Special Report No 10/2001 concerning the financial control of the Structural Funds, Commission Regulations (EC) No 2064/97 and (EC) No 1681/94, together with the Commission's replies
Date: 2001-07-19
Institutions: European Court of Auditors
Subjects: Structural Funds, financial control

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EN

Official Journal of the European Communities

8.11.2001

SPECIAL REPORT No 10/2001

concerning the financial control of the Structural Funds, Commission Regulations (EC)
No 2064/97 and (EC) No 1681/94, together with the Commission’s replies

(pursuant to Article 248(4), second subparagraph, EC)

(2001/C 314/02)

CONTENTS

Paragraph

Page

GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE COURTS AUDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE REGULATORY ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Regulation (EC) No 2064/97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Regulation (EC) No 1681/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE OBJECTIVES OF REGULATION (EC) No 2064/97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE ROLE OF THE COMMISSION IN THE IMPLEMENTATION OF REGULATION (EC)
No 2064/97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Commission’s audit manual

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Assessment by the Commission of compliance with the Regulation . . . . . . . . . . . . . . . . . . .

Coordination within the Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE STANDARDS TO BE APPLIED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

IMPLEMENTATION BY THE MEMBER STATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Coordination within Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Responsibility for carrying out the checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sample selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Content of the checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Eligible expenditure checked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reduction in the 5 % target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The closure statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Audit trails . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE OBJECTIVES OF REGULATION (EC) No 1681/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I-IV

1-3

4-6

7-18

8-15

16-18

19-21

22-36

25-28

29-34

35-36

37-41

42-87

43-50

51-60

61-62

63-65

66-69

70-74

75-79

80-84

85-87

88-89

THE ROLE OF OLAF AND THE OTHER COMMISSION SERVICES IN THE IMPLEMENTA-
TION OF REGULATION (EC) No 1681/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

90-126

The management systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

90-94

The Commission’s guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

95-106

The monitoring by OLAF and the other Commission services of Regulation (EC)
No 1681/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

107-114

Follow-up of irregularities by OLAF and the other Commission services . . . . . . . . . . . . . . .

115-126

CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

127-132

ANNEXES 1 AND 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Commission’s replies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27

28

29

29

29

30

30

30

31

31

31

32

32

33

33

33

35

35

35

36

36

37

37

37

38

38

38

40

41

43

45

47

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GLOSSARY

BMF

CICC

CSF

DG

Bundesministerium der Finanzen (The German Federal Ministry of Finance)

Commission interministérielle de coordination des contrôles (The French interministerial committee for
the coordination of controls)

Community Support Framework

Directorate-General

DG EMPL

DG Employment and Social Affairs

DG REGIO

DG Regional Policy

DG AGRI

DG Agriculture

DG FISH

DG Fisheries

ERDF

ESF

European Regional Development Fund

European Social Fund

EAGGF

European Agricultural Guidance and Guarantee Fund

FIFG

IGA

IGAE

IGAG

IGAS

IG

IGRUE

OLAF

SFAM

UCLAF

Financial Instrument for Fisheries Guidance

Inspection générale pour l’administration (French general inspectorate of administrative affairs)

Intervención General de la Administración del Estado (Spanish general inspectorate for national expendi-
ture)

Inspection générale de l’agriculture (French general inspectorate of agriculture)

Inspection générale des affaires sociales (French general inspectorate of social affairs)

Inspection générale des finances (French general inspectorate of finances)

Ispettorato Generale per i Rapporti Finanziari con l’Unione Europea (Italian general inspectorate of finan-
cial relations with the EU)

Office de lutte antifraude (The Anti-fraud Office)

The Commission’s management and control systems audit manual for the Structural Funds

Unité de coordination de la lutte antifraude (Unit for the Coordination of Fraud Prevention)

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SUMMARY

I. The Court’s audit concerned the implementation by the Commission and Member States of two Regula-
tions which aim to improve financial control in the Structural Funds: Commission Regulation (EC) No 2064/
97, which sets out a system of checks by Member States on expenditure incurred on projects co-financed by
the EU, and Commission Regulation (EC) No 1681/94, which introduced a system of communicating informa-
tion on detected irregularities by Member States.

II. The audit took place in OLAF and other Commission services and in Germany, Spain, France, Italy and
the United Kingdom. A preliminary visit was carried out in Portugal.

III. The introduction of Regulation (EC) No 2064/97 represents an important initiative by the Commission
to improve financial control of Structural Funds expenditure by Member States. The checks made and the
resultant closure statements should help to avoid the EU co-financing ineligible expenditure. Although much
good work is being carried out in Member States, the Court found many cases where Member States were not
applying the Regulation correctly (paragraphs 42 to 80). Insufficient clear and timely guidance has been given
by the Commission, despite the guidance given in two appendices of the audit manual distributed in October
1999 which provides a useful basis for the implementation of the Regulation. The Commission had carried
out little assessment of Member States’ efforts by the end of 2000 (paragraphs 20 to 36). Unless prompt action
is taken to ensure correct application of the Regulation by Member States, there will not be sufficient, reliable
information to form the basis upon which to close the forms of assistance.

— The Commission should carry out a detailed review of Member States’ implementation of the Regulation

and provide adequate guidance.

— The Commission must urgently and systematically issue advice to Member States on the adequacy of the

checks undertaken and the reports made.

IV. According to OLAF’s statistics detected irregularities are increasing in the Structural Funds. Weaknesses
were found in the application of Regulation (EC) No 1681/94 at every level — regional, national, OLAF and
other Commission services. Data on irregularities were incomplete, out of date and only of limited use, partly
because the OLAF database was not working for three years in the period 1998 to 2000 and partly because
the information available was not properly followed up by the Commission (paragraphs 88 to 126).

— The Commission should examine the operation of the systems for the detection and communication of
irregularities within and by Member States, and then monitor them with a view to ensuring timeliness,
completeness and relevance, and give guidance where necessary.

— Member States need to review their own systems to ensure that cases detected are communicated and

progress reported.

— OLAF and the other Commission services should jointly define their respective responsibilities and deter-
mine whether a more effective follow-up would be ensured if communications were sent to and examined
initially by the new financial units being set up in the Structural Fund DGs.

— The Commission should formulate proposals to combine the various aspects of both Regulations to pro-
vide effective and cohesive control and reporting systems on a clear and consistent basis throughout the
EU.

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INTRODUCTION

THE COURT’S AUDIT

1. Structural Fund expenditure represents about 30 % of budget-
ary expenditure (153 038 million euro at 1994 prices for the six-
year period 1994 to 1999). The administration of the Structural
Funds under multiannual programmes is mostly undertaken by
Member States which send declarations of expenditure to the
Commission based on costs incurred by final beneficiaries. The
Community co-finances a defined proportion of this. In its previ-
ous audits the Court has detected numerous errors in the underly-
ing transactions and serious weaknesses in the control systems
within the Structural Funds. These weaknesses relate to ineligible
costs or activities, costs declared exceeding those actually incurred
and insufficient supporting documentation. Many of these errors
may have no direct effect on the Community payments of advances,
but there is a real risk that they will have an effect when the pro-
grammes are closed. Improvement of financial control must be a
key aim in the implementation of the new Community Support
Framework 2000 to 2006 (CSF 3).

4. The Court’s audit examined the extent to which the Commis-
sion ensures the proper implementation of these two Regulations,
thereby improving financial control and increasing assurance as
to the legality and regularity of Structural Fund expenditure.

5. The audit was divided into two distinct areas:

(a) the management by OLAF and other Commission services to
ensure a complete and effective application of the require-
ments of the Regulations, and

(b) the implementation of these Regulations by Member States.

2. This report deals with the implementation of two Regulations
which aim to improve the financial control of Structural Fund
expenditure:

(a) Commission Regulation (EC) No 2064/97, which established
detailed arrangements for financial control by Member States
of operations co-financed by the Structural Funds (1), and

(b) Commission Regulation (EC) No 1681/94 concerning irregu-
larities and the recovery of sums wrongly paid in respect of
structural policies and the organisation of an information sys-
tem (2).

6. The audit took place in OLAF and other Commission services
and in Germany, Spain, France, Italy and the United Kingdom. A
preliminary visit (with limited audit testing) had been carried out
in Portugal in order to prepare the scope and objectives of the
audit. The Member States were selected on the basis of financial
importance and on their differing administrative structures. Infor-
mation from Member States not visited was provided by answers
to questionnaires. However, subsequent audit tests on some of the
information supplied indicate that their accuracy and complete-
ness cannot be relied on. The observations in this report are
therefore mostly based on the results of the audits in the Member
States mentioned above.

THE REGULATORY ENVIRONMENT

3. The Court has reported on the steps taken by the Commis-
sion to implement Regulation (EC) No 2064/97 in its 1998 and
1999 Annual Reports (3). A Special Report in 1998 (4) evaluated
the management operations of UCLAF (the Commission’s then
anti-fraud unit which preceded OLAF, the recently established
Anti-fraud Office).

(1) OJ L 290, 23.10.1997.
(2) OJ L 178, 12.7.1994.
(3) Annual Report of the Court of Auditors concerning the financial year
1998, paragraphs 3.14 to 3.19 (OJ C 349, 3.12.1999) and Annual
Report of the Court of Auditors concerning the financial year 1999,
paragraphs 3.69 to 3.74 (OJ C 342, 1.12.2000).

(4) Special Report No 8/98 on the Commission’s services specifically
involved in the fight against fraud, notably the Unité de co-ordination
de la lutte anti-fraude (UCLAF) (OJ C 230, 22.7.1998).

7. The governing provisions for financial control of the Struc-
tural Funds derive from Article 23 of Council Regulation (EEC)
No 4253/88 (as amended by Council Regulation (EEC)
No 2082/93) (5). This provides that Member States should take
the necessary measures to verify that operations financed by the
Community have been properly carried out, that they prevent and
take action against irregularities and that they recover any amounts
lost as a result of an irregularity or negligence. These provisions
should be seen in the light of the Treaty which provides that the
Commission is responsible for implementing the budget and that
Member States should cooperate to ensure that appropriations
are used in accordance with the principles of sound financial
management.

(5) OJ L 193, 31.7.1993.

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Regulation (EC) No 2064/97

8. Commission Regulation (EC) No 2064/97 (the Regulation)
came into force in November 1997 and was introduced in order
to address criticisms of the quality of the financial management
of the Structural Funds, where almost all expenditure is adminis-
tered by Member States.

9. Until that time Member States carried out post-payment checks
either on a relatively limited scale or not at all. Previous Court
audits (1) revealed that checks by the Commission on the closure
of forms of assistance were limited.

10. Article 2 of the Regulation sets out the minimum require-
ments for Member States’ management and control systems,
including details of the elements necessary for a satisfactory audit
trail.

15. The Regulation also requires action to be taken in respect of
irregularities. This is set out in Article 7, which states that Member
States shall ensure investigation and satisfactory treatment of
‘apparent irregularities’. In effect, this reinforces the requirements
laid down in Regulation (EC) No 1681/94.

Regulation (EC) No 1681/94

16. Commission Regulation (EC) No 1681/94 provides a frame-
work for the communication and follow-up of detected irregulari-
ties. Under Article 2(1), Member States’ procedures for ensuring
the regularity of Community-financed operations, the prevention
of irregularities and the recovery of amounts lost must be com-
municated to the Commission, along with descriptions of current
management control systems. Article 2(3) requires the Commis-
sion to study this information and inform Member States of the
conclusions it intends to draw therefrom.

11. Article 3 requires that Member States verify the effectiveness
of the management and control systems in place and the expen-
diture declarations made at the various levels. The checks, which
must be carried out before the closure of each form of assistance,
must cover at least 5 % of the total eligible expenditure and be
both representative and at the same time risk-based. (See para-
graphs 19 to 21).

17. The primary responsibility for communicating irregularities
lies with the designated authorities for each Structural Fund in the
Member States. This responsibility involves: (Article 3) each quar-
ter, communicating to the Commission (in practice to OLAF)
details of detected irregularities having a financial impact exceed-
ing 4 000 euro and (Article 5) providing updates of such cases
each quarter.

12. Article 8 requires that, no later than at the time of the request
for the final declaration of expenditure in respect of each form of
assistance, Member States shall present to the Commission a
statement drawn up by a person or organisation functionally
independent of the implementing service (the closure statement).
This statement shall summarise the conclusions of the checks
made and provide an overall conclusion as to the validity of the
request for final payment and the legality and regularity of the
operations underlying the final declaration of expenditure.

13. The Regulation came into force in the middle of the pro-
gramming period 1994 to 1999, which continues in most cases
until 31 December 2001, the last date for payments. Article 3(2)
allows Member States to reduce the 5 % percentage proportion-
ally for forms of assistance approved before the entry into force
of this Regulation. Commission Regulation (EC) No 2406/98 (2)
allows that the closure statement is not required where the final
date for making commitments was before 1 January 1997.

14. Article 9 of the Regulation requires Member States to inform
the Commission by 30 June each year of their application of this
Regulation in the previous calendar year. As stated in the Court’s
1999 Annual Report (3), these reports have been diverse in qual-
ity and in the type of information provided.

(1) Annual Report 1998, paragraph 3.33; Annual Report 1999, para-

graph 3.75.

(2) OJ L 298, 7.11.1998.
(3) Annual Report 1999, paragraph 3.74 (OJ C 342, 1.12.2000).

18. Article 8 requires that the Commission shall maintain con-
tacts with Member States in order to disseminate information of
the lessons to be learned and where there is a risk of similar
irregularities occurring.

THE OBJECTIVES OF REGULATION (EC) No 2064/97

19. Member States are required to organise checks on an appro-
priate sampling basis in order to verify the effectiveness of the
management and control systems and to verify, on the basis of
risk analysis, expenditure declarations made at the various levels.
The existence of errors may cause loss to the Community budget
and is therefore prejudicial to the interests of the European tax-
payer. As such, the objectives of the Regulation and the theoreti-
cal and practical effectiveness of the control procedures included
are of critical interest.

