Article 8(1) of Regulation No 2185/96). Identification of the national rules of procedure, both administrative and judicial, is often a delicate exercise in view of the diversity and complexity of the rules in force; their application to an investigation case sometimes raises difficulties, in particular when a transnational investigation is involved. The judicial expertise available in the Office can go some way towards solving these difficulties.

[31] Compliance with the national law of the Member State concerned by an external investigation is mandatory under Article 9 of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999. It is also provided for by the third subparagraph of Article 6(1) of Regulation No 2185/96.

The Commission considers that the Office needs to have the fullest possible knowledge of national rules of procedure at all times. To this end it must build up an internal memory so that it can constantly update its knowledge and share it easily with its staff. The Commission also recognises that it would be worthwhile to continue current thinking on improving the situation by a corpus of administrative rules for transnational external investigations, in connection with the corpus of administrative rules for internal investigations (see R.2).

The effectiveness requirement

The protection of the Community's financial interests being a field of shared responsibility between the Community and the Member States, the relationship between the Community and national levels is a determining factor for effectiveness. [32] The establishment of a strategic and operational intelligence function in the Office is real progress. It is intended to improve the targeting of the use of the Community's own investigation powers to ensure greater complementarity and compatibility with action undertaken by the national authorities (see below at 1.2.1) and greater effectiveness.

[32] The Supervisory Committee stressed the need to determine in what situations and in what forms the Office's activity precedes or accompanies national investigations (concern for transparency with regard to national partners).

The new registry which the Office is setting up will contribute to greater transparency in the Office's activities, which will make it possible to address the concerns expressed by the Supervisory Committee (see at 3.4.1 below). The follow-up to external investigations, which is part of the effectiveness requirement, obviously depends on an obligation to inform the Office (see below at 1.2.2).

1.2. Operational partnership

The Office conducts its operational activities in accordance with the subsidiarity and proportionality principles. It is mindful of the fact that the primary responsibility and the principal resources here belong to the Member States (external investigations). The Office's operational tasks are thus inevitably based on close partnership with all the players involved in protecting financial interests and combating financial crime; this partnership concerns information exchanges and exploitation of strategic and operational intelligence, and regular coopération with the various European Community and Union bodies and international organisations.

1.2.1. Partnership with the Member States

The partnership with the relevant national authorities is an essential element for the protection of financial interests and for fraud prevention. This includes cooperation in the broad sense, i.e. conducted by the Office of its own motion and in full independence when exercising its investigation powers (see above at 1.1.1 and 1.1.2) but also the cooperation between the Member States and the Commission which the Office initiates as a department of the institution (Article 280(3) of the EC Treaty).

Here the Office organises a specific form of partnership with the relevant national authorities to secure compliance with Community law and ensure an equivalent level of protection throughout the Community. This partnership is based on sectoral provisions referred to in Article 9(1) and (2) of Regulation No 2988/95 and on provisions for mutual assistance in the Community policies or regulations to which Regulation No 515/97 (agriculture, customs, commercial policy etc.).

Regulation (Euratom, EC) No 2185/96 places partnership with the Member States at the centre of the scheme of on-the-spot checks and inspections conducted by the Office. This minimises the risk of duplication (the second paragraph of Article 3 requires the Commission to "take into account the inspections in progress or already carried out in respect of the same facts with regard to the economic operators concerned, by the Member State on the basis of its legislation"). It contributes to guaranteeing sincere cooperation at all the stages of an on-the-spot mission (under Article 4, "On-the-spot checks and inspections shall be prepared and conducted by the Commission in close cooperation with the competent authorities of the Member State concerned, which shall be notified in good time of the object, purpose and legal basis of the checks and inspections, so that they can provide all the requisite help. To that end, the officials of the Member State concerned may participate in the on-the-spot checks and inspections. In addition, if the Member State concerned so wishes, the on-the-spot checks and inspections may be carried out jointly by the Commission and the Member State's competent authorities").

Partnership with the Member States on the ground can sometimes be difficult to apply harmoniously, particularly as a result of the asymmetry in national administrative and judicial powers. But as the annual Commission reports on the fight against fraud and the office's activity reports regularly stress, the assessment is broadly positive and significant operational results have been obtained thanks to the effectiveness of this partnership. The practice of forming tasks groups acting as crisis units in certain sectors (cigarettes, alcohol, olive oil) is a model that deserves to be developed. The same applies to the conclusion and operation of protocols between the Office and certain specialised national services, such as the Direzione Nationale Antimafia (see R.5), in particular to meet the need to boost the fight against economic crime. The treatment of certain complex transnational cases, such as illegal banana imports in the Community under false import licences or the investigation conducted for forgery and fraud by a group of non-governmental organisations in the field of direct expenditure, [33] bears witness to the importance of the partnership with the Member States on the spot, as is also illustrated by the formation of Community investigation teams on mission in third countries, which include investigators from the Member States. The partnership also takes the form of treatment of cases having an impact not only on financial interests but also in other areas such as food safety (BSE for example) or counterfeiting (cigarettes). It is expressed in the form of cooperation projects based on first- and third-pillar instruments at the same time, as in the case of the Office's technical assistance to the Member States in joint maritime surveillance operations (MARINFO) conducted on the basis of Regulation (EC) No 515/97 and the Convention on the Customs Information System.

