Opinion No 8/2005 on a proposal for a Regulation of the European Parliament and of the Council on mutual administrative assistance for the protection of the financial interests of the Community against fraud and any other illegal activities
Date: 2005-10-27
Institutions: European Court of Auditors
Subjects: VAT, administrative cooperation, fraud against the EU, money laundering, own resources

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I

(Information)

COURT OF AUDITORS

OPINION No 8/2005

on a proposal for a Regulation of the European Parliament
and of the Council on mutual administrative assistance for the protection
of the financial interests of the Community against fraud
and any other illegal activities

(Presented pursuant to Article 280(4) of the EC Treaty)

(2005/C 313/01)

CONTENTS

I.

II.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

General observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

III. Administrative cooperation in the field of traditional own resources and expenditure . .

IV. Administrative cooperation in the field of value added tax . . . . . . . . . . . . . . . . . . . . . . .

V.

Administrative cooperation to combat money laundering . . . . . . . . . . . . . . . . . . . . . . . .

VI. Conclusions and recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-7

8-11

12-19

20-28

29-32

33-39

2

2

3

4

4

5

Paragraph

Page

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THE COURT OF AUDITORS OF THE EUROPEAN COMMUNITIES,

Such ‘particular relevance at Community level’ is defined

5.
by two criteria:

Having regard to the Treaty establishing the European Commu-
nity, and in particular Article 280 thereof,

Having regard to the Council’s request, dated 12 October 2004,
for the Court of Auditors’ opinion on the Commission pro-
posal (1) for a Regulation of the European Parliament and of the
Council on mutual administrative assistance for the protection of
the financial interests of the Community against fraud and any
other illegal activities;

HAS ADOPTED THE FOLLOWING OPINION:

I. INTRODUCTION

1.
Pursuant to Article 280 of the Treaty, the Member States
shall coordinate their action aimed at protecting the financial
interests of the Community against fraud. To this end they shall
organise, together with the Commission, close and regular coop-
eration between the competent authorities. Such administrative
cooperation comprises notification of irregularities, administra-
tive enquiries, on-the-spot checks and inspections, exchanges of
information, withdrawal of wrongly obtained advantages and
administrative penalties.

2.
Based on Article 280 and other provisions of the Treaty,
there is a common set of legal rules to be enacted for all areas.
However, the bulk of Community anti-fraud legislation is com-
prised of the numerous and different detailed provisions govern-
ing the Community policies concerned.

3.
The legislative proposal under examination seeks to
enhance the Commission’s role as a coordinator of Member
States’ activities in fighting fraud and other illegal activities affect-
ing the financial interests of the Community. According to the
explanatory memorandum submitted by the Commission, the
existing legal framework for administrative cooperation is incom-
plete in providing for an active role for the Commission in sup-
porting and coordinating Member States’ activities. This would in
particular be the case with regard to transnational VAT fraud and
money laundering related to EC fraud.

(a) The irregular transaction must have ramifications or links to

operations in more than one Member State

and

(b)

the irregular transaction is estimated to cause damage of
100 000 euro or more to the Community or to cause fiscal
damage in the area of VAT in the Member States concerned
in excess of 500 000 euro.

6.
The proposed regulation would apply to all areas of Com-
munity revenue and expenditure, unless other Community legis-
lation provides for more specific cooperation or for broader
access to information by the Commission.

7.
The Court has examined the Commission proposal in the
light of its relevant audit work, also taking into account provi-
sions on better law-making and guidelines for the quality of draft-
ing of Community legislation laid down jointly by the European
Parliament, Council and Commission (3).

II. GENERAL OBSERVATIONS

The European Parliament, Council and Commission have
8.
agreed (4) to update and condense Community legislation and sig-
nificantly to simplify it. In spite of this objective, the Commission
proposal entails no effort to simplify or amend existing legisla-
tion. A new regulation would be added to and co-exist with hori-
zontal and sectoral anti-fraud legislation currently in force.

4.
A comprehensive system of cooperation, both amongst
the administrative authorities of the Member States and between
those authorities and the Commission (acting through the Euro-
pean Anti-Fraud Office OLAF (2)), is proposed in order to collect
and exchange information on irregular transactions which are of
‘particular relevance at Community level’.

The Commission has committed itself (5) to taking due
9.
account in its legislative proposals of their financial or adminis-
trative implications, for the Union and the Member States in par-
ticular. However, in its proposal for the new regulation no infor-
mation is given concerning the financial and administrative
implications for the Member States.

(1) COM(2004) 509 final of 20 July 2004.
(2) Pursuant to Article 2 of Commission Decision 1999/352/EC, ECSC,
Euratom of 28 April 1999 establishing the European Anti-fraud Office
(OLAF) (OJ L 136, 31.5.1999, p. 20), the Office shall be responsible
in providing the Commission’s support in cooperating with the Mem-
ber States in the area of the fight against fraud and for any other
operational activity of the Commission in relation to the fight against
fraud.

(3) Interinstitutional Agreement of 16 December 2003 on better law-
making (OJ C 321, 31.12.2003, p. 1) and Interinstitutional Agreement
of 22 December 1998 on common guidelines for the quality of draft-
ing of Community legislation (OJ C 73, 17.3.1999, p. 1).

(4) See Article 35 of the Interinstitutional Agreement of 16 December

2003.

(5) See Article 27 of the Interinstitutional Agreement of 16 December

2003.