20. The method by which the checks provided for in Regulation
(EC) No 2064/97 should be applied was not clearly defined at the
time the Regulation was issued. Advice was subsequently given
on selection of the sample in Appendices 2 and 5 of the Com-
mission’s Structural Fund audit manual. These checks are required
by the Regulation to be based on a sample which is both risk-
based and representative. This led to questionable practices in the
Member States.

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21. One approach could be to combine the two methods in a
logical framework in which a risk analysis is undertaken, identify-
ing items for exhaustive checking, in order to detect and correct
errors, complemented by the checking of a representative sample
from the remaining population which would show whether or
not this is indeed low risk and unaffected by a material incidence
of error. The Commission should provide additional guidance to
the Member States on the selection method as well as on how the
results of the work are to be used, notably in the context of the
closure statements.

26. However, it was not sent to Member State authorities in the
appropriate languages until October 1999, which was too late in
practice to have a major impact on the methods of implementing
the Regulation in some of the Member States audited by the Court.
For example, no Member State’s risk analysis identified the rel-
evant inherent and control risks as set out in the SFAM. Moreover,
the Court’s audits in Member States in 2000 revealed that some
bodies responsible for implementing and coordinating the Regu-
lation and the checkers themselves were unaware of the SFAM’s
existence largely due to coordination problems within the Mem-
ber States themselves (1).

THE ROLE OF THE COMMISSION IN THE IMPLEMENTATION
OF REGULATION (EC) No 2064/97

22. The essential role of the Commission is to ensure the cor-
rect application of the Regulation in all Member States and across
all Funds, so that the closure statements are based on audit con-
clusions which are the result of rigorous and reliable audit work.

23. Until July 2000 DG AUDIT was the coordinating DG for
matters relating to the Regulation. In the period January 1998 to
June 2000 DG AUDIT adopted the remaining bilateral adminis-
trative arrangements (the protocols with Member States) for which
a legal basis was provided under Article 10, analysed the reports
compiled under Article 9 and organised the bilateral meetings
held with the Member States. In parallel, a limited number of veri-
fications were made on the spot by DG AUDIT of the application
by Member States of certain aspects of Regulation (EC) No 2064/
97. This activity however was insufficient to assess the implemen-
tation of Regulation (EC) No 2064/97 by the Member States. Fur-
thermore, until mid 2000 the four operational DGs concerned
(Regional Policy (REGIO), Employment and Social Affairs (EMPL),
Agriculture (AGRI) and Fisheries (FISH)) did not consider it to be
their responsibility to assess the implementation of the Regula-
tion.

24. Since July 2000 DG REGIO has taken over the coordination
role, although the other three operational DGs are responsible for
the implementation of the Regulation in respect of their Funds.

The Commission’s audit manual

27. Despite the distribution of the SFAM, the interpretation of
some elements of the Regulation remained unclear to Member
States, notably concerning the proportional reduction of the 5 %
target for checks (see paragraphs 75 to 79). The Commission had
not issued common guidance to Member States on this key issue
by the end of 2000.

28. The SFAM states that the Commission will assess compli-
ance with the Regulation’s requirements, i.e. the planning and
progress of Member States’ checks to ensure that these are adequate
and sufficient to meet the 5 % target. Such an assessment cannot
be satisfactorily carried out using only the reports compiled under
Article 9 and the information obtained from the annual bilateral
meetings held with the Member States. Thus further assessment
is necessary, notably at Member State, central and regional levels,
in order to provide the Commission with sufficient information
on the quality and quantity of these checks.

Assessment by the Commission of compliance with the
Regulation

29. DG AUDIT carried out a limited number of verifications on
certain aspects of the Regulation. A review of DG EMPL and DG
AGRI reports for 1999 and 2000 on visits to Member States
revealed that, while references were made to the Regulation, these
were ad hoc comments and descriptions of Member States’ sys-
tems. In no case did an examination of compliance with the Regu-
lation figure in the audit objectives. DG REGIO had carried out
very few audits of the implementation of this Regulation by the
end of 2000.

25. The Commission issued an audit manual entitled ‘Manage-
ment and control systems audit manual for the Structural Funds
— Financial controls in the Member States’ (SFAM) on 19 April
1999 (some 18 months after the Regulation came into force).
Although this manual is not legally binding on Member States,
the introduction to its Appendix 2 (which is directly addressed to
Member States and which covers their implementation of the
Regulation) states that its purpose is ‘to set out the requirements
for Member State controls and to provide guidance on how these
requirements will be interpreted and verified by the Commission
services’. The Court considers that this appendix provides a use-
ful basis for implementing the Regulation.

30. Neither DG REGIO nor DG EMPL have the resources to fully
assess compliance with the Regulation, in view of the many forms
of assistance, particularly as the control units of each Structural
Fund DG are also committed in 2001 to carrying out important
work on compliance with the rules governing the new program-
ming period 2000 to 2006. DG EMPL informed the Court that its
audit and control unit is facing an important lack of human

(1) France: CICC, DATAR, Ministère de l’intérieur, DGEFP. United King-

dom Department of Trade and Industry, GOWM.

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resources and that this unit’s level of activity in 2001 may well be
compromised.

31. DG FISH carried out an on-the-spot audit in October 2000,
having received a closure statement relating to the closure of an
Operational Programme. The report assessed the compliance of
the national system with Article 2 of the Regulation (the proper
operation of adequate management and control systems) but not
the quality of the Article 3 checks (quality of checks, their con-
tent, follow-up of findings, attainment of 5 %, respect of appro-
priate mix of projects, etc.). Whilst it is encouraging that the DG
did carry out an on-the-spot audit in respect of this closure, the
above issues should be examined and reported on in all such
audits.

32. The four operational DGs plan to carry out a series of visits
to assess the implementation of the Regulation in 2001. In the
Court’s opinion, starting this work in 2001 does not leave suf-
ficient time to properly evaluate the work of the wide range of
checkers and closure statement providers. Moreover, it may well
be too late to correct any serious weaknesses by June 2002, such
as the quality of the checking, the composition of the samples or
the validity of the work carried out by the closure statement pro-
vider.

33. There have also been delays in the execution of the 5 %
checks by Member States. For example, in Italy only four out of
36 Ministries/regions had started the 5 % checks by 30 June 2000,
and, in some cases, the checking body had not even been selected
by the end of 2000. As all checking must be completed before
30 June 2002 (the final date for closure), it is a matter of concern
that Member States may not be able to carry out the checks of
sufficient quality in the time remaining. The Commission should
identify and urgently follow-up all Member States that are late in
starting their checks.

34. The absence of on-the-spot assessment of the Member States’
implementation of this Regulation has led to the Commission
only becoming aware of problems of interpretation in the Mem-
ber States at a late stage. This has meant that Member States have
been carrying out checks which are not in accordance with the
Regulation. Had the Commission carried out such assessments
earlier, not only would it have been able to cover a wider range of
regions and forms of assistance, it would also have been able to
identify misunderstandings and misinterpretations promptly and
inform all Member States of the correct interpretation in good
time.

36. Another example of differing interpretation occurred when
DG FISH informed the Italian authorities that the signatory of the
closure statement must be a public official. All other Commission
guidance on this issue stated that this need not be the case. To
avoid such cases, replies to Member States should be agreed by
DG REGIO, the coordinating DG, and any guidance of a general
nature should be copied to a central contact point in each Mem-
ber State.

THE STANDARDS TO BE APPLIED

37. Article 3 of the Regulation does not set out in detail how
Member States should carry out the checks. The Court’s audit
evaluated the checking procedure and the checks carried out by
Member States, based on the SFAM and generally accepted audit-
ing standards. In the Court’s view these criteria can be considered
to be the minimum requirements of an Article 3 check, although
the nature of the detailed work to be carried out on the spot by
Member States should be tailored to each type of support. The fol-
lowing paragraphs set out how the checks could be organised in
the Court’s view.

38. Those undertaking the checks should be independent of the
implementation of the project. There should be checklists cover-
ing the basic aims of such checks, adapted to suit the different
risks presented by each type of project. The check should examine
the physical reality of the project on-site and include an examina-
tion of all aspects of the expenditure declaration back to source
documents. This should involve testing the reality of operations,
the financial aspects and compliance of the underlying expendi-
ture with the legislation. The Court believes that only expenditure
so checked may be counted towards the 5 % target. A checking
team may need to comprise an appropriate technical expert (such
as an engineer) as well as a financial/auditing expert.

39. Article 3(1)(a) requires that the checker should verify the
effectiveness of the management and control systems in place.
This work should be carried out by an independent body, such as
the one providing the closure statement. Project managers should
not verify the effectiveness of their own management and control
systems in this context.

Coordination within the Commission

35. There is a need for the Commission DGs to provide a co-
ordinated response on interpretative issues concerning the Regu-
lation. Member States address questions primarily to the DG
responsible for the Fund concerned and conflicting advice and
interpretations were sometimes given to Member States, such as
in the case of the reduction of the 5 % target (see paragraphs 75
to 79).

40. The checks should be fully documented and there should be
a written report on the results of the work undertaken. It should
explain the way in which the project was selected and detail the
audit work carried out, including identification of eligible expen-
diture checked. The value of errors/irregularities detected should
also be recorded, in order to allow the provider of the closure
statement to comply with Article 8(2) of the Regulation by decid-
ing whether they are material.

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In cases where it is not possible to check 100 % of the expen-
41.
diture items in a project, normal audit practice allows a represen-
tative sample of adequate size to be selected for audit, in order to
help come to a conclusion as to the eligibility of the whole. In the
context of the Regulation, the total project expenditure to date
may be considered as checked provided it can be demonstrated
that the sample tested is representative. Other substantive audit
procedures such as analytical review may also be used to provide
evidence of the legality and regularity of a project. Thus, when a
100 % check is not undertaken, details of the sample and justifica-
tion of its representativeness and sufficiency should be set out in
the report.

IMPLEMENTATION BY THE MEMBER STATES

42. The following paragraphs summarise the audit findings for
those Member States visited. It must, however, be borne in mind
that final responsibility for verifying the correct application of the
Regulation lies with the Commission.

Current arrangements

43.
In France the Article 3 checks for the ERDF, the EAGGF
Guidance and the FIFG are carried out by officials of the service
that administers the expenditure, under the authority of the Préfet
of the region. The checks for the ESF are carried out by a separate
regional control service.

44. The closure statement will be provided by the Commission
interministérielle de coordination des contrôles (CICC). This body
has representatives of the Inspection générale des finances and of
the Inspection générale of each ministry responsible for a Fund.
It is functionally independent of the bodies implementing the
co-financed expenditure and thus complies with Article 8(1).

45.
In the United Kingdom for the ERDF the Article 3 checks are
carried out by officials of the regional government office (or for
Scotland and Wales, the Scottish Executive and the Welsh Assem-
bly respectively) who manage the project. To ensure indepen-
dence, a separate unit in the Finance division is responsible for the
checking. This is also the case for the ESF, although there is, in
addition, an independent central unit which carries out some of
the checks. For the EAGGF-Guidance a separate corps of check-
ers is used. The closure statements will be provided in each case
by the internal audit service of the national ministry concerned.
This guarantees
complies with
Article 8(1).

independence

and thus

46.
In Spain, responsibilities for carrying out Article 3 checks are
divided between the Intervención General de la Administración
del Estado (IGAE), for nationally administered measures, and the
17 Intervenciones Generales of the autonomous communities, for

measures administered by those autonomous communities. The
closure statements will be provided for all Funds by these same
bodies, which are functionally independent of the implementing
service.

47.
In Italy the definitive structure had not been determined at
the time of the Court’s audit in October 2000. Each national min-
istry and each region responsible for implementing forms of assis-
tance will be free to determine its own arrangements. The
Article 3 checks will be performed either by an internal commit-
tee set up by the ministry/region or by private external auditors.
In general, the checking body will also provide the closure state-
ment. Thus independence would be ensured.

48.
In Germany the Bundesländer also have autonomy, with
Article 3 checks mostly carried out by the operational depart-
ments of the Länder ministries which manage the Funds and the
closure statements provided by independent departments, such as
the Beauftragte für den Haushalt of that ministry.

49. The German authorities sought advance agreement from the
Commission that their existing administrative arrangements met
the requirements of the Regulation. DG AUDIT and representa-
tives of the Federal Ministries signed an agreement (the Agreed
Conclusions) in 1998, confirming that the systems in place in the
Federal Government and the Länder, as described in the systems
description provided by the German authorities, already fulfilled
the requirements of the Regulation. The very limited testing which
the Commission carried out on the German management and
control system gave rise to reservations about key issues such as
the independence of the provider of the closure statement. Nev-
ertheless, the Commission granted unqualified approval to the
German authorities. Therefore the basis on which the Commis-
sion decided that the German management and control system
was compatible with the requirements of the Regulation is not
clear. Furthermore the Court’s audit revealed that for ERDF the
system applied did not meet the requirements of the Regulation.

50.
In Portugal the checks are carried out partly by control bod-
ies independent of the administering departments, and partly by
the provider of the closure statement, which is part of the Minis-
try of Finance. This guarantees independence and thus complies
with Article 8(1).

Coordination within Member States

51.
In Member States there are a number of bodies that carry out
the checks. The Court therefore considers that a coordinating
body would facilitate the implementation of the Regulation, by
establishing guidelines and best practice, giving advice and being
the focal point for communication with the Commission. One of
the particularities of the implementation of ERDF measures by
Member States is the intervention of a large number of bodies.
This makes the standardisation of procedures and the production
of common instructions difficult but important.

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In France the CICC has been very active in recommending
52.
best practice to the regions for carrying out the Article 3 checks.
This body visits all regions and assesses the pertinence (compli-
ance of the sample with Article 3(3)), quantity (attainment of the
required coverage) and quality of the Article 3 checks and has an
overview of all forms of assistance in that Member State. It also
assesses the adequacy of the management and control systems.
The CICC returns to each region to ensure that its recommenda-
tions for improvement have been implemented.

In Spain the regions are also independent of the national
57.
authorities. However the advantage of the Spanish arrangements
is that, because the body providing the closure statement is the
same as the one carrying out the Article 3 checks, there is an
inherent quality overview of these checks across all Funds.
Although IGAE issued standard instructions and checklists to all
autonomous communities, compliance with these instructions
and consistency of interpretation between regions is not ensured
for those forms of assistance which are the sole responsibility of
an autonomous community (2) because of the Spanish constitu-
tional organisation.