[33] See the Commission's annual reports for 1999, 2000 and 2001, referred to above, and the report on the activities of the Office for the period from 1 June 2000 to 31 May 2001.

It should enable the Office to develop its strategic and operational intelligence function and to adapt, in liaison with the national authorities, to the mobility of transnational and organised crime while preserving the possibility of unannounced action on the ground. The national authorities will also be better placed to target their action on the ground.

The Commission encourages the Office to continue thinking about how to strengthen its cooperation with the national authorities. It considers that the Office should have the power to call on all prevention and investigation services in the Member States to undertake anti-fraud investigations (see R. 3). The practical usefulness of such a mechanism, centred on the detection of serious offences, should make it possible to strengthen synergies between the national and Community levels, in accordance with the subsidiarity principle.

From this point of view, the Commission considers that the Office should develop its intelligence function and finalise the project, recommended by the Commission's overall strategic approach, for an operating platform. [34] The aim of this project is to better present the range of activities undertaken in the Office and to propose an inventory of the expertise available in it so as to give concrete expression to the value added at Community level, in particular for all the national authorities having powers regarding administrative investigations or the prerogatives of a criminal investigation service. It aims to develop mutual exchanges of know-how, practice and experience that will help to optimise the protection of Community interests.

[34] See, in particular, item 4.2 "Scope and means for Community action" of this strategy.

On the basis of the memoranda of understanding which the Office has concluded with certain authorities in the Member States, the same type of operation could be envisaged with other national authorities.

Recommendation No 5 (R.5)

The Commission recommends the Office to continue the setting up and development of its strategic and operational intelligence function, in accordance with the overall anti-fraud strategy of 2000/2005.

It also recommends the Office to consider the case for extending the memoranda of understanding concluded with certain authorities in the Member States to other national authorities.

1.2.2. Legal assistance and judicial expertise

The effectiveness of the Office's administrative investigations is heavily dependent on the use made of them not only in administrative and disciplinary proceedings but also in judicial proceedings, which depends primarily on close cooperation between the Office and the national police and judicial authorities (Article 2 of the Commission decision of 28 April 1999). This is why the guidelines adopted by the Commission in its overall strategy of June 2000 attach priority to strengthening of the criminal judicial dimension.

This concern is expressed in the Office through the legal follow-up and advice functions (institutional and Community law) and judicial follow-up and advice functions (national law). These functions take the form in daily life of assistance measures and multidisciplinary legal advice projects, of the Office's own motion or on request, and support in the form of the expertise of the Judicial Advice Unit attached to the Office's Director-General ("the Director"). The establishment of the operating platform should make it possible to develop the contribution of these functions in support of investigations, in cooperation with the national authorities. The partnership that the Office endeavours to build up with the national prosecution authorities should facilitate the preparation of a guide to good practice, already recommended by the Commission's overall strategy. The aim of this (non-mandatory) guide would be to provide national operational services with basis for organising and managing their cooperation and to encourage them to continue their efforts make best use of the Office's resources and expertise.

* Scope

The tasks entrusted to the Office here result in particular from the principle of close and regular cooperation set out in Article 280 of the EC Treaty. They are based:

- as regards assistance to judicial authorities, on Article 2(2) of the Commission Decision establishing the Office, which makes it "responsible for providing the Commission's support in cooperating with the Member States in the area of the fight against fraud", this provision being taken over in Article 1(2) of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999. In addition, the second subparagraph of Article 7(1) of the second protocol to the Convention on the protection of the financial interests of the Communities European, [35] currently in the process of being ratified, also substantially reproduced in a Commission proposal for a Directive, [36] underlies the Commission's action, providing that "the Commission shall lend such technical and operational assistance as the competent national authorities may need to facilitate coordination of their investigations";

[35] OJ C 221, 19.7.1997, p. 11.

[36] Relating to the criminal protection of the financial interests of the Community. COM(2001) 272 final.

- as regards judicial follow-up, on Article 2(6) of the Decision establishing the Office, which provides "The Office shall be in direct contact with the police and judicial authorities". This power is strengthened by Articles 9 and 10 and by recital 16 to Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999.