53.
In Portugal the Inspecçao-Geral de Finanças has a similar
overview of all forms of assistance and of the work carried out
under Articles 2 and 3. In addition this body carries out its own
checks. In the United Kingdom the internal audit body of the
respective Ministries carries out similar work to the CICC in
France, but each is only concerned with one Fund (1).

54.
In Italy there is no single body responsible for the closure
statements, but there is a coordination body, the Ispettorato Gen-
erale per i Rapporti Finanziari con l’Unione Europea (IGRUE) of
the Ministry of Treasury. IGRUE carries out little coordination of
audit methodology and there are no detailed practical guidelines
on issues such as what constitutes an Article 3 check and what
work the provider of the closure statement should perform. Simi-
larly, there are no centrally issued checklists to ensure basic con-
sistency and minimum standards between ministries/regions with
similar types of expenditure. IGRUE allows each managing body
to determine the provider of the closure statement. Owing to the
autonomy of the regions each body remains responsible for its
own work and is free to establish its own methodology. Thus
there is no guarantee of consistency of audit standards or treat-
ment of errors between the various bodies or within the same
Fund.

55.
IGRUE is not the only interlocutor with the Commission in
Italy for the Regulation, with enquiries often being sent directly
from the ministry or region to the DG responsible for the Fund
concerned. IGRUE is not always informed of such correspon-
dence, nor the replies.

58. Thus in these three latter Member States with devolved con-
stitutional and administrative organisations, the central respon-
sible authority does not review the work of the regional authori-
ties nor, except in Spain, does it set out how the audits should be
carried out, as these are the exclusive responsibility of those
regional authorities. With little contact between the regional
authorities to discuss methodology and treatment of cases detected,
there is no guarantee as to the consistency of treatment, nor con-
sistency in the application of the same minimum standards of
checking by each regional authority. Action should be taken by
the Commission, in partnership with the Member States con-
cerned, to address this, for example by setting up coordinating
committees.

59. The provision of a combined closure statement requires sig-
nificant coordination between the national and the regional bod-
ies concerned. Nevertheless, where a form of assistance contains
both national and regional expenditure and where national and
regional bodies carry out separate checks, a single closure state-
ment should be provided. This is because, firstly, the Regulation
itself requires one such statement for each form of assistance and
secondly, because the provision of multiple closure statements,
with perhaps differing conclusions, would be unmanageable for
the Commission.

56.
In Germany the 16 Bundesländer are responsible for their
compliance with the Regulation and the Federal Ministry of
Finance (BMF) coordinates the implementation of the Regulation
for all Structural Funds. However, there is no overview or quality
control of its implementation. The federal level has no informa-
tion concerning the organisational decisions the Länder have taken
in respect of the execution of the Article 3 checks nor the appoint-
ment of the closure statement provider.

60. The monitoring of the attainment of the target 5 % required
by Article 3 of the Regulation was found to be insufficient at
national level in some of the Member States visited by the Court.
Such monitoring was only found in Spain and Italy. In France, in
respect of the ESF only, the responsible national ministry con-
stantly monitors progress towards the target. It is recommended
that this practice is adopted by the national authorities for each
Fund in each Member State. The information should also indicate
any irregularities arising which need to be communicated to the
Commission in accordance with Regulation (EC) No 1681/94.

(1) However, the Internal Audit Body of the UK Ministry of Agriculture,

(2) Spain: IGAE has no power to review and enforce changes in the work

Fisheries and Food covers both EAGGF Guidance and FIFG.

of the 17 regional Intervenciones Generales.

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Responsibility for carrying out the checks

61. The Commission has stated that a clear separation of func-
tions between managing and paying authorities and the checking
bodies is vital to achieving the aims of Article 3 of the Regula-
tion (1), but in October 2000 and March 2001 the Commission
was still discussing with Member States the issue of the indepen-
dence of the organisations which are undertaking the Article 3
checks for the 1994 to 1999 period. This should have been settled
by the Commission at the time of the introduction of the Regula-
tion. Although Article 3 does not explicitly require such indepen-
dence, the new control Regulation (2), which governs the pro-
gramming period 2000 to 2006, introduced the principle that
there should be a clear separation between checker and manager.

62.
In Brandenburg the persons responsible for managing the
ERDF projects, including approval for payment, also carry out the
Article 3 checks. In France (Nord-Pas-de-Calais) it was not always
possible to ensure that the checker was not the project adminis-
trator. Both regions have informed the Court that they have taken
steps since the Court’s audit to ensure adequate separation. In
another instance, the Commission approved that the internal
audit units of two private sector companies (which were imple-
menting bodies) be authorised to carry out both Article 3 checks
and the Article 8 closure statements. The bodies were also final
beneficiaries of a number of measures, thus compromising inde-
pendence. In such cases where there is an absence of an external
public audit review the independence of the checks may be com-
promised.

Sample selection

63. The audit uncovered serious problems with sampling pro-
cedures in three Member States as regards the representativeness
of the audit sample and the lack of risk analysis, both of which
are required by the Regulation.

64.
In Germany (Brandenburg), no mechanism was applied to
ensure that the sample was representative, with an appropriate
mix of types and size of projects. In Germany (ESF, federal level),
only projects with total eligible expenditure of more than 500 000
euro were selected, and in Brandenburg the 5 % sample to be
tested was based on 5 % of the number of ERDF projects co-funded,
rather than 5 % of total eligible expenditure as required by the
Regulation. In addition, in the United Kingdom, ERDF and EAGGF
closed projects were excluded from the selection procedure.

(1) Letter from the Commission to the United Kingdom of 28 September

2000.

(2) OJ L 63, 3.3.2001 — Regulation (EC) No 438/2001.

In Italy for the ESF and Germany (Brandenburg, ESF and
65.
EAGGF-Guidance), the risk analysis criterion was ignored in select-
ing the sample, while in other instances the sample was selected
solely on a risk basis taking account of errors already identified
in the related projects. The latter selection procedure is unrepre-
sentative as it does not provide a true picture of the overall error
rate and does not comply with the requirements in Article 3(2)
and (3).

Content of the checks

66.
In the United Kingdom (Scotland) checks in respect of the
ERDF were found by the Court to be checks on the operation of
systems rather than substantive checks of individual expenditure
declarations of projects. Thus in effect the Member State was only
complying with Article 3(1)(a), which concerns the verification of
management and control systems and not Article 3(1)(b), con-
cerning the verifications of expenditure declarations. In the same
Member State in respect of ESF expenditure, the checks carried
out only assessed whether there were systems in place to ensure
correct declarations of expenditure and thus the reports exam-
ined by the Court’s auditors included only limited substantive
testing of projects.

67. The opposite case was found for ESF measures in Germany,
both at the national and regional level, where the efficiency of the
existing management and control systems did not form part of
the checks. As no other checks on the systems were carried out,
Article 3(1)(a) was not being fulfilled.

68.
In France, the centrally-issued instructions concerning the
checks to be carried out at regional level meet the requirements
of Article 3. However, in Nord-Pas-de-Calais, for all Funds except
the ESF, many of the checks counting towards the target coverage
were found to be routine checks before final payment, which
existed before the introduction of this Regulation. As such they
did not normally include an in-depth financial audit of expendi-
ture. Thus, the obligation to carry out the checks on 5 % of
expenditure was not being satisfactorily implemented at the time
of the audit in February 2000. The French authorities have since
informed the Court that this weakness has been dealt with.

69. Shortcomings were found in the content of audit reports. In
general it was rare that the reports gave quantified results of the
checks, although this information is necessary when drawing up
the closure statement. In France (Nord-Pas-de-Calais) the reports
examined for the ERDF and the EAGGF consisted of a one-line
certification of the work carried out and a recommendation for
the final payment to be made to the project promoter. Since the
Court’s audit, new instructions have been given to remedy this. In
Brandenburg, Germany (ESF and EAGGF-Guidance), and at the
national level (ESF), no details were given of what had been tested
or whether, and how, representative samples had been drawn.

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Eligible expenditure checked

carried out by EU auditors may not meet the same criteria. How-
ever, international audit standards require that the closure state-
ment providers should take the results of EU audits into account.

70. Articles 3(1)(b) and 4(d) and (e) of the Regulation and the
Commission’s SFAM (1) require testing of the underlying expen-
diture (2). Only expenditure that has been paid, declared and sub-
jected to substantive audit testing can be considered as checked
under the Regulation. However, such testing was not carried out
in many cases examined.

71.
In the United Kingdom, ESF expenditure recorded as checked
included expenditure claims in relation to years prior and subse-
quent to the year actually checked, without any actual examina-
tion of the underlying documentation. In another case, projects
were considered to have been substantively audited on the basis
of a financial system review (3).

72. A common weakness encountered during the audit was the
inclusion of expenditure which had not been incurred at the time
of the check, particularly in the case of ERDF expenditure where
projects were checked at an interim stage. In such cases, Member
States counted the entire authorised eligible expenditure as
checked. In one case in Germany, expenditure relating to a project
that was checked twice was included twice towards the 5 % target.

73. The authorities in Spain and the United Kingdom reported
that they had already attained the target percentage for certain
forms of assistance, in some cases as early as in 1998. Further
expenditure will need to be checked in the ensuing years to ensure
coverage over the whole period as the Regulation requires checks
to be spread evenly over the period concerned.

74. Despite beliefs to the contrary on the part of a number of
Member States, Court and Commission audits cannot be included
in the 5 % total, as the Regulation states that ‘Member States shall
organise controls of projects ...’. (Article 3). In any case the meth-
ods of selection of projects for audit and the objectives of the tests

(1) The SFAM refers to ‘an in-depth check on-site of all aspects of the
expenditure declaration back to source documents and other records
held by final recipients of Structural Fund support’ and to ‘substan-
tive tests to determine whether particular transactions are correct’
(section B of Appendix 2) and ‘the controls which count towards the
5 % of total eligible expenditure must involve on-the-spot checks of
individual expenditure declarations’. Finally, section A states that ‘the
verification of expenditure declarations will only provide assurance
on those declarations actually checked’.

(2) Article 3(1)(b) requires that Member States verify selectively on the
basis of risk analysis expenditure declarations made at the various lev-
els concerned.

(3) For example, the 1998 final claims of two ESF co-financed courses
were checked, yet all 28 ESF co-financed courses were counted as
checked, on the basis that the same systems applied, even though the
eligibility and reality of the other 26 claims were not tested. Although
the authorities correctly applied the conclusions of the results of the
two training courses to the remaining 26, in cases where an audit
reveals no systems weaknesses or substantive errors, it is not justifi-
able to extrapolate this absence of errors to claims which have not
been examined.

Reduction in the 5 % target

75. The Commission has not properly explained the provision
which allows a reduction of the 5 % audit target and confusion
was found in Member States as to its implementation. Further-
more, the SFAM does not give any indication on the matter, other
than to state that the reduction is calculated on the basis of the
final date for payments (31 December 2001).

76. One interpretation, promulgated by DG EMPL, is that the
5 % sample should only be taken from expenditure over the period
1998 to 2001 (i.e. since the introduction of the Regulation), with
no expenditure needing to be checked for the period 1994 to
1997. Another interpretation (recommended by DG AUDIT (4)) is
that a reduced percentage of expenditure be checked in respect of
each year 1994 to 2001 (5).

77. As the results of these checks will be a key component of the
conclusions in the closure statement the Court considers that
they, like the final declarations of expenditure, should cover the
whole programming period. However, a calculation made on a
pro rata profile of expenditure, rather than pro rata temporis, as
recommended by DG AUDIT, would be more appropriate.

In February 2001 the Commission’s (DG REGIO) first moni-
78.
toring visit specifically for this Regulation revealed that the Irish
authorities were not covering expenditure incurred before the
introduction of this Regulation. The Court itself found a similar
interpretation in Italy and Sweden in the course of its financial
audit in respect of 2000. Earlier assessment of the implementa-
tion of the Regulation would have alerted the Commission to the
varying interpretations. It is essential that the Commission give
urgent guidance on this to all Member States.

79. Regulation (EC) No 2406/98 only applies to the drawing-up
of the closure statement. The requirement to verify 5 % (or the
reduced percentage) of the total eligible expenditure remains for
all forms of assistance, which includes, for example, Objective 2,
1994 to 1996. The audit revealed that no Member State had car-
ried out the 5 % checks in respect of the 1994 to 1996 program-
ming period. The Commission should either take action to ensure
that Member States apply the Regulation in full or propose an
amendment to this Regulation.

(4) Letters to Denmark and Finland.
(5) For example, for an Operational Programme 1994 to 1999, payments
may be made over an eight-year period. The Regulation came into
force with approximately four eighths of the period remaining (Novem-
ber 1997) and thus the percentage to be checked would be four eighths
of the 5 %. Thus, a minimum 2,5 % of each year’s expenditure (1994
to 2001) would be checked.

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The closure statement

80. Few forms of assistance had been closed at the time of the
Court’s audit. The audit did not identify any cases where the clo-
sure statement provider did not have the required independence
(except in the cases in paragraph 62). However, in a subsequent
audit for the ERDF in Greece, the Court found that the provider
did not review the work carried out by the checkers, which will
make the provision of a meaningful closure statement difficult.

81. The audit highlighted Member States concern that by carry-
ing out thorough checks and systems audits and reporting a high
frequency of irregularities (1), they might be penalised by a reduc-
tion in EU co-financing. Such action might discourage Member
States from issuing critical statements. The Commission indicated
to the Court that only irregularities known to be remaining in the
final declaration of expenditure would be excluded from EU
co-financing. Moreover, the Commission would only extrapolate
irregularities and make financial corrections in cases where the
Regulation had not been correctly applied. It is not clear to the
Court what legal basis would be available to the Commission to
do this.

82. A high frequency of irregularities in the population checked
cannot be ignored, even if the detected errors are corrected.
Although the sample should take into account any risk factors, it
should also be representative. Thus, if the sample reveals a high
frequency of irregularities, it would indicate that a significant level
of irregularities still remained in the untested part of the popula-
tion. If the irregularities identified during checks are systemic,
Article 7 of the Regulation requires Member States to correct
those cases which have not been individually identified by these
checks. It is essential that the use to which the Commission will
put the closure statements should be addressed now and Member
States informed, particularly in respect of the irregularities found
which are non-systemic.