While it considers that the final solution to the problem of efficiency in criminal proceedings depends on establishing uniform definitions of offences and proper rules of criminal procedure (European Prosecutor), the Commission considers that for the time being it must continue using the resources available to strengthen cooperation between the Office and the Member States' judicial authorities, both for external investigations and for the judicial follow-up to internal investigations. Consolidating this approach, the Office develops its liaison and criminal expertise function in order to provide practical support for carrying out fraud prevention and anticorruption objectives and improves its role of advice, assistance and coordination to support national criminal prosecution of serious offences to the detriment of the Communities' financial interests.

* Procedures

The judicial assistance and follow-up function appears particularly essential to optimise use of the Office's investigations in judicial proceedings. But there are difficulties in judicial treatment. A first barrier to the action of the Office concerns the lack of judicial information in the reporting obligations under the sectoral Regulations (external investigations) and the difficulties of access to this type of information. These reports and this access are neither systematic nor complete. On the one hand, national provisions on confidentiality of judicial proceedings in Member States where they exist can be used as an argument for restricting reporting obligations, and files on criminal prosecutions are accessible only if civil proceedings are joined to the criminal action. In the latter hypothesis, it should be specified that the Member States are responsible for combating fraud where indirect Community financing ids concerned, so the Commission does not therefore join civil proceedings as a matter of routine, and the possibility is not available in all the Member States.

Although sectoral regulations impose notification obligations on the Member States, their practical implementation seems to raise certain difficulties where procedures reach the prosecution stage. It has been observed here that, unlike the provisions relating to the institutions and other bodies as regards internal investigations (Article 9(4) of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999), [37] the legislation does not impose on the Member States an obligation to inform the Office of the follow-up to external investigations.

[37] This provides that "The institution, body, office or agency shall take such action, in particular disciplinary or legal, on the internal investigations, as the results of those investigations warrant, and shall report thereon to the Director of the Office, within a deadline laid down by him".

The Commission considers that such a reporting obligation, which exists in certain sectoral Regulations, should be extended to all external investigations and to the judicial follow-up to internal investigations (see R. 6). This would greatly improve the quality of follow-up, which is substantially the responsibility of the Commission.

Recognition of the role of OLAF staff by national prosecution authorities would obviate an additional difficulty. Application of the second protocol to the financial interests Convention should facilitate the recognition of OLAF staff by national judicial authorities. This would help the Office to meet the needs of the relevant judicial authorities. The feasibility of recognition will have to be analyse in relation of the various existing national systems.

The Commission considers that in the absence of Community criminal prosecution powers, cooperation instruments such as the operating platform and the judicial advice, assistance and follow-up function should be developed, in particular by the constant development of operational exchanges between the judicial advisers in the Office and their national counterparts on the basis of a good practice guide. Given the present state of Community resources, this should help to improve the capacity of the criminal courts to respond to investigation reports from the Office.

The Commission also notes that the fact that not all the Member States have ratified the second protocol to the Convention on the protection of financial interests is a further barrier to action by the Office by way of operational assistance to the national judicial authorities. [38] This is one of the reasons why the Commission presented the proposal for a Directive referred to above. It broadly takes over the vertical cooperation scheme of Article 7 of the second protocol.

[38] Only the Convention and its 1st protocol entered into force on 17 October 2002.

The Commission points out, therefore, that the Council is invited to adopt the proposal for a Directive referred to above which was presented to it in May 2001 [39] and that, in parallel, Member States are invited to ratify the second protocol to the Convention on the protection of financial interests with a view to strengthening its implementation. The Commission considers, in addition, that the obstacles encountered in the judicial treatment of cases referred by the Office to the criminal prosecution authorities are a major argument in favour of the establishment of a European Prosecutor (see R. 13).

[39] COM(2001) 272. The Commission presented an amended proposal on 16.10.2002. COM(2002) 577 final.

Recommendation No 6 (R.6)

To enhance the effectiveness of the judicial advice, assistance and follow-up functions, the Commission calls on:

- the Member States to ratify the second protocol to the Convention on the protection of the Community's financial interests;

- the Council to adopt the proposal for a directive on the criminal-law protection of the Community's financial interests.

The Commission will propose an initiative to provide that the Member States must inform the Community of action taken to follow up external investigations.

It recommends the Office to establish a guide to good practice as suggested in the Commission's overall strategy.

1.2.3. Coordination of Community action

The action taken by the Office and by other departments has been designed so that they offset each other in order to provide better protection for Community interests and meet the need for sound administration. This is the case of action by certain Commission departments, the disciplinary authorities, authorities specialising in dealing with financial irregularities and the Court of Auditors.

* Commission departments

Day-to-day relations between the Office and other Commission departments, in particular in terms of their responsibility as authorising or managing Community funds or as policy-making and legislating departments, are a component of complementary operations for the protection of financial interests and the fight against fraud. The complementarity appears to work satisfactorily, but it should be better coordinated, particularly as regards information exchanges. As regards information exchanges between certain services and the Office, divergent practices have emerged as regards communication flows on both sides. The Office considers that information intended for it should be better channelled upstream, at departmental level, so that the Office receives only information that corresponds to predetermined criteria or parameters. By the same token, some departments would like more information from the Office for the performance of their own tasks. Improving practice here would enable the Office to deploy its investigation resources more effectively and would encourage complementarity between anti-fraud action with on-the-spot checks and inspections that authorising and administrative services conduct on the basis of sectoral regulations, to ensure the sound implementation of Community policies, the regularity of the accounts and the smooth operation of national management and control systems.

In addition, in the field of direct expenditure, certain authorising officers tend to suspend payments as a precaution when they transmit information to the Office and/or the Office is launching an investigation. This approach should be re-appraised in accordance with concerted and better scheduled procedures so as to improve consistency. [40] In this context, according in particular to Article 106(4) of the implementing rules for the new Financial Regulation, [41] if an authorising officer receives information raising doubts as to the eligibility of expenditure in a payment request, he can suspend the payment period for the purposes of further checks, including on-the-spot checks and inspections.

[40] In this connection, action 59 of the reform of the Commission (COM (2000) 200 final) stipulates that management officials of the Commission are not released from the obligation to act themselves after passing a case to the Office.

[41] Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of Council Regulation (EC, Euratom) No 1605/2002. OJ L 357, 31.12.2002, p. 1.

The Office must rationalise the use of available resources to focus operational activity on the most significant cases justifying Community intervention in accordance with the subsidiarity principle. The upstream selection of cases, on the basis of regular cooperation with departments responsible for checking the sound application and management of Community policies and financial instruments and of close cooperation with national authorities, will enable the Office to prepare its programme of operational activities in accordance with Article 11 of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999.

The Commission considers, in the light of experience, that improvements are needed in the exchange of information, as is stronger mutual cooperation between the Office and its departments. It would be useful here to extend to other Commission departments the initiatives of action 93 of the Commission Reform White Paper for the improvement of coordination between the Office and certain services to enhance the fight against irregularities, fraud and corruption and improve the use of available resources. There is an arrangement with the Internal Audit Service and the Joint Research Centre; other arrangements are being prepared, notably with the Directorate-General for Employment and Social Affairs and the Cooperation Office (AIDCO). A practice has been established to set a general context for procedures for cooperation and information exchanges between the Office and other Directorates-General such as Taxation and the Customs Union. With this in mind, it is planned to develop interdepartmental memoranda of agreement, as set out in the 2001/2003 action plan, between the Office and the services responsible for verifying the effectiveness of national systems for the management of Community funds with a view to defining practical procedures for regular close interdepartmental coordination.

Recommendation No 7 (R.7)

To enable the Office to better target its operational activities, the Commission recommends that interdepartmental memoranda of agreement, as set out in the 2001/2003 action plan, be developed and implemented to establish ground rules for cooperation between the Office and the other Commission departments, particularly those that manage Community funds.

* The Commission's internal auditor

Investigations, both internal and external, can enable the Office, beyond its anti-fraud mission, to identify functional defects in the internal audit systems that can affect either the regulations or administrative organisation. This information must be transmitted in the first instance to the hierarchy so that it can take the requisite remedial measures. The Office can also share with the Commission's Internal Audit Service and the internal audit unit in the relevant Directorate-General or department all the information relating to systemic defects in internal audit arrangements that it identifies with a view to routine follow-up. Likewise the Internal Audit Service and the internal audit unit in the relevant Directorate-General or department, in accordance with the standard practice of internal auditors, can share with the Office all information arising in the course of their work that might ground a suspicion of fraud.

* Disciplinary authorities

Under Article 1(3) of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999 and the Interinstitutional Agreement of 25 May 1999, the Office carries out administrative investigations for the purpose of:

- "fighting fraud, corruption and any other illegal activity affecting the financial interests of the European Community"; and

- "investigating to that end serious matters ... such as to constitute a dereliction of the obligations of officials and other servants of the Communities liable to result in disciplinary or, as the case may be, criminal proceedings, or an equivalent failure to discharge obligations on the part of members ... heads ... or members of the staff ... not subject to the Staff Regulations".