83. The Commission has not issued guidelines as to what con-
stitutes a high or low frequency of irregularities. This leads to the
risk that what is deemed ‘high’ in one Member State may be
deemed ‘acceptably low’ in another. The Commission should
ascertain the criteria being applied by Member States in making
such a distinction and set guidelines. It should also adopt a com-
mon policy to be followed by the operational DGs upon receipt
of a closure statement, to ensure equality of treatment between
Member States and between Structural Funds.

84. Furthermore, the term ‘frequency’ is not sufficient in itself to
judge the effect of irregularities on an expenditure declara-
tion. Irregularities may be frequent (in which case the cause should
be investigated) but the effect on the expenditure declaration may

be minimal. Frequency of irregularity does not measure the finan-
cial impact of these irregularities and without this an accurate
assessment of the reliability of an expenditure declaration is dif-
ficult. Therefore a quantification of irregularities is also needed to
reflect the true extent of their impact in the underlying expendi-
ture.

Audit trails

85. An audit trail consists of the individual expenditure records
and supporting documents at the various administrative and ben-
eficiary levels. The Commission employed a firm of consultants
to carry out a study of control and management systems of Struc-
tural Fund expenditure in selected Member States. This resulted in
a set of flow charts and systems descriptions for the selected
Member States per Fund. Similar information was compiled by
the remaining Member States on the basis of a model designed by
the consultants. The entire study was to be regularly updated.

86. The composition of a sufficient audit trail is described in
Article 2(2) and Annex I to the Regulation. The audit trails result-
ing from the Commission’s study set out the responsibilities but
did not allow a judgement to be made on the adequacy of the
management and control systems in place, nor identify risk areas.
Neither did they ensure that the audit trail complied with the
model annexed to the Regulation.

87. The wide diversity of projects and Member States’ adminis-
trative systems for managing and controlling the Structural Funds
(in particular the ERDF) makes it rare that each audit trail is appli-
cable to all forms of assistance for that fund in a Member State.
Indeed, the value obtained from the contract (2) is doubtful as the
Court found no evidence that these audit trails were being used,
or indeed, updated either by Commission officials, who prefer to
rely on their own knowledge of the systems, or by Member States.

THE OBJECTIVES OF REGULATION (EC) No 1681/94

88. The main purpose of this Regulation is to allow the Com-
mission to be better informed of the relevant legal and adminis-
trative provisions in Member States, the nature and level of irregu-
larities occurring in the Structural Funds, their financial effects
and the corrective and preventive measures taken by the national
authorities in this regard, as provided for in Article 23 of Council
Regulation (EEC) No 2082/93. To this end it envisages the organi-
sation of an information system concerning irregularities and the
recovery of sums wrongly paid.

(1) Article 8 of the Regulation only uses the word ‘irregularity’. In this
context the Court considers that ‘irregularities’ should include the
concept of errors.

(2) Contract cost 300 000 euro.

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the

introduction

of Regulation

89. The Regulation does not define how the term irregularity
should be interpreted by the Member States (this was not done
until
Euratom)
No 2988/95 (1)), nor does it set out the objectives of the Com-
mission in requiring the creation of such an information sys-
tem. In particular, the Regulation is silent on the use to which
such information might be put, for example, the application of
risk analysis and the monitoring of the recovery of sums wrongly
paid.

(EC,

THE ROLE OF OLAF AND THE OTHER COMMISSION
SERVICES IN THE IMPLEMENTATION OF REGULATION (EC)
No 1681/94

The management systems

90.
In December 1993, UCLAF was established as part of the
Secretariat-General of the Commission. One of its responsibili-
ties was to ensure the implementation of Regulation (EC)
No 1681/94, including the receipt and management of irregular-
ity communications from Member States. However, the normal
financial management responsibilities of the Commission for the
implementation of Structural Funds’ actions under Article 23 of
Council Regulation (EEC) No 2082/93 remained with the relevant
Commission Directorates-General (DG).

91. UCLAF’s (latterly OLAF’s) system for the management and
recording of Member States’ irregularity reports in the area of
Structural Funds has been hampered since 1997 by technical dif-
ficulties and a lack of staff resources. All communications ceased
to be entered on UCLAF’s irregularities database from the end of
1997 (2), as the database, which was located in Luxembourg, was
closed and its contents were transferred to the main IRENE (3) sys-
tem in Brussels. Owing to an absence of software, data were not
processed nor was new information registered on this system.
The closure of the database meant that the DGs access also ended.
Thus, while UCLAF continued to receive quarterly irregularity
reports from Member States, there was no regular or systematic
transfer of irregularity communications from UCLAF to the other
Commission services after 1997 (4).

(1) Article 1(2) of Council Regulation (EC, Euratom) No 2988/95
(OJ L 312, 23.12.1995) states that an irregularity shall mean 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 bud-
gets 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.

(2) OLAF’s Activity Report 1 June 1999 to 31 May 2000 of 23 May 2000
stated with regard to Member State communications, that all informa-
tion notified under Regulation (EC) No 1681/94 was entered in the
Office’s database IRENE (paragraph 1.1.1).
IRENE (irregularities, enquiries, exploitation) has been in operation
since 1 December 1992.

(4) For example, of the 14 cases communicated by Member States in the
period 1997 to 1999 to OLAF, concerning FIFG, only four of these
had been notified to DG FISH prior to the latter’s request for updated
information to OLAF in May 1999.

(3)

92. Only DG REGIO and DG FISH had a system for the manage-
ment, recording and follow-up of irregularity communications,
although even these were found to contain weaknesses. Any mat-
ters relating to the financial management of Structural Funds were
retained on individual financial files, making full control and use
of the information difficult. As a result of the Court’s audit, the
Commission’s services stated that they were instigating improve-
ments in this area.

93.
In conjunction with the establishment of OLAF on 1 June
1999 (5), a new database information system is being designed to
take account of the numerous information needs of the new
organisation and is due to be operational in 2001. The Court has
been informed that the proposed system will allow electronic
communication and consultation of irregularities by Member
States and Commission DGs.

94. Under the Commission’s White Paper on Reform (6) of March
2000, and in the context of the current strengthening and reor-
ganisation of the Commission’s internal audit function, the Com-
mission plans to ensure better coordination and interaction
between OLAF and the Commission’s DGs, the optimisation of
the central early warning system concerning beneficiaries of EU
funds (which allows the Commission accounting system to iden-
tify high-risk beneficiaries prior to payment) and more effective
management of the recovery of unduly paid funds. To this end,
OLAF and the other Commission services should consider whether
an initial verification of irregularity reports should be carried out
by the Structural Fund DGs. This would facilitate a timely and
direct follow-up of irregularities with Member State authorities
and ensure that corrections to future payments were properly
made by the Commission.

The Commission’s guidance

95. A definition of an irregularity is contained in Article 1(2) of
Council Regulation (EC, Euratom) No 2988/95, the Regulation on
the protection of the European Communities’ financial interests.
It states that an irregularity is:

‘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 ... by an unjusti-
fied item of expenditure’.

96. As Regulation (EC) No 1681/94 does not contain a defini-
tion of an irregularity, the above definition is referred to by OLAF
in its guidance to Member States on the detection and reporting
of irregularities. In general terms, the distinction between fraud

(5) On 28 April 1999, the Commission adopted Decision 1999/352/EC,
ECSC Euratom establishing the European Anti-fraud Office (OLAF)
(OJ L 136, 31.5.1999).

(6) White Paper on Reform, COM(2000) 200 final of 1 March 2000 and

COM(2000) final/2 of 5 April 2000.

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and irregularity is that fraud is an intentional act and a criminal
offence, whereas an irregularity is any infringement of Commu-
nity law resulting from an act or omission.

97. OLAF’s role has been to provide information and guidance
on the interpretation and implementing provisions of Regulation
(EC) No 1681/94. This has been done through seminars organised
in Member States, bilateral meetings with national authorities and
at meetings of the Advisory Committee for Coordination of Fraud
Prevention (Cocolaf (1)). While these initiatives have, in some
cases, resulted in improvements in the number of reported cases
and the quality of the information therein, the audit showed that
OLAF (2) did not have detailed information as to the extent of
each Member State’s compliance with the terms of the Regulation,
in particular the definition of irregularity being applied, so as to
enable it to evaluate the quality and quantity of the information
being reported.

98. The lack of clear guidance from the Commission services
and the national coordinating authorities (3) contributed to many
different interpretations being used by Member States and regions
and even between the managing authorities of each Structural
Fund. For example, contradictory guidance received by Italy from
Commission services initially limited reportable irregularities to
cases resulting in penalties, but later included even cases which
did not prejudice the Community budget (4). In Italy (Lazio), the
audit revealed that no instruction or guidance had been received
by the relevant regional authorities since 1995.

99. This difficulty in the definition and interpretation of a report-
able irregularity by Member States was referred to by the Com-
mission in its 1999 annual report on the fight against fraud. The
report, which included the results of a research study (5) based on
Member States’ irregularity reports in the period 1993 to 1997,
concluded that, ‘Member States’ reports differed from one another’
with the result that, ‘Member States’ current practice was not in
line with the objectives of securing equivalent protection of finan-
cial interests throughout the EU’.

(1) The ‘Advisory Committee for Coordination of Fraud Prevention’ (Coco-
laf) was established in 1994 and is made up of representatives from
the Member States and is chaired by OLAF.

(2) However, OLAF stated in its Activity Report of 23 May 2000 (1 June
1999 to 31 May 2000) that, ‘procedures for reporting by Member
States are harmonised’, and ‘that a uniform presentation (of commu-
nications) is imposed to facilitate computer processing’ in relation to
Regulation (EC) No 1681/94 communications (paragraph 1.1.1).
Italy: The Department for Community Policy within the Office of the
Prime Minister did not define a communicable irregularity, thus each
administration interpreted it differently.

(4) Letter from DG Employment April 1995, revised by the subsequent
letter 1319 of 16 January 2000 to the Italian Ministry of Labour.
Joint Research Centre Study 1993 to 1997.

(3)

(5)

100. Some reporting authorities (owing perhaps to the primary
role of UCLAF/OLAF as a fraud prevention agency) incorrectly
interpreted their reporting obligation as being restricted to fraud
and suspected fraud cases, despite the fact that this narrow inter-
pretation of irregularities was rejected on 4 October 1995 at the
meeting of Cocolaf as not compatible with Regulation (EC)
No 1681/94.

101.
In cases where non-fraudulent irregularities were recog-
nised as reportable under the Regulation, confusion also existed
as to whether a payment or a claim was necessary before an
irregularity could be recognised. In the United Kingdom, this
resulted in three different interpretations being applied, in respect
of three Structural Funds, in Germany (Brandenburg), the same
implementing body responsible for the management of two Struc-
tural Funds applied a different interpretation to each without
apparent reason, and in Spain only cases for which a recovery
procedure had been initiated were reported.

102. The criterion that all irregularities subject to initial admin-
istrative or judicial investigations be communicated was also the
subject of different interpretations by national authorities. In
many cases, the issuing of a recovery order or judicial proceed-
ings was considered a prerequisite by the authorities to reporting
an irregularity, rather than its detection and analysis. In France
and Italy, this resulted in a significant number of suspected frauds
which were the subject of investigation not being communicated
to OLAF or the other Commission services.

103. Under Article 3(3) of the Regulation, and where provided
for in national laws, communication of irregularities may be sub-
ject to the authorisation of the competent court or tribunal. The
due application of this provision resulted in delays of up to two
years in some cases (6), while the authorities awaited the outcome
of administrative and judicial procedures. In contrast, the proce-
dures adopted in Spain and the United Kingdom often allowed for
the early reporting of irregularities.

104. The Regulation was interpreted in both Germany (Bavaria)
and Italy as not applying to cases of irregularities committed by
the bodies managing the funds. This interpretation is of particular
significance where the managing body, owing to its independent
legal status is not subject to audit by the authorities certifying the
funding, with a higher risk thus attaching to its EU-funded opera-
tion.

105.
In many instances (7) the managing authorities corrected
detected irregularities by a reduction of the grant paid, without
communicating the irregularity. This practice, along with the
interpretation of the aforementioned issues, contributed in the
case of some managing bodies to the relatively low numbers of
reported irregularities in Belgium, France and the Netherlands,

(6) France, Belgium, Netherlands and Italy.
(7) Netherlands, Germany, United Kingdom, Italy.

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and the total absence of reported irregularities in some instances (1),
in relation to some Structural Funds. On the basis of a full appli-
cation of the irregularity definition, an initial analysis by one
managing body (2) visited estimated that thousands of irregular-
ity cases would now have to be reported annually. Annex 1 shows
the number and value of irregularity cases reported in the period
1994 to 2000 by Structural Fund and by Member State.

106. The application of several definitions of an irregularity by
Member States’ authorities and the failure to keep information
updated result in the reporting of incomplete, unreliable, mislead-
ing and out-of-date data which are of little value for financial
management purposes. Although joint information seminars have
been organised between the national authorities and OLAF, fur-
ther efforts are necessary on the part of the Commission and
Member States to overcome the national legal and administrative
obstacles, so as to ensure a more coherent approach to reporting.
A summary of the Member States’ systems for complying with
the Regulation is shown in Annex 2 for those Member States vis-
ited.

The monitoring by OLAF and the other Commission services
of Regulation (EC) No 1681/94

107. While primary responsibility for dealing with irregularities
detected and for making financial corrections lies with Member
States, responsibility for monitoring the system and the irregular-
ity communications at Community level is shared between OLAF,
DG AUDIT and the operational DGs of the Commission. The
Commission’s monitoring of this Regulation was found to be
deficient in a number of areas. First, the Court has found no evi-
dence that the Commission has made an analysis and assessment
of the disparate information provided by Member States about
their management and control systems and their arrangements
for detecting and reporting irregularities. OLAF is the lead author-
ity in respect of
the implementation of Regulation (EC)
No 1681/94 and receives Articles 3 and 5 communications from
Member States. DG AUDIT (in its role as auditor of Member States’
financial systems) receives reports of Member States’ administra-
tive and legal provisions as required under Article 2 of the Regula-
tion and Article 23(1) of Regulation (EEC) No 4253/88. Contrary
to the intention of the Regulation, this information does not
include specific details of Member States’ information systems for
detecting and reporting irregularities and neither OLAF nor the

(1) UK: FIFG; France: ERDF, FIFG, EAGGF.
(2) Germany: MASGF. Because of the hitherto very restrictive interpreta-
tion of an irregularity in all Länder, it can be assumed that a general
application of the BMFs’ criteria will now require the BMA to declare
several thousand cases each quarter, which will create a quite differ-
ent situation from the past, with only 42 irregularities reported in the
five and a half years to 31 December 1999.