The Commission notes that action by disciplinary authorities with investigation powers, when they exist, is confined to the institution or body to which they are attached, unlike the Office, which has broad internal powers to carry out investigations, even into members or personnel not subject to the Staff Regulations, which it can exercise without distinction in all the institutions and bodies. Since the institutions and bodies have general powers as regards disciplinary investigations and their own responsibility, [42] the scope of the Office's activities must be demarcated to ensure that its powers are preserved in the event of an overlap.

[42] See the sixth recital to the model decision annexed to the interinstitutional agreement of 25 May 1999, which states "such investigations should be carried out under equivalent conditions in all the Community institutions...; assignment of this task to the Office should not affect the responsibilities of the institutions ... themselves".

No such authority exists in the other institutions or bodies, but the Commission has set up the Investigation and Disciplinary Office (IDOC) [43] with the function under Article 2 of the Commission Decision of 19 February 2002 of conducting administrative investigations and preparing disciplinary proceedings submitted to the appointing authority. The Commission has confirmed the priority status of OLAF within its powers (protection of financial interests or serious offences). If OLAF shows that it is already conducting an investigation or planning to do so, IDOC refrains from opening a parallel investigation. Article 5(2) of the Decision of 19 February 2002 provides that "Before opening such an inquiry, the Director-General of Personnel and Administration shall first consult the European Anti-Fraud Office (OLAF) to check that OLAF is not itself undertaking an inquiry or does not intend to do so". It is clear from the Commission Decision and from administrative practice that IDOC exercises powers that are residual in relation to those of the Office, which avoids overlapping in administrative investigations. Incidentally, the effectiveness of the disciplinary follow-up to internal investigations demands that Office staff engaging in investigations bear in mind the specific features of disciplinary law.

[43] Commission Decision of 19 February 2002. C(2002) 540.

To improve coordination and complementarity, the Office must be asked to enhance the transparency of the limits to its action on the basis of various intervention criteria. Certain parameters appear necessary on the basis of the principle of speciality, such as the criterion of criminal follow-up or expertise in the fight against behaviour involving serious forms of economic and financial crime. [44] With regard to the offences in relation to the office held by the offender, the Office should intervene wherever the conduct complained of is such that it its expertise as regards economic and financial crime is needed.

[44] In addition, members of the institutions are not covered by the Staff Regulations and are consequently not answerable to the disciplinary authorities. It is to answer this situation that the legislature specified that the Office had the power.

The Commission considers that investigations by the Office and the disciplinary authorities could be demarcated by memoranda of understanding which would reserve intervention by the Office for the detection of serious facts liable to be treated as serious economic or financial offences. The establishment of a typology of conduct would also help to delimit powers more precisely. It would require major work on defining and classifying different types of violation of professional obligations in the exercise of functions.

Recommendation No 8 (R.8)

The Commission recommends that memoranda of understanding be concluded to make the practical breakdown of tasks between the Office and disciplinary bodies more transparent.

* Authorities specialising in financial irregularities

Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities [45] does not affect Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999, in particular the responsibilities given to the Office.

[45] Published in OJ L 248, 16.9.2002, p. 1.

But, to "determine whether a financial irregularity has occurred and what the consequences, if any, should be", the Financial Regulation provides for each institution to "set up a specialised financial irregularities panel which shall function independently". On the basis of the opinion of this authority, the institution is to decide whether to initiate proceedings entailing liability to disciplinary action or to payment of compensation. [46]

[46] Article 66(4) of the Financial Regulation.

It is essential to preserve a sound relationship between action by these authorities and by the Office, while safeguarding the powers of the Office. The opinion of each of these authorities evaluates whether there is an irregularity, how serious it is and what its consequences might be. If the analysis suggests that the case requires action by the Office, it will be informed without delay.

The Commission considers it useful that the system be appreciated in the light of experience so that the need for improvements can be considered.

* Court of Auditors

The Court of Auditors, in accordance with Articles 246 and 248 of the EC Treaty, audits the accounts and examines to this end the accounts of all Community income and expenditure to assess its legality and regularity and ensure sound financial management. The Court of Auditors has an audit function, generally exercised without any pre-existing suspicions in order to check the reliability of systems. This institution's primary purpose is not to detect punishable acts, and it has no power to identify individual liability, unlike the Office. To place cooperation with the Office on a sound footing, there is an arrangement between the Office and the Court whereby the Court sends the Office facts that might constitute fraud and the Office informs the Court of the action taken.

The Commission considers that this provides a solid foundation for cooperation between the Office and the Court of Auditors.

Since this type of mechanism would facilitate the exercise of the Office's internal investigation function on equivalent terms in all the institutions and bodies, the Commission considers it useful to launch a debate on the advisability of specific memoranda of understanding between the Office and the other institutions and bodies.

Recommendation No 9 (R.9)

The Commission recommends the Office to consider the case for extending the memoranda of understanding to other institutions and bodies.

1.2.4. Cooperation at the international and European Union level

Because economic and financial crime are transnational, and action by the European Community falls within the scope of its cooperation with third countries, it is necessary to improve cooperation with all organisations that are responsible for combating these forms of crime. The relationship between the powers of the Office and those of Europol and Eurojust, and the procedures for cooperation between them, are essential. Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999 contain no provisions on the matter. The Office is part of a Community institution which exercises responsibilities outside the area in which national powers are exercised. Europol and Eurojust, as third-pillar authorities, have functions focusing on coordination of national operations.

* Europol

According to Article 2(6) of the Decision of 28 April 1999 establishing the European Anti-fraud Office (OLAF), it is in direct contact with the police and judicial authorities. The Council Decision of 6 December 2001 [47] extended Europol's mandate to the fight against the serious forms of international crime listed in the annex to the Europol Convention. Fraud and corruption, in particular, are covered by Europol's mandate. A recital to the Decision states that the Commission's role is not affected. According to a declaration annexed to the Decision, the Council "agrees that referring to fraud among the serious forms of crime referred to in the annex to the Europol Convention must take account of OLAF's powers ... as regards tax evasion and customs fraud and lead to the negotiation of an agreement between Europol and the Commission".

[47] OJ C 362, 18.12.2001, p. 1.

A cooperation agreement concluded between the Commission and Europol on 18 February 2003 makes provision for the direct conclusion of arrangements between Europol and OLAF in fields covered by the investigation function in which the Office enjoys full independence.

The Commission notes that the desire to improve cooperation is shared by the Office and Europol. To improve cooperation by allowing Europol to transmit information to the Office, the Council would have to adopt a unanimous decision. That much is clear from Article 10(4) and Article 18 of the Europol Convention. Because of these legal restrictions, operational exchanges between Europol and the Office remain limited. All ways of improving the situation should be explored, including more regular participation of the Office in Europol's Management Board, which would facilitate personal contacts and improve perceptions of the usefulness of exchanges between Europol and the Office.

* Eurojust

According to Article 2(6) of the Decision of 28 April 1999 establishing the European Anti-fraud Office (OLAF), it is in direct contact with the judicial authorities. In areas within Community jurisdiction, such as the protection of financial interests, relationships as regards operational cooperation, in particular the judicial follow-up to investigations by the Office, are directly organised through the Office's judicial advice and follow-up function.

Eurojust is a permanent European Union body that coordinates judicial cooperation in criminal matters between the authorities of the Member States and sets its own priorities. Established by a Council Decision of 28 February 2002, [48] it replaced Pro-Eurojust, the provisional unit set up on 1 March 2001. Recital 8 to the Council Decision states that "Eurojust's jurisdiction is without prejudice to the Community's competence to protect its own financial interests". To give priority to Community law and practice, the Commission made a statement, annexed to the Council Decision. [49] Eurojust does not have its own powers of investigation at European level. A judicial body, Eurojust aims to improve coordination and cooperation between national prosecution authorities and to support them so as to enhance the effectiveness of their investigations and prosecutions in cases involving serious forms of crime.

[48] OJ L 63, 6.3.2002, p. 1.

[49] According to which "The protection of the Community's financial interests is a responsibility shared between the Community and the Member States and it is important to stress in this connection that at Treaty level, Article 280 of the EC Treaty constitutes the specific legal basis for cooperation with the competent national authorities ... or taking the necessary measures for preventing and combating fraud and any other illegal activity affecting the Community's financial interests .... It is in this framework in particular that close and regular cooperation between the European Anti-Fraud Office (OLAF) and the national law-enforcement authorities, on the one hand, and between the Commission (OLAF) and Eurojust, on the other hand, should be guaranteed." »

The Commission notes that the negotiation of a memorandum of understanding between the Office and Eurojust under Article 22 of the Eurojust rules of procedure is in progress. This memorandum should envisage practical procedures for mutual communication of information and cooperation in practical cases, as well as more general topics of interest to both the Office and Eurojust.

With regard to relations between the Office and Union authorities such as Europol or Eurojust, the Commission considers that account must be taken of the European institutions' specific responsibilities for the protection of Community interests, particularly its financial interests. The Commission and the two branches of the budgetary authority are basically responsible. [50] The 'acquis communautaire' should not back off.

[50] The protection of financial interests is connected with existing responsibilities for the institutions and, in particular, of the Commission under the proper implementation of the budget (Articles 274 to 276 EC), in close correlation with shared liability provided for in Article 280 EC.