Commission DGs had specific details or analysis of Member States’
procedures or systems for reporting irregularities.

108. Secondly, none of the Commission’s services had carried
out on-site visits to the Member States to specifically review their
systems in this area. The necessity for this is illustrated by the
results of the Court’s audit which revealed many shortcomings in
the systems for the detection, recording and communication of
irregularities, at both central and subsidiary authority levels. OLAF
and the other Commission services were unaware of these prob-
lems.

109. For example, the individual authorities responsible for the
management of Structural Funds at national and regional level did
not have instructions or written procedures for verifying the
interpretation or quality of the irregularity information received.
In spite of the lack of monitoring at Community and national
level (3) as to how each reporting body interpreted the term
‘irregularity’, no Member State authority validated the nature of
the information being received, but merely passed it on unchecked
to the Commission.

110. Furthermore,
in most cases the national coordinating
authorities did not have records providing a summary overview
of all reported cases and their current situation, nor did they carry
out any completeness checks or reasonableness tests by analysing
which of the reporting bodies or regions submitted what volume
of irregularities. In the case of the French Ministry of the Interior,
no records were maintained of the irregularity communications
received, and in the United Kingdom one ministry was unable to
provide a listing of all cases in the period 1994 to 1999 owing to
the fact that it deleted closed cases from its database. The Court
considers that such information should be retained for use in
applying risk analysis in the context of Regulation (EC)
No 2064/97 and other audits.

111. The obligation on Member States, under Article 5 of the
Regulation, to submit quarterly updated information about judi-
cial or administrative action taken on irregularities previously
notified, is not generally complied with, owing principally to the
lengthy investigation periods. Such delays impede the efficiency
and transparency of follow-up procedures. Similarly, the require-
ment to confirm the non-detection of irregularities each quarter
(nil returns) is often ignored.

112. The audit revealed that the quality of the records main-
tained by the managing authorities on irregularities was poor,
with many errors and inaccuracies uncovered in the records
maintained by the authorities at each level. For example, OLAF
rejected all French irregularity cases reported in the period 1997
to 1998, owing to incomplete information. In many cases (4), the

(3) United Kingdom: DTI (Department of Trade and Industry); France:

CICC; Italy.

(4) France: MI (Ministry of the Interior); United Kingdom: DTI, DETR
(Department of the Environment, Transport and the Regions); Spain;
Italy: Ministry for Industry.

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absence of important details on the irregularity forms submitted
to OLAF, such as project name, irregularity amounts or a unique
reference number and the use of non-standard forms, made any
meaningful analysis of the information difficult.

instituted. For example, in 1999 some 75 recovery orders were
issued under Article 24, amounting to 82 million euro (3).

113. The communication in some cases of meaningless data, and
their acceptance without follow-up action, demonstrates the need
for a clearer and workable definition of what needs to be com-
municated. Furthermore, proper records (on electronic media)
should be maintained to ascertain quickly what irregularity com-
munications have been received or are outstanding, the general
content of the reports and the follow-up and correspondence on
each case. These records should be periodically validated with the
records of other authorities in the reporting system, so as to
eliminate errors in the compilation of reports.

114. Lastly, the reporting system in most Member States exam-
ined did not ensure that all irregularities detected were in fact
finally and correctly communicated to OLAF (1). In many instances
the central managing authority’s records of open and closed
irregularity cases did not fully correspond to that of the originat-
ing Structural Fund bodies and complete breaks in the reporting
trail and inaccurate and delayed reporting were observed. In
Italy (2), a number of parallel communication channels were used
for reporting irregularities, which resulted in irregularities not
being communicated to OLAF and intermediate authorities being
bypassed and excluded from taking the necessary measures to
safeguard Funds.

Follow-up of irregularities by OLAF and the other
Commission services

115. Under the Structural Funds’ Regulations, if Member State
authorities report a detected irregularity prior to the final date for
financial commitments under the Operational Programme, they
may substitute other project expenditure for the ineligible amounts.
In the absence of this, and where OLAF and the other Commis-
sion services subsequently become aware of the irregularity, a
procedure under Article 24 of Council Regulation (EEC)
No 2082/93 to reduce, suspend or cancel Community aid may be

(2)

(1) For example, in the case of one region, six cases of irregularity
recorded by the regional managing authority were not communicated
to either the national authorities or OLAF.
In Italy, despite an instruction that each managing body communicate
a detected irregularity to the Department for Community Policy, some
bodies communicated them directly to the Treasury Ministry, while
others sent them directly to their lead ministries and the Commission
DGs.

116. Very few of OLAF’s investigations result from Member State
communications. This is primarily due to the fact that the Com-
mission services expect Member States to follow-up irregularities
they themselves have detected and to automatically correct, recover
and/or re-programme the amounts concerned. Accordingly, OLAF
prioritises its own investigations and high-risk areas for attention,
while the managing DGs give priority to the recording and the
follow-up of irregularity cases arising from the Commission’s own
audit missions, those of the Court of Auditors and those arising
from OLAF investigations.

117. Frequently, the incompleteness of Member States’ commu-
nications (4) and their lack of significance from a risk viewpoint
also lead to their low prioritisation. Thus, OLAF stated in its
annual activity report 1999 to 2000 (5) that it could not ‘be con-
tent with the information received from traditional sources’ and
that it had yet to carry out an analysis to determine whether
‘irregularities detected ... constituted the bulk of the irregularities
actually committed or just a small part’.

118. According to data supplied by OLAF concerning (6), the
period 30 June 1994 to 31 December 2000 a total of 3 244 com-
munications of irregularities were reported by Member States
under Regulation (EC) No 1681/94 in respect of the four Struc-
tural Funds (ERDF, ESF, EAGGF and FIFG), amounting to 433,9
million euro. At the end of 2000, the total amount still to be
recovered in respect of these cases was 317,3 million euro. Thus
the amount effectively recovered in respect of those same reports
was 116,6 million euro, or just over one quarter of the amounts
declared to be affected by irregularities.

119. The Table shows the number and value of irregularity cases
communicated by Member States in 2000. In 2000 the number
of cases reported increased by over 74 % on the previous year. The

(3)

Structural Fund

No of recovery orders

Amount issued

ERDF
EAGGF
ESF
FIFG
Total

Source: Commission.

22
33
12
8
75

63 303 281
12 224 957
1 557 709
5 172 100
82 258 047

(4) Furthermore, Member State communications were submitted in many
different formats, owing to the fact that the Regulation provides no
prescription in this area. This situation created additional difficulties
in inputting and analysing the information.

(5) OLAF Activity Report of 23 May 2000 (1 June 1999 to 31 May 2000)

(6)

paragraph 5.1.2.
It should be noted that this information varies from that in ‘Protect-
ing the Community’s financial interests and the fight against fraud’
Annual Report 1999 (COM(2000) 718 final of 8 November 2000 due
to updating of the information.

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8.11.2001

largest proportion of cases reported (in terms of both number of
cases, 55 % and the amount involved, 51 %) concerned the Social
Fund. While the significant increase in the number of reported

cases reflects the greater effort on the part of Member States to
report irregularities, the figures still mask the enormous varia-
tions between Member States and between regions.

Table

Fraud and irregularities communicated by Member States under Regulation (EC) No 1681/94 (year 2000)

ERDF

EAGGF-Guidance

FIFG

ESF

Grand total

Number

Amount

Number

Amount

Number

Amount

Number

Amount

Number

Amount

(1 000 EUR)

0
8
40
2
11
69
75
21
0
0
0
10
2
3
51

0
123
12 034
2 359
985
2 387
8 170
8 895
0
0
0
786
271
87
4 461

0
4
83
3
27
9
8
51
0
0
44
23
5
2
0

0
173
3 070
165
799
113
82
4 902
0
0
1 363
576
32
25
0

Total

292

40 558

259

11 300

0
0
0
0
4
1
0
16
0
0
0
2
0
1
0

24

0
0
0
0
207
445
0
2 824
0

0
296
0
0
0

3 772

0
0
20
9
141
207
5
29
0
223
0
15
6
13
28

696

0
0
2 173
130
9 282
7 018
505
6 305
0
23 736
0
1 835
56
1 152
6 196

0
12
143
14
183
286
88
117
0
223
44
50
13
19
79

0
296
17 277
2 654
11 273
9 963
8 757
22 926
0
23 736
1 363
3 493
359
1 264
10 657

58 388

1 271

114 018

Member State

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
United Kingdom

120. As the principal objective in communicating irregularities
is to enable the information to be taken into account by the Com-
mission when authorising payments on individual Structural Fund
programmes, the accuracy and timeliness of the information are
of the utmost importance. However, the absence of an agreed and
documented system, both within the Structural Fund DGs and
between OLAF and the DGs, for the follow-up of irregularities
communicated by Member States hinders the proper and efficient
utilisation of this information.

122.
In many instances, the flow of information and enquiries
between OLAF and the other Commission services proved most
tortuous. DG REGIO sent queries through OLAF to Member States
for reply, although direct communication with Member State
authorities would have obtained immediate results. Instead, volu-
minous and at times needless correspondence was generated,
resulting in inefficiencies.

121. For example, in February 1997, OLAF sent to the Structural
Fund DGs a list of all the irregularities received up to that date.
However, in many instances, owing to the inadequacy of the
information provided by Member States, the cases could not be
followed up by the DGs (1). Furthermore, in DG EMPL, despite
having three files of copied 1998 communications, no analysis or
follow-up of the documents took place. Similarly, DG REGIO had
17 cases which had been referred to the relevant geographic units
for follow-up action, which were still shown as outstanding after
two years.

123. The veracity and accuracy of all significant expenditure
items submitted for grant aid should be independently or directly
verified by reference to the original underlying documents. Fur-
thermore, a horizontal analysis of ‘over-claimed’ grants (i.e. grants
requested compared with final approved amount) should be con-
sidered by managing authorities, to identify ineligible expenditure
and irregularities in excess of 4 000 euro and to be included in
risk profiles.

124. While some Member States had reported large numbers of
irregularities each quarter, many of these cases remained un-
resolved for long periods. For example, in one instance (2), follow-
ing a 16-month delay in taking initial action, a further five years

(1) DG REGIO — In 35 cases (33 % of 107 cases) the final situation was
that it was not possible for the DG to identify the beneficiary/action/
OP, etc.

(2) Germany: Brandenburg: ILB (Investition Landesbank).

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passed in which numerous requests to the beneficiary for repay-
ment of the grant aid went ignored. Although the case was identi-
fied as outstanding in quarterly reports to the coordinating body,
no follow-up action was taken by this body, OLAF or the other
Commission services.

128. The Court’s audit revealed that much good audit work is
being carried out in the Member States but the quality is variable,
even within regions (paragraphs 42 to 84). It is essential that the
Commission ensures that there are satisfactory levels of control
across the Union.

125. The nature, trend or frequency of the reported irregulari-
ties were not systematically analysed by OLAF nor by the other
Commission services for risk analysis purposes (e.g. the identifica-
tion of high-risk areas for specific audit attention), or as a source
of information for improving or targeting financial checks. Fur-
thermore, OLAF’s computer database IRENE, owing to its con-
figuration and design, did not allow for the production of analyti-
cal reports on irregularities across geographic areas or sectors,
nor was it generally used as a tool for risk analysis. Indeed, for the
period September 1997 to late 2000 it was non-operational. The
non-systematic follow-up and the lack of analysis of irregularities
across Operational Programmes and Member States reduce the
effectiveness of financial management and seriously call
into
question the usefulness of this reporting mechanism.

129. The audit identified delays in the implementation of the
Regulation (paragraph 33) and widespread incorrect application
on the part of national and regional administrations in funda-
mental details of its implementation (paragraph 78, for example),
due, in part, to insufficient guidance from the Commission (para-
graphs 22 to 36). The audit revealed that none of the Member
States visited fully complied with the Regulations. In general the
Member States visited during this audit have indicated to the Court
that they will review procedures and undertake improvements.
Given the diverse nature of the Structural Fund organisations in
Member States, all Member States should review their implemen-
tation of the Regulation, and the Commission urgently needs to
carry out an extensive assessment of the systems used, and give
guidance where necessary.

126.
In general, in the Member States, the information was not
being fully utilised, with no statistical analysis being carried out
to compare the irregularity history of the different sectors. Nor
were the Court and Commission audit findings found to be
included in the irregularity reporting system examined. If the
irregularities reporting exercise is to be worthwhile, prompt
follow-up action is needed to protect EU funding in individual
cases and an analysis must be carried out of audit results from all
relevant sources, so as to draw conclusions for control systems
and risk in general.

CONCLUSIONS AND RECOMMENDATIONS

127. The introduction of Regulation (EC) No 2064/97 is a posi-
tive step in the improvement of the financial control by Member
States, as the checks made and the closure statements given should
help to reduce the level of error in expenditure co-financed by the
Community. The Commission should give increased priority to
guidance and to assessment of the implementation of the Regula-
tion, thereby improving the verification of the legality and regu-
larity of expenditure declared as eligible by Member States, either
at the intermediate stages or at closure (paragraphs 22 to 36). The
Court’s audits have repeatedly shown that a significant amount of
error exists in the final declarations of expenditure after payment
of the final balance and the closure of the form of assistance
(paragraph 1).