* Third countries

In the Commission, the Office is responsible for negotiating agreements or protocols on mutual administrative assistance in customs matters with third countries. There are already 41 agreements. Negotiations are in hand with countries such as Syria and China. In this respect, the Commission considers that the Office must continue negotiating such agreements and protocols to cover more countries and reinforce in particular reciprocal exchanges of information and cooperation. The implementation of these instruments is monitored in the joint committees.

There is moreover, an agreement under negotiation with Switzerland aimed at combating fraud and any other illegal activity against the financial interests of the respective parties (administrative assistance and judicial cooperation).

In addition, work on protection of the euro against counterfeiting (see below at 2.3) has focused on the importance of cooperation with third countries. To this end, Article 9 of Regulation (EC) No 1338/2001 must become concrete by the inclusion of anti-counterfeiting measures in cooperation, association and pre-accession agreements.

Finally, on the basis of the memoranda of understanding which the Office has already concluded with certain authorities in third countries (e.g. Russian tax inspectorate), the Commission considers that the same type of operation could be envisaged with other national authorities.

Recommendation No 10 (R.10)

The Commission recommends the continuing of the negotiation of international agreements on mutual administrative assistance in customs matters, with a view to reinforce in particular exchange of information and cooperation between the Community level and third countries authorities.

Equally, the Commission recommends to put in place anti-counterfeiting provisions relating to exchanges of information between the Community and the authorities of third countries in cooperation, association or pre-accession agreements with them.

The Commission further recommends the Office to consider the case for extending the memoranda of understanding concluded with certain authorities in third countries to other third countries.

* International authorities

The Office maintains appropriate contacts with various actors on the international scene, such as Interpol, the World Customs Organisation (WCO) and the World Bank. Cooperation includes participation in international forums Such is the case of the annual conference of international investigators which the Office is to organise in 2003. The Office has the option of envisaging procedures for closer cooperation with these partners. It is associated as an observer with several WCO committees and, at a more operational level, data exchanges are organised between the Office's computerised system and the WCO's database, in particular with regard to cigarette trafficking. Practice has also revealed the value of associating Interpol with work on the protection of the euro against counterfeiting done by the Commission's anti-fraud advisory committee chaired by the Office, with real value added in terms of the use of international instruments in the fight against counterfeiting and of their integration into the Community mechanism (national central offices or contact points).

*

2. THE COMMISSION'S GENERAL TASKS: A SPECIFIC EXPERTISE OF THE OFFICE

Like other Commission departments, the Office is responsible for preparing decisions, developing and implementing projects and implementing the Commission's decisions. The provisions applied in the matter provide that the Office's responsibilities range beyond the protection of the Community's financial interests to all activities connected with safeguarding Community interests against illegal conduct against which administrative or criminal proceedings may lie. [51] Its functions include "the tasks carried out up to now by the Task Force for Coordination of Fraud Prevention, in particular those tasks concerning the preparation of legislative and regulatory provisions in the areas of activity of this Office, including instruments which fall under Title VI of the Treaty on European Union." [52]

[51] See, in particular, the sixth recital to Decision 1999/352/EC, ECSC, Euratom and fifth recital to Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999.

[52] Article 2(1) to (7) and seventh recital to Decision 1999/352/EC, ECSC, Euratom.

Within the objectives laid down by the legislature for the protection of the Community's financial interests, the Commission, by creating the European Anti-fraud Office, has maintained a close relationship between policy-making activities and fieldwork.

The scope of these planning activities is determined by the objectives laid down by Article 280 of the EC Treaty, Article 1(2) of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999 and Article 2 of Decision 1999/352/EC, ECSC, Euratom establishing the Office. The main aim of these activities is to prepare work on anti-fraud policy (strategy) and legislation for prevention, cooperation and the fight against fraud. [53] It also concerns development of infrastructure and technical assistance, the collection and use of information, and the task of representing the Commission and cooperation with the appropriate national authorities.

This evaluation makes it possible to use a number of activities that have been undertaken to illustrate the effects of proximity between the general Commission tasks entrusted to the Office and tasks connected with the operational function.

[53] See also Article 1(2) of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999, requiring the Office to "contribute to the design and development of methods of fighting fraud and any other illegal activity affecting the financial interests" of the Communities.

2.1. Anti-fraud strategy

The strategy for the protection of financial interests and the fight against the fraud adopted by the Commission in 1994, and the Commission work programmes on the fight against fraud, in particular for 1998-99, testify to the Commission's desire to take advantage of the experience gained by the old anti-fraud unit. [54] It has also been possible to make use of this multidisciplinary expertise to develop specific know-how in other fields where there is a body of Community law that can be affected by illegal conduct for which administrative or criminal proceedings may lie. Consequently the anti-fraud unit, and then the Office, as a Commission department, were instructed to prepare and contribute to its anti-fraud strategy.