130. The audit of the implementation of Regulation (EC)
No 1681/94 has shown that irregularities detected are not being
communicated and progress not reported, resulting in differences
in the volume and type of cases being communicated by Member
States (paragraphs 98 to 106 and 111 to 114). The failure of OLAF
to maintain an adequate database for a substantial period (para-
graphs 91 and 125) and the lack of systematic follow-up by the
Commission’s Structural Fund DGs (paragraphs 92 and 121) have
weakened the usefulness of the Regulation. Given that OLAF’s
role to date with regard to this Regulation has been that of an
intermediary in the communication system, OLAF and the other
Commission services should review the current procedures with
a view to having communications immediately examined and
followed-up by the managing Structural Fund DGs (para-
graph 94).

131. The Court notes the continuing increase in reported irregu-
larities in the year 2000. Nevertheless, the Commission should
carry out a series of comprehensive on-the-spot checks in Mem-
ber States. This would identify shortcomings in the national sys-
tems for the detection, reporting and follow-up of irregular expen-
diture. The Commission should give Member States clear written
instructions on the nature of the required control and communi-
cation systems and on the timing and format of reports on irregu-
larities. It should also make recommendations and requests for
corrective measures, as provided for in the new Structural Funds’
Council Regulation (EC) No 1260/1999 (1) (paragraphs 107 to
108).

(1) Council Regulation (EC) No 1260/1999 laying down general provi-

sions on the Structural Funds (OJ L 161, 26.6.1999).

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132. Both Regulations should provide a means for OLAF, the
other Commission services and Member States to identify and
correct weaknesses in management and control. In addition, the
Commission should formulate proposals to combine the various

aspects of both Regulations to provide effective and cohesive con-
trol and reporting systems on a clear and consistent basis through-
out the EU.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 19 July 2001.

For the Court of Auditors

Jan O. KARLSSON

President

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C 314/45

COMMUNICATIONS IN ACCORDANCE WITH ARTICLE 3 OF REGULATION (EC) No 1681/94

(Period 30.6.1994 to 31.12.2000)

ANNEX 1

Number of cases

Funds

Member States

Austria
Belgium
Denmark
Germany
Greece
Spain
Finland
France
Ireland
Italy
Luxembourg
Netherlands
Portugal
Sweden
United Kingdom

Total

0: no irregularity cases to report.
Source: OLAF.

EAGGF Guidance

ESF

ERDF

FIFG

Total

44
5
10
258
19
91
7
10
16
100
0
0
211
17
7

795

1
14
14
62
198
416
12
407
8
128
0
258
103
42
69

1 732

0
7
14
93
8
88
3
80
128
40
0
3
65
5
134

668

0
0
1
3
1
9
1
1
3
21
0
0
7
2
0

49

45
26
39
416
226
604
23
498
155
289
0
261
386
66
210

3 244

Amount declared by Member State

Funds

Member States

Austria
Belgium
Denmark
Germany
Greece
Spain
Finland
France
Ireland
Italy
Luxembourg
Netherlands
Portugal
Sweden
United Kingdom

EAGGF Guidance

ESF

ERDF

FIFG

Total

(EUR)

1 363 000
273 725
225 213
13 113 144
4 742 229
4 543 382
51 424
122 681
202 160
19 211 671
0
0
10 111 667
68 959
791 778

0
233 969
363 251
23 760 810
9 340 305
18 928 581
157 530
10 978 239
590 549
49 149 226
0
25 691 540
15 141 298
2 256 557
37 034 596

0
745 503
418 823
29 275 297
2 906 187
30 280 447
301 819
4 718 833
14 012 838
29 639 564
0
49 371
23 743 101
202 936
42 329 768

0
0
104 719
137 548
15 258
921 081
37 541
445 000
179 244
3 360 807
0
0
1 733 509
4 954
0

1 363 000
1 253 197
1 112 006
66 286 799
17 003 979
54 673 491
548 314
16 264 753
14 984 791
101 361 268
0
25 740 911
50 729 575
2 533 406
80 156 142

Total

54 821 033

193 626 451

178 624 487

6 939 661

434 011 632

0: no irregularity cases to report.
Source: Commission.

C 314/46

EN

Official Journal of the European Communities

8.11.2001

SUMMARY OF COMPLIANCE WITH REGULATION (EC) No 1681/94 IN MEMBER STATES SUBJECT TO AUDIT VISITS

ANNEX 2

Member State

Definition of irregularity compliant/non-compliant

Reporting and control systems

Central coordination review, audit trail

Germany

Spain

France

Evidence of non-compliance
— only serious irregularities were reported
— conclusion that thousands of irregularities
cases would have to be reported if prop-
erly defined

— reporting obligation restricted to fraud and

suspected fraud cases

— same implementing body responsible for
two Structural Funds, applied two differ-
ent irregularity definitions

— National coordinating authorities did not
have records providing a summary over-
view of all reported cases and their cur-
rent situation, nor did they carry out any
completeness checks or reasonableness
tests by analysing which of the reporting
bodies or regions submitted what volume
of irregularities. The federal authority for
EAGGF, however, collated and registered
irregularity reports received from all Länder

— Absence of important details on the irregu-
larity forms submitted to OLAF, such as
name of beneficiary

— No records were actually maintained by
Interior Ministry of the irregularity com-
munications received

— Poor quality of the records maintained by
the managing authorities (cases in the
period 1997 to 1998 were rejected by
OLAF)

— One national coordinating authority did
not have records providing a summary
overview of all reported cases and their
current situation, nor did they carry out
any completeness checks or reasonable-
ness tests by analysing which of the report-
ing bodies or regions submitted what vol-
ume of irregularities

— Absence of important details on the irregu-
larity forms submitted to OLAF, such as
project name, irregularity amounts or a
unique reference number and the use of
non-standard forms, made any meaning-
ful analysis of the information difficult
— No material non-compliance noted at the

Evidence of non-compliance
— irregularities only reported in cases where

recovery procedure initiated

Evidence of non-compliance
— authorities await final outcome of admin-

istrative and judicial procedures

— irregularities corrected without communi-
cating (total absence of reported irregu-
larities for ERDF, FIFG, EAGGF)

Italy

Evidence of non-compliance
— different interpretations by each adminis-

tration

— recovery order or judicial proceedings is a
prerequisite to reporting an irregularity
— authorities await outcome of administra-

tive and judicial procedures

— irregularities corrected without commu-

nicating

— Regulation not applied to irregularities
committed by the bodies managing the
Funds

Portugal

Evidence of non-compliance
— The Portuguese authorities do not system-
atically communicate updates of the initial
Article 3 communications. In particular
details of recoveries made are not always
conveyed to the Commission

United Kingdom Evidence of non-compliance

— different definition for the three Structural

Funds (ERDF, EAGGF and FIFG

— irregularity restricted to grants paid only
— irregularities corrected without communi-

cating

— No coordination between the three federal
ministries responsible for the implementa-
tion of the Structural Funds and the federal
coordinating ministry

— Many of

the notified irregularity cases
remained unsolved for long periods. For
example, in one case, following a 16 month
delay in taking initial action, a further five
years passed in which multiple requests to
the beneficiary for repayment of the grant
aid went ignored. Although the case was
identified as outstanding in quarterly reports
to the coordinating body, no follow-up
action took place on the part of either this
body or OLAF

— Lack of coordination between central and

regional reporting authorities

— Lack of monitoring at national level on inter-

pretation of irregularity

— Lack of monitoring at national level as to
how each reporting body interpreted the
term ‘irregularity’

— A number of parallel communication chan-
nels were used for reporting irregularities,
which resulted in irregularities not being
communicated to OLAF and intermediate
authorities being bypassed and excluded
from taking the necessary measures to safe-
guard Funds

— No material non-compliance noted at the

preliminary audit stage

preliminary audit stage

— The authority responsible for ERDF in
England was unable to provide a full list-
ing of all irregularity cases in the period
1994 to 1999 due to the fact that it deleted
closed cases from its database once they
were resolved

— Absence of important details on the irregu-
larity forms submitted to OLAF, such as
project name, irregularity amounts or a
unique reference number and the use of
non-standard forms, made any meaning-
ful analysis of the information difficult

— Lack of monitoring at national level (UK) as
to how each reporting body interpreted the
term ‘irregularity’

— The coordination body carries out no com-
pleteness checks or analysis as to which
ministries or regions are submitting irregu-
larities

— No control or monitoring as to how each
government office interprets the Regulation

8.11.2001

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C 314/47

THE COMMISSION’S REPLIES

SUMMARY

Both Regulations are part of a process aiming to improve the financial control by Member States of Structural
Funds expenditure. This process has entailed many changes in the Member States’ administrative arrangements
as well as a need for resources, in order to meet the new requirements. Many of these changes have taken place
gradually over the past three years and some specific issues are becoming more visible as programmes are
being wound down and closed.

The experience gained will contribute to increasing the efficiency of control systems for the 2000 to 2006
programming period.

III. The adoption of Regulation (EC) No 2064/97 at the end of 1997 was the culmination of a lengthy pro-
cedure which involved detailed discussions with Member States in the Structural Funds committees which had
to be consulted on the Commission’s proposal. The implications of the principal obligations laid down had
therefore been the subject of scrutiny and explanation prior even to the adoption of the Regulation.

Since the entry into force of Regulation (EC) No 2064/97, the Commission has made great efforts to give
detailed guidance to Member States on the implementation of its provisions, notably through the Structural
Funds audit manual, first presented in June 1998 and through the systematic treatment of questions relating
to the Regulation in the framework of the bilateral coordination meetings with Member States, at the annual
meeting of EU Financial Controllers in 1998,1999 and 2000 and on other occasions.

As regards assessment of the application of the Regulation, since 1999, a number of audit missions have been
carried out by Structural Funds services covering compliance with certain aspects of the Regulation. In prepa-
ration for the closure of programmes from the 1994 to 1999 period, at the beginning of 2001 a full enquiry
started into the implementation by all Member States of the Regulation. Where problems are identified in the
course of this enquiry, the national authorities are informed so that they are able to take remedial action.

The continued action to improve the quantity and the quality of the information received under Regulation
(EC) No 1681/94, has been successful as is reflected in the increased number of communications received from
Member States. OLAF works closely with other Commission departments and Member States in order to
improve persistent weaknesses. Since December 2000, OLAF has been using the new software that was devel-
oped for communication under Regulation (EC) No 1681/94. The new software has been tested by some Mem-
ber States and is ready for deployment in all Member States.

The Commission’s White Paper on reforming the Commission details a series of measures regarding protect-
ing the Community’s financial interests and aimed at improving the systems of detection and cooperation.
Furthermore, cooperation among Commission departments and between the Commission and Member States,
particularly in the area of the Structural Funds, will need to be better defined to ensure that more effective
action is taken to improve the prevention and detection of irregularities, fraud and corruption. This objective
for the Structural Funds is then translated into Action 97 ‘Improving monitoring of Structural Funds’ of the
action plan of the White Paper. A Commission communication on this subject is in its final stages of adop-
tion.

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As regards the cooperation between OLAF and the Structural Funds DGs, the Commission’s newly adopted
‘Action plan for 2001 to 2003’ for ‘Protecting the Communities financial interests — Fight against fraud’ clearly
recognises the need for clarification of the different departments’ responsibility as regards follow-up of reported
irregularities and fraud cases and recovery of amounts unduly paid. The action plan provides that protocols
will be drawn up between OLAF and the DGs responsible for the Structural Funds with regard to the follow-up
of irregularities notified by the Member States under Regulation (EC) No 1681/94. It is foreseen that these
protocols will be concluded before the end of 2001.

Coordination between OLAF, Member States and the Structural Funds DGs has also been ensured in the annual
control coordination meetings held previously under the responsibility of DG Audit, and from July 2000 under
the responsibility of DG REGIO. These meetings always include a discussion of irregularity cases reported by
the individual Member States.

A systems audit on the application of the control provisions of Regulation (EC) No 2064/97 is currently being
undertaken in all Member States, which includes an assessment of compliance with Article 7 of that Regula-
tion concerning the treatment of irregularities.

Article 2(5)(b) of Commission Decision 1999/352/EC lays down that OLAF is responsible for ensuring the col-
lection and the storage of the Member States’ reports on irregularities. It is important that any database hold-
ing information on irregularities allows for a global view. Decentralised databases kept by the spending depart-
ments could not meet that objective. However, since March 2001 it has again been possible for the operational
departments to have on-line access to the Member States’ communications in the electronic communications
registry (ECR).

The procedures for reporting by the Member States have been harmonised at Commission level for all sectors.
A uniform presentation is imposed to facilitate computer processing. All information notified on the basis of
Regulation (EC) No 1681/94 is entered in OLAF’s database. OLAF will be in a position to derive maximum
benefit from the deployment of the new software across the Member States. The new Regulation (EC)
No 448/2001 links the application of financial correction to the reports made available within the framework
of Regulation (EC) No 1681/94. It is therefore not considered necessary to combine the two Regulations.

INTRODUCTION

1. The closure of a programme on the basis of the final declara-
tion of expenditure by the national authorities is a formal process.
If it is established that the declaration of expenditure is incorrect,
the ineligible amount will be excluded. The legislation applicable
to the 2000 to 2006 programming period, notably Council Regu-
lation (EC) No 1260/1999, and Commission Regulations (EC)
No 438/2001 and (EC) No 448/2001, significantly reinforce the
financial control measures.

Commission has not concentrated its audit activity at the moment
of programme closure. Following the transfer in the Commission
of
July 2000 of control units from the Financial Control
Directorate-General to the Structural Funds Directorates-General,
and the subsequent allocation of additional posts for certain ser-
vices, the auditing capacity in relation to the Structural Funds has
increased.

14. The Commission has given guidance in its last progress
report on the implementation of Regulation (EC) No 2064/97 of
June 2000 on the minimum information which should be included
in the reports.

THE REGULATORY ENVIRONMENT

Regulation (EC) No 2064/97

THE OBJECTIVES OF REGULATION (EC) No 2064/97

9. Checks of co-financed operations are a requirement by virtue
of Article 23 of Council Regulation (EEC) No 4253/88. The Mem-
ber States have been the subject of audits by the Commission dur-
ing the course of the multiannual implementation periods. The

21.
In view of the need to give more guidance the Commission
is reviewing its audit manual and will discuss with the Member
States the detailed methodology.

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THE ROLE OF THE COMMISSION IN THE IMPLEMENTATION
OF REGULATION (EC) No 2064/97

Assessment by the Commission of compliance with the
Regulation

23. The Commission considered that it would be premature to
undertake an audit of the application of the Regulation before the
end of 1999. It was in fact started at the beginning of 2001. How-
ever in 1998, 1999 and in 2000, the annual meetings of the
Financial Controllers discussed the implementation of the Regula-
tion based on Commission and Member States presentations and
the Article 9 reports, and the application of the Regulation was
also treated in the high level group of personal representatives of
the Ministers of Finance.

24. The coordination role of DG REGIO was taken over in July
2000 following the decision of the Commission transferring from
DG Audit to DG REGIO the two units responsible respectively for
the control of regional expenditure and the coordination of con-
trols for the Structural Funds.

The Commission’s audit manual

25 and 26. The Structural Funds audit manual was presented to
Member States at a seminar in London on 2 and 3 June 1998 for
their financial control bodies. It was presented again at a seminar
in Budapest on 15 and 16 October 1998 to a combined audience
of financial controllers of the Member States and candidate coun-
tries. Accordingly the concerned bodies of the Member States
should have been fully aware of the guidance contained in the
manual even if the formal distribution in all the Community lan-
guages did not take place until October 1999. At least one Mem-
ber State undertook the translation itself. Even on the basis of the
formal distribution in all the Community languages in October
1999, Member States should still have been able to adapt their
procedures, for example in relation to risk-analysis methods, with
over two years before closure of the majority of programmes.

27. The Regulation allows the proportional reduction to be
applied in different ways and does not specify whether it should
be pro rata expenditure or pro rata temporis. Accordingly, the
Commission cannot impose one uniform basis for applying the
reduction. The Commission has issued guidance as to its preferred
approach bilaterally to Member States which have raised the issue
of proportional reduction of the 5 % requirement from checks.

30. The primary responsibility for control of the regularity of
expenditure rests with Member States. Through its audits on a
selection of programmes during the life of the programming
period, the Commission seeks to give assurance as to the adequacy
of the national control systems. The provisions of Article 8 of the
Regulation reinforce the obligations of Member States in this
respect through the requirement of a closure statement.

DG EMPL Audit and Control Unit is currently facing an important
lack of human resources but is also endeavouring to fill the cur-
rent vacancies with a view to ensuring that its work programme
for 2001 is not compromised.

31. The audit report of DG FISH states clearly that the financial
control system set up as well as the checks carried out by the Aus-
trian authorities are in line with the requirements of Regulation
(EC) No 2064/97.

All those requirements (content of the systems, attainment of 5 %,
appropriate mix of checks and respect of any risk factors, content
and quality of checks, follow up of findings) were of course
checked through interviews with the responsible officials, and the
supporting documentation (especially audit reports) was exam-
ined.

Since all was in order, it did seem not necessary explicitly to
describe the steps in the audit and the results in detail.

Nevertheless, the recommendation of the Court of Auditors con-
cerning the detailed reporting on the quality of the Article 3
checks will be followed in the future.

32. A systems audit on the application of the control provisions
of Regulation (EC) No 2064/97 is currently being undertaken in
all Member States. It is the view of the Commission that it will be
possible to reach valid conclusions as to the compliance with the
Regulation on the basis of the work done in 2001. Since the
checks by Member States can be carried out up to the date of clo-
sure of the programme, it should still be possible to take some
remedial measures. Where the Commission services identify short-
comings in the performance of checks in the course of their audit
work, they inform the responsible national authorities in order
that remedial action can be taken.

28. The Article 9 reports and the information obtained from the
bilateral coordination meetings are a useful basis for monitoring
the application of the Regulation, and the Commission has taken
measures to complete its assessment by undertaking systems
audits in 2001 in all Member States on the implementation of the
control provisions of the Regulation.

33.
It is a matter of concern if the clear requirements of the
Regulation have not been fulfilled in a Member State. Member
States must ensure that the control provisions of the Regulation
are complied with before closure, and if necessary they must apply

C 314/50

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Official Journal of the European Communities

8.11.2001

for an extension of time for this purpose. In cases where delay is
identified by the Commission in the course of its current audit on
the application of the Regulation, the attention of the national
authorities is drawn to the consequences for the closure.

IMPLEMENTATION BY THE MEMBER STATES

34.
In addition to the positions taken in the protocol meetings
and in replies to written enquiries the Commission has reacted on
issues of interpretation arising from its audit activity.

42 to 87. The Commission only received all the replies of the
Member States to the sector letters of the Court in mid June 2001.
Of the Member States covered by the Court’s audit, the Commis-
sion services have so far visited France, Germany, Spain and Por-
tugal in the framework of their audit activity on the Regulation
in 2001. The Commission will take into account the findings of
the Court and will follow up failings identified when it undertakes
its own audit work.

The main problem with regard to checks found in the Commis-
sion’s audit work so far appears to be that insufficient checks have
been carried out, rather than that the checks done are not in
accordance with the Regulation.

Current arrangements

Coordination within the Commission

35 and 36.
In July 2000 the Commission decided that the
Regional Policy Directorate-General should coordinate the
response to all questions of interpretation of Regulation (EC)
No 2064/97, and consult the legal service where necessary, before
replies are given to national authorities.

49. The agreement concerned the relationship between the fed-
eral and regional authorities and accepted that the checks required
by the Regulation could be carried out under existing administra-
tive structures. Due to the weaknesses in the management and
control systems identified by the Commission, a provision was
included in the agreement which stated that the Commission, the
Bund and the Länder will agree in partnership to resolve any
potential problems in the implementation of the Regulation. Con-
sequently, the agreement did not prejudge the results of verifica-
tions of the actual application of the control provisions of the
Regulation to ensure compliance with the requirements laid down.

36.
In its letter to the Italian authorities, DG FISH wanted to
stress the subsidiary responsibility of the Member State and the
independence of the certifying body.

Coordination within Member States

As regards the person or body that must sign the declaration pro-
vided for in Article 8 of Regulation (EC) No 2064/97, the Italian
authorities have been informed that the information sent by DG
FISH was incorrect.

THE STANDARDS TO BE APPLIED

58. The Court criticises the fact that particularly in States with a
federal structure, there is no central coordination, nor a central
quality control of the implementation of the Regulation. The
Commission shares the Court’s concern that there is no guarantee
as to the consistency of treatment, nor consistency in the applica-
tion of the same minimum standards of checking by each regional
authority. The Commission will continue its efforts to convince
the Member States concerned to build up a central coordination
function, and for example to foresee the representation of regions
during the bilateral coordination meetings.

37 to 41. The Commission agrees that the standards indicated by
the Court based on the Structural Funds audit manual represent
the best practice which it would like to see followed by national
control bodies. Nevertheless, it is necessary to draw a distinction
between the legally binding requirements of the Regulation, and
the guidance given in the audit manual.

59. There will generally be a single closure statement per pro-
gramme or a closure statement for each fund in a multifund pro-
gramme. However, in particular cases (for example Interreg pro-
grammes) it may be necessary for more than one closure statement
to be provided.

For example, it would be difficult to discount checks on the sole
ground that no checklists had been prepared.

Responsibility for carrying out the checks

While the Commission agrees with the importance of ensuring
the independence of the checker, the possibilities for indepen-
dence have to take account of the administrative structures in the
Member State, the resources available having regard to the size of
the programme, and the risks involved.

61. The issue as to which organisations would undertake checks
for the 1994 to 1999 programming period has been a continu-
ous subject of discussion with Member States since the adoption
of the Regulation. It will be taken into account as a risk factor
when closing programmes.

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C 314/51

62. The two private sector implementing bodies were consid-
ered by the Commission as suitable to carry out the Article 3
checks and the Article 8 closure statement. Since these bodies
were also final beneficiaries of some measures, the Court puts
into question their independence. The Commission takes the view
that since the respective internal audit departments are com-
pletely, functionally and hierarchically, independent within the
company structure from the management structures including
the structure responsible for certification of expenditure, the over-
all issue of separation of functions has been resolved in a satisfac-
tory way.

The two bodies are responsible for the for the day-to-day running
of the of the operational programmes while the overall responsi-
bility lies with the two respective public bodies (ministries) and
the Commission made it clear in its written guidance to the Mem-
ber State in question that a clear mandate should be given to the
private sector bodies by the public authorities, that an audit meth-
odology conforming to Structural Funds should be used and that
the conclusions of the private bodies should be validated by the
same public authorities.

Reduction in the 5 % target

75 to 77. The Regulation allows the proportional reduction to be
applied in different ways and does not specify whether it should
be pro rata expenditure or pro rata temporis. Accordingly, the
Commission cannot impose one uniform basis for applying the
reduction. However, the Regulation does not permit pre-1998
expenditure to be excluded from all checking. This is now the
common position of the Commission which is applied for the
audit of the implementation of the provisions of the Regulation
currently being undertaken.

79. While it is correct that Regulation (EC) No 2406/98 refers
only to Article 8 of Regulation (EC) No 2064/97, the provisions
of Article 3 must be applied in relation to the Objective 2 pro-
grammes 1994 to 1996, on the one hand taking into account the
faculty for reducing the percentage of expenditure to be checked,
and on the other to the principle of proportionality. At the date
of entry into force of the Regulation, these programmes were only
12 months from closure, while in many Member States a consid-
erably longer period was required to put in place new structures
capable of carrying out checks in compliance with the provisions
of Article 3. Consequently, the Commission will examine whether
further action is required.

cover all operations likely to be affected as provided by Article 7
of Regulation (EC) No 2064/97. However, the Commission con-
siders that Article 24 of Regulation (EEC) No 4253/88 provides a
legal base for extrapolated or flat-rate financial corrections as
indicated in the internal guidelines on financial corrections of
15 October 1997.

82. The body providing the closure statement has to give its
opinion, on the basis of all the checks carried out and the correc-
tive measures taken under Article 7, as to the validity of the request
for final payment and the legality and regularity of the underly-
ing operations. It is expressly foreseen in Article 8(2) of the Regu-
lation and in the indicative model for the closure statement that
if the frequency of errors found is high, the Article 8 body will
indicate that it is not in a position to express an unqualified opin-
ion even if such errors have been satisfactorily treated.

In such a case, the Commission service will discuss with the
national authorities the measures to be taken. Article 8(2) second
subparagraph provides that the Commission may require further
checks to be carried out and the Commission has the responsibil-
ity to make financial corrections.

83. The body providing the closure statement will have to define
and indicate its approach having regard to generally recognised
audit standards. The Commission services will ensure that there
is a consistent approach by coordinating their position with regard
to different cases arising.

84. The Regulation refers to ‘frequency’. In the Commission’s
opinion, it is the frequency of errors which is the key indicator
with reference to the reliability of the system. In any event the
Article 8 body has to take account of all irregularities and be satis-
fied that a correct treatment has been applied.

Audit trails

The closure statement

85 to 87. The study referred to which covered all Member States
and all Funds was intended as a means to facilitate verification of
compliance with the audit trail requirement. The study itself was
not intended to be as such a verification.

81. The body designated under Article 8 of the Regulation is
required to indicate in the closure statement any irregularities
which have not been satisfactorily treated and the amount of
Community aid affected. The Commission will therefore have a
basis for excluding such amounts from co-financing. If the irregu-
larity is systemic, Member States should have extended checks to

The result of the study is available to the Commission’s auditors
as well as national authorities. The possibility of updating the
study in the context of the application of Article 38(1) of Regula-
tion (EC) No 1260/1999 is under examination.

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Official Journal of the European Communities

8.11.2001

THE OBJECTIVES OF REGULATION (EC) No 1681/94

89. Since no exact definition of the term ‘irregularity’ appears in
the text of Regulation (EC) No 1681/94, this was the subject of a
statement entered in the minutes at the time of their adoption.
The Commission considers that it is vital to ensure that one sin-
gular definition of the term ‘irregularity’ is used by all parties and
has therefore found it should be defined only once, namely in
Regulation (EC) No 2988/95.

92. The Commission’s newly adopted ‘Action Plan for 2001 to
2003’ for ‘Protecting the Communities financial interests — Fight
against fraud’ (1) recognises the need for clarification of the dif-
ferent departments’ responsibility as regards follow-up of reported
irregularities and fraud cases and recovery of amounts unduly
paid. The action plan provides that protocols will be drawn up
between OLAF and the DGs responsible for the Structural Funds
with regard to the follow-up of irregularities notified by the Mem-
ber States under Regulation (EC) No 1681/94. It is foreseen that
these protocols will be concluded before the end of 2001.

On the basis of the new system for on-line communication, it will
be much easier to carry out a detailed risk analysis and take the
appropriate financial management action.

THE ROLE OF OLAF AND THE OTHER COMMISSION
SERVICES IN THE IMPLEMENTATION OF REGULATION (EC)
No 1681/94

The management systems

In December 1993, the Commission reorganised and cen-
90.
tralised its anti-fraud services and has formed a special unit within
UCLAF to deal with Structural Funds, direct expenditure and anti-
corruption.

91. Due to the phasing out of the mainframe in the Computing
Centre in Luxembourg, the IRENE database holding information
on all irregularities reported by the Member States had to be
moved to Brussels. Given the increasing number of cases reported
by the Member States, in parallel with the introduction of the new
relational database, the way in which information received from
the Member States was entered into the database was changed.
However, due to technical and staffing problems, the software
that allows for on-line communication by the Member States in
electronic format was not available at the time (it will be installed
in the Member States during the second half of 2001). It is cor-
rect and the Commission regrets that during a transitional phase
(1998 to 2000), the most relevant information contained in the
Member States’ communications was entered into a separate data-
base that was accessible only within UCLAF/OLAF. However, in
this transitional period it has been possible for the Commission
services to request information from the database. A possibility
which has been used to provide a basis for the discussion of
reported irregularities at the annual control coordination meet-
ings with Member States. Since early 2001, all communications
received from the Member States are stored in the electronic com-
munications registry (ECR) that replaced IRENE. This includes the
cases reported for the years 1998 to 2000 (the data contained in
the separate database have been migrated to ECR). Since March
2001 it has been possible for the other Commission services in
charge of managing or controlling the Funds to have access to the
ECR.