[54] COM (1994) 92 final and COM(1998) 278 final. This strategy was built around four priorities (stronger presence on the ground and support for operational activity, stronger partnership between the Commission and the Member States, including the improvement and use of information, improvement of the Community legislative framework and better compatibility of national legislation). See the annual Commission reports on the protection of financial interests and the fight against fraud adopted later, in particular for the years 1995 to 1997, COM (1996) 173 final, COM (1997) 200 final, COM (1998) 276 final.

The broad lines of the anti-fraud strategy adopted in June 2000 [55] and the programming of action to implement them give concrete expression to the principle of bringing the investigation, intelligence (strategic and operational) and analysis functions and the general functions of the institution together in the Office.

[55] General policy on anti-fraud legislation; the new operational cooperation culture; inter-institutional measures to prevent and combat corruption; strengthening the criminal-law dimension.

In the context of this strategy the Office, as a Commission department, contributes to initiatives to develop the means needed for an overall view of the phenomenon of transnational fraud. It encourages concrete practices for close and regular cooperation, while avoiding any partitioning and fragmentation of know-how. This is accompanied by the development of instruments, means and measures in the fields of prevention, cooperation and enforcement in relation to transnational crime. Such is the case of a matrix for the interpretation of the criteria for irregularity reporting allowing better coordination of intelligence and investigations, of the use of expertise of the Commission Anti-fraud Advisory Committee (see at 2.6 below) and the procedure for fraud-proofing (see at 2.2.1 below).

The programming of measures and annual evaluation (reports under Article 280 of the EC Treaty) provide the means of guiding Community action and monitoring the development of the Commission's anti-fraud policy.

Given its task of implementing the budget (Article 274 of the EC Treaty), which is closely linked to its responsibility for protecting financial interests (Article 280 CE), the Commission considers that it can determine the broad lines of anti-fraud policy and contribute to the development of guidelines for the Office's operational strategy without affecting the Office's operational independence. This could enable it to take account of recommendations from other institutions (Parliament Resolutions, reports of the Court of Auditors, Council conclusions). The Commission will establish work procedures with the Office (see at 3.5.1 below) to enable it to take into consideration contributions by the Commission and the other institutions in its work programme under Article 11 of Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999.

Recommendation No 11 (R.11)

The Commission recommends that the Office draws up its work programme, taking account of the guidelines and contributions of the institutions in connection with the fight against fraud and relying on the strategic and operational intelligence function.

2.2. Prevention

Prevention is one of the challenges of the Commission's strategy of June 2000. In this connection, the Office is involved directly in the design and implementation of measures which come within the framework of the strategy and of the reform of the Commission (White Paper). The role entrusted to the Office in the White Paper also testifies to the political will of the Commission to fight effectively against fraud on the basis, in particular, of the expertise of the Office.

2.2.1. Fraud-proofing

The guidelines of action 94 of the White Paper on Reform of the Commission and of the strategic approach of June 2000 enabled the Commission to develop the prevention stage more consistently through measures to strengthen Community fraud-proofing (legislation, contract management).

This was the context in which, on 7 November 2001, the Commission adopted a communication [56] according to which the Office is to provide regular support to other departments in all areas of Community finance. The Office can rely on its operational experience since its investigations give it the opportunity to detect possible weaknesses in the legislation. This is why consultation procedures on new proposals for legislation with a major political or financial impact were introduced at an early stage in the legislative process. In this connection, the Office gives the relevant Commission departments its support in selecting risk sectors. The new consultation procedure also applies to contracts, public procurement and subsidies, in particular as regards expenditure managed direct by the Commission.

[56] Commission communication concerning the fraud-proofing of legislation and contract management. SEC (2001) 2029.

The Commission observes that Parliament recently stressed the advantages of this method as conducive to the development of a more effective prevention culture, in which the Office is involved by contributing the value added by its expertise. [57] The Commission will strive to implement action 94 of the White Paper.

[57] Parliament Resolution of 10 October 2002 on the Commission communication referred to above relating to fraud-proofing. EP 323.627.

2.2.2. Rules of professional ethics

The reform White Paper also envisages (action 92) that "To contribute to a proper business conduct of officials throughout the life cycle of programmes and projects, from the conceptual level to the evaluation of final results, guidelines will be put in place" raising awareness "on the part of officials and beneficiaries to forms of conduct which ... might lead to unintentional errors, conflicts of interest and irregularities" (see at 1.2.3 above, disciplinary authorities).

On this basis, the Office has devised an operational tool to strengthen and develop the ethical quality of professional conduct in the institution. A number of professional ethical rules illustrated by practical examples are set out in the form of a user guide.

This draft must now be submitted for approval by the full Commission, and could then be sent on to the different institutio