The Commission is prepared to examine and follow up in detail
any irregularities brought to its attention. The shortcomings that
surfaced in recent years in the information system where the
monitoring of Member States’ notifications of irregularities is
concerned should have already been resolved as a result of the
recent introduction of the new database. This will record all noti-
fications from the Member States and the entire Commission will
have access to it.

93. Since December 2000, OLAF has been using the new soft-
ware that was developed for communication under Regulation
(EC) No 1681/94. All irregularities reported by the Member States
for the year 2000 have been introduced into the newly created
electronic communications registry (ECR). The (summary) data
on the irregularities reported for the previous year have migrated
from the Excel spreadsheet to the ECR. The new software has
been tested by some Member States and is ready for access by all
Member States. Submission of irregularities by Member States will
be done using the AFIS system, for which a special module has
been developed and was released to Member States in March 2001.
However, a shortage of resources in OLAF has not allowed its
immediate promotion for use in Member States (training of users,
installation support), which should be completed before end
2001. From March 2001, it has been technically possible to access
ECR from other Commission DGs.

94. As regards the Structural Funds DGs the White Paper on
reform has been translated into Action 97 ‘Improving monitor-
ing of Structural Funds’ of the action plan. A Commission com-
munication on this subject is in its final stages of adoption.The
relevant main preliminary results of Action 97 have been the
adoption of Commission Regulations (EC) No 438/2001 on man-
agement and control procedures and (EC) No 448/2001 on the
application of financial corrections, and the reorganisation and
strengthening of certain Commission control services responsible
for Structural Funds.

As regards the cooperation between OLAF and the Structural
Funds DGs, see the answer to point 92 as regards the protection
of financial interests action plan 2001 to 2003.

(1) COM (2001) 254 final adopted on 15 May 2001, in particular point

1.2.2.

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All irregularities reported by the Member States are entered into
the ECR. It is now technically possible for the Commission ser-
vices in charge of managing or controlling the Funds to access the
ECR.

99 and 100. The problems were reported at different moments
and in different reports as the Court states. Guidance was given
by the Commission, but the Member States took much time to
understand and accept the scope of their responsibility or even,
in some cases, simply did not make any follow-up to OLAF’s
regular demands.

The Commission’s guidance

96. Article 3 of Regulation (EC) No 1681/94 clearly defined what
has to be communicated to the Commission by the Member States.
The definition of ‘irregularity’ is harmonised in Council Regula-
tion (EC) No 2988/95, as specified in the report. As stated in
point 89, it is a policy of the Commission to stick to one defini-
tion of the term ‘irregularity’.

97. OLAF follows up whether the Member States report all
irregularities in conformity with Regulation (EC) No 1681/94. In
particular, it insists (e.g. in the coordination meetings with the
Member States) on receiving detailed and accurate information on
each case as well as information on the follow-up action taken.
This information serves as a basis for deciding on OLAF’s own
investigative or follow-up activities and for suggesting to the man-
aging DG to apply financial sanctions where appropriate.

OLAF has, during the meetings with the Member States, taken
every opportunity (seminars, Cocolaf, bilateral meeting) to improve
the quality and the quantity of the information. This continued
action has been successful as is reflected in the increased number
of communications received from Member States.

The Commission wishes to underline that the management of
Structural Funds is done in partnership with the Member States.
The primary responsibility for reporting irregularities in accor-
dance with Commission guidelines lies with the Member States
(see also the Court of Auditors remarks in point 107). OLAF will
promote a uniform standard for the reporting of irregularities.

98. After the adoption of Regulation (EC) No 1681/94 the Com-
mission’s services (UCLAF) designed a transmission form and an
explanatory guide on how this form should be completed. More-
over, after requests from certain Member States in 1997, UCLAF
prepared a working document (1) in order to facilitate the imple-
mentation and clarify the term ‘irregularity’. This document con-
cerns the types of irregularities in connection with the applica-
tion of Commission Regulations (EC) No 1681/94 and (EC)
No 1831/94 and was the subject of a discussion with Member
States in the framework of the Cocolaf meeting of 12 December
1997. In particular, concerning Italy, UCLAF organised several
bilateral meetings in order to provide guidance and to clarify the
implementation of the abovementioned Regulation

101. Article 3 first paragraph and subpoint 3, clearly state that
Member States are obliged to report any irregularities even before
any payment has been made except where the error or negligence
detected before payment does not result in any administrative or
judicial investigation. The Commission is aware of coordination
problems at national level.

102. Article 3(1) clearly states that any irregularities subjected to
an initial administrative or judicial investigation must be reported.
In addition Article 5 reinforces this interpretation and imposes on
Member States the duty to report ‘with reference back to any pre-
vious report made under Article 3’:

— the amounts which have or are expected to be recovered,

— the judicial and administrative procedures instituted with a

view to recovering sums wrongly paid.

Therefore, it is clear that the issuing of recovery orders or judicial
proceeding is not a prerequisite to reporting an irregularity.

103. Even if this provision is being applied, some elements of
the case (reference number of the programme, the amount
involved) may be communicated without the required authorisa-
tion and without infringing the right of confidentiality covered by
Article 3(3). However, the national provisions must be respected.

104. During the adoption of Regulation (EC, Euratom)
No 2988/95 on the protection of the European Community’s
financial
interests, which defined the term ‘irregularity’, the
Council introduced in the minutes at the time of their adoption a
declaration to the effect that the Member States, acting within the
prerogatives of a public authority, would not be considered ‘eco-
nomic operators’ within the meaning of that Regulation.

(1) SEC(97) 9445.

The interpretation given by the two Member States concerned is
not appropriate since the bodies managing the funds were not
acting within the prerogatives of a public authority.

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105. OLAF organised a bilateral meeting with the three Member
States concerned, in order to facilitate implementation of the
Regulation.

110. The Commission departments are aware of the situation
and for this reason, the new Regulation (EC) No 448/2001 (1)
links the application of financial correction to the reports made
available within the framework of Regulation (EC) No 1681/94.

Indeed, the three Member States have encountered some prob-
lems in the application of the abovementioned Regulation.

The statement made by one managing body in Germany that the
strict application of Regulation (EC) No 1681/94 would result in
thousands of irregularities being reported appears to be exagger-
ated. Even with a relatively high number of final beneficiaries
receiving support from the Social Fund, only a small fraction of
the payments are expected to be irregular. Only irregularities hav-
ing an impact of more than EUR 4 000 need to be reported.

106. Since the implementation of Regulation (EC) No 1681/94
there have been ever increasing levels of cooperation and com-
munication between Member States and the Commission services,
particularly OLAF. It is envisaged that this momentum will be
reinforced.

The monitoring by OLAF and the other Commission services
of Regulation (EC) No 1681/94

107. DG Audit considers the reports received under Article 2 of
the Regulation as one of the elements available to it when assess-
ing Member States control systems. The Commission considers
that in the context of the Reform, in particular improving the
monitoring and control procedures for the Structural Funds, it is
taking steps to ensure that the Commission will be informed about
the procedures in place in the Member States. As regards the
cooperation between OLAF and the operational DGs the Com-
mission’s newly adopted ‘Action plan for 2001 to 2003’ for ‘Pro-
tecting the Communities financial interests — Fight against fraud’
clearly recognises the need for clarification of the different depart-
ments’ responsibility as regards follow-up of reported irregulari-
ties and fraud cases and recovery of amounts unduly paid. The
action plan therefore foresees that protocols will be drawn up
between OLAF and the DGs responsible for the Structural Funds
with regard to the follow-up of irregularities notified by the Mem-
ber States under Regulation (EC) No 1681/94. It is foreseen that
these protocols will be concluded before the end of 2001.

111. The Commission department (OLAF) agrees with the Court
observations and draws Member States’ attention to the lack of
application of Article 5. However, we have to take into account
that most of the delays concerning cases are related to national
judicial proceedings.

112. The quality of information given by Member States still
needs to be improved. During the meeting with Member States,
OLAF has taken every opportunity (seminars, Cocolaf, bilateral
meetings, letters) to improve the quality of information. The Office
sees the creation of new software for on-line communication,
coupled with the appropriate training, as an important step for-
ward.

113. Article 3 of Regulation (EC) No 1681/94 defines very clearly
the information to be communicated. However, the new system
for on-line case communication will facilitate the treatment of the
communication for the appropriate follow-up of each case.

114. Each time the Commission’s services were informed of the
existence of an irregularity case not having been reported, or not
having been correctly reported, they asked the Member States
concerned to fulfil the obligations of Regulation (EC) No 1681/
94.

Follow-up of irregularities by the Commission and OLAF

116.
In fact, in the field of Structural Funds, where part-finance
operations are the common pattern, priority is given to cases
with a major economic impact and to those that were exemplary
in one or other way.

108. DG Audit was in charge of the examination of the Member
States’ system, a task which they have carried out. The systems
audit of the application of Regulation (EC) No 2064/97 currently
being carried out by DG REGIO (taken over from DG Audit)
includes an assessment of compliance with Article 7 of that Regu-
lation concerning the treatment of irregularities. Furthermore, the
annual control coordination meetings have included discussions
of the irregularity reports from Member States.

The follow-up of the cases will be centralised within OLAF to
ensure more effective action.

(1) Commission Regulation (EC) No 448/2001 of 2 March 2001 laying
down detailed rules for the application of Council Regulation (EC)
No 1260/1999 as regards the procedure for making financial correc-
tions to assistance granted under the Structural Funds (OJ L 64,
6.3.2001, p. 13).

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118. Member States that discover an irregularity during the
course of the operational programme can redress the financial
situation at the latest at the time of the final payment (recovery
of the undue payment already made or reduction of a later pay-
ment) and, if there is time, reallocate the funds thus freed to
another project not affected by any irregularity. OLAF has been
restructured with the aim of improving administrative and finan-
cial follow-up .

126. The new Regulation (EC) No 448/2001 links the applica-
tion of financial correction to any lack of reports made available
within the framework of Regulation (EC) No 1681/94 or of any
follow-up by the Member State. As a result, the Member States
will have more incentive to make maximum use of the available
information

120.
It is now technically possible to give access to the ECR to
the other Commission services and so such an ‘agreed and docu-
mented system’ is provided for. This will be strengthened by the
interdepartmental protocols to be drawn up (see answer to point
92).

However, concerning the old period, on 29 September 1994,
within the framework of an interdepartmental meeting, chaired
by UCLAF, the role of each Commission service was agreed con-
cerning the implementation of Regulation (EC) No 1681/94 and
the follow-up of cases reported. Coordination was also ensured in
the annual control coordination meetings with Member States.

121. With regard to 17 requests not being replied to by the geo-
graphical units to the DG REGIO Financial Control Unit, a final
reply had not been forwarded to UCLAF (now OLAF) as a meet-
ing on 6 May 1998 between DG REGIO (Financial Control Unit)
and UCLAF had determined that UCLAF had already received this
information directly from the Member States. No further action
was thus required from DG REGIO.

CONCLUSIONS AND RECOMMENDATIONS

127 to 129. Since the adoption of the Regulation in 1997, the
Commission has given a high priority to ensuring that its provi-
sions were being correctly implemented by Member States. It has
devoted significant resources to the various information activities
— the preparation, presentation and distribution of the Structural
Funds audit manual, the organisation of annual bilateral meetings
with Member States under the financial control protocols, the
organisation of seminars and the provision of replies to queries
raised. Checks on the application of provisions of the Regulation
have increasingly been included as a component of the normal
audit missions of Commission services. The Commission services
are currently undertaking a systems audit of the application of the
control provisions of Regulation (EC) No 2064/97 in order to
verify that the Regulation is being applied correctly, thus ensur-
ing an adequate level of control throughout the Community. Rec-
ommendations are transmitted to Member States on the basis of
these audits where issues of non-compliance are identified. The
Commission has given a considerable volume of guidance and
will address further questions as they arise.

122. Depending on the urgency, the nature and the national
structures, the Commission services contact the competent
national authorities directly or via OLAF.

It is intended to carry out closure audits in 2002 which will be
directed at checking the accuracy of final declarations of expen-
diture and the accompanying closure statements.

123. The Commission services are currently carrying out a pre-
ventive systems audit of the management, payment and control
procedures implemented by the Member States for the new pro-
gramming period. This audit includes verification of the control
procedures in place at managing and paying authorities in respect
of payment claims from final recipients of aid and payment dec-
larations to the Commission.

130. The Commission considers that the interdepartmental pro-
tocols to be drawn up in line with the protection of financial
interest action plan 2001 to 2003 (point 92), along with the
actions taken to improve the monitoring and control of the Struc-
tural Funds for the new programming period 2000 to 2006 (point
107), will ensure an improved proper reporting and follow-up of
irregularity cases.

124. As mentioned in point 116, follow-up will be reinforced by
the newly created structure of OLAF.

125. See reply to points 91 and 94.

131. The Commission has given clear written instructions on the
timing and format of reports on irregularities. The fact that some
Member States have encountered some problems in the applica-
tion of Regulation (EC) No 1681/94, is not related to this issue.
During the adoption of Regulation (EC) No 2064/97, the Com-
mission also adopted internal guidelines concerning the applica-
tion of Article 24 of Regulation (EEC) No 4253/88 (financial cor-
rections).

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Nevertheless, in the framework of the protocols between OLAF
and the DGs responsible for the Structural Funds, foreseen in the
action plan for 2001 to 2003 for ‘Protecting the Communities
financial interests — Fight against fraud’, it will also be clearly set
out which departments are responsible for undertaking the checks
on the national systems for the detection, reporting and follow-up
of irregularities. Furthermore, OLAF is to put in place measures
to minimise the disparity in the differing interpretations of the
term ‘irregularity’ across the Member States.

As stressed in the reply to point 107, the Commission considers
that the actions taken in the context of the Commission reform
for the new programming period clearly set out the guidelines for

the Member States and ensure that the national systems for
reporting irregularities are defined and described.

See also reply to points 127 to 129.

132. The question of coherence has been addressed under Action
97 improved financial monitoring and control of Structural Funds
detailing actions to be taken, and for which a communication is
in preparation. Significant steps have already been taken by the
adoption of Commission Regulations (EC) No 438/2001 and (EC)
No 448/2001, the latter providing a clear link to Regulation (EC)
No 1681/94.