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The proposal

introduces a broader definition of the
10.
notion of ’irregularities affecting the Community’s financial inter-
ests’. Its scope is extended to include

(a)

infringements of legislation relating to value added tax (VAT)

In Special report No 3/2004 on recovery of irregular pay-
14.
ments under the Common Agricultural Policy (6), the Court had
concluded that the relevant Commission data bank concerning
irregularities reported by Member States (7) cannot be considered
reliable, complete and accurate.

and

(b) money laundering.

These areas are not covered by the general definition of irregu-
larities as laid down in Council Regulation (EC, Euratom)
No 2988/95 of 18 December 1995 on the protection of the
European Communities’ financial interests (1). Such a juxtaposi-
tion of differing definitions of the notion of
‘irregularities’
throughout anti-fraud legislation entails a risk of confusion and
legal uncertainty.

Uncertainty is further increased due to the fact that exist-
11.
ing Community legislation does not contain any definition of the
notion ‘financial interests of the Community’ (2). The new regu-
lation proposed by the Commission does not provide such a defi-
nition either.

III. ADMINISTRATIVE COOPERATION IN THE FIELD OF TRA-

DITIONAL OWN RESOURCES AND EXPENDITURE

12.
The recent audit by the Court concerning the manage-
ment of the European Anti-Fraud Office (3) has confirmed that
there is a need for more effective cooperation with the Member
States, both in areas of direct management and in areas where the
management of Community funds is shared with Member States.
Problems in existing cooperation are to a large extent linked to
weaknesses in operational efficiency, at both Member State
and Commission level.

13.
In the special case of the mutual assistance procedure in
the customs and agriculture sectors (4), it was found that there is
no systematic follow-up, and that OLAF has established no rules
for the continuous and consistent monitoring of progress within
the framework of the procedures for requesting mutual assistance
form the Member States, and that the results of such requests are
not clearly recorded (5).

(1) OJ L 312, 23.12.1995, p. 1.
(2) Some guidelines can be found in a judgment of the Court of Justice.
In Case C-11/00 the Court of Justice stated ‘that the expression
“financial interests of the Community” in Article 280 EC is not
restricted exclusively to the budget of the European Community in
the strict sense’. (2003, ECR I-7147, paragraph 95).

(3) See Special report No 1/2005, Summary, paragraph VI (OJ C 202,

18.8.2005, p. 1).

(4) Pursuant to Council Regulation (EC) No 515/97 of 13 March 1997
on mutual assistance between the administrative authorities of the
Member States and cooperation between the latter and the Commis-
sion to ensure the correct application of the law on customs and agri-
cultural matters (OJ L 82, 22.3.1997, p. 1).
(5) See paragraph 32 of Special Report No 1/2005.

15.
In the case of structural policies, when auditing the appli-
cation of the relevant regulation (8) in 2001, the Court found (9)
weaknesses at every level, with the consequence that reported
data on irregularities were incomplete, unreliable, misleading and
out-of-date.

16.
These weaknesses were due, inter alia, to difficulties in
defining reportable irregularities in a uniform manner through-
out Member States. The Court also found that information was
often made available only after long delays and was not properly
followed up by the Commission.

17.
The new procedures introduced through the proposal
would represent an additional workload, both for the administra-
tive authorities in the Member States and for the Commission, as
existing reporting obligations pursuant to other Community leg-
islation are neither abolished nor streamlined. In practice,
it
would therefore be difficult to concentrate efforts and resources
and prevent the Commission services from being overloaded with
information and requests relating to cases of minor relevance,
which is the declared intention (10) of the Commission.

18.
Furthermore, the coexistence of the newly proposed rules
with existing sector-specific regulations would increase the risk of
difficulties of interpretation and harmonised application through-
out the Member States. Inconsistencies with regard to criteria,
deadlines and thresholds for reporting arise (11).

(6) See paragraphs 16 to 32 of Special Report No 3/2004 (OJ C 269,

4.11.2004, p. 1).

(7) Pursuant to Council Regulation (ECC) 595/91 of 4 March 1991 con-
cerning irregularities and the recovery of sums wrongly paid in con-
nection with the financing of the common agricultural policy and the
organisation of an information system in this field and repealing
Regulation (EEC) No 283/72 (OJ L 67, 14.3.1991, p. 11).

(8) Commission Regulation (EC) No 1681/94 of 11 July 1994 concern-
ing irregularities and the recovery of sums wrongly paid in connec-
tion with the financing of the structural policies and the organiza-
tion of an information system in this field. (OJ L 178, 12.7.1994,
p. 43).

(9) See Special Report No 10/2001 concerning the financial control of
the Structural Funds, paragraphs 107 to 126 (OJ C 314, 8.11.2001,
p. 26).

(10) See page 6 of the Explanatory Memorandum accompanying the

Commission proposal.

(11) For example, pursuant to the proposed regulation, Member States
must supply without prior request any relevant information in
respect of irregularities which might have ramifications in other
Member States and where the potential damage to the Community’s
financial interests is 100 000 euro or more. No deadlines for report-
ing are set. It could therefore be assumed that the information has to
be provided as soon as the financial impact of a case can be assessed.
Under Commission Regulation (EC) No 1681/94, each Member State
is however already, regardless of the amounts involved, under an
obligation to report forthwith any irregularities, where it is feared
that they may very quickly have repercussions outside its territory.

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A further complication is created because the scope of
19.
the newly proposed reporting obligations would also include
cases where irregularities have not yet taken place but where
information is available that irregularities might be planned (1). It
is doubtful whether such a requirement is realistic.

However, the proposal changes the role to be played by
24.
the Commission (including OLAF). Under Regulation (EC)
No 1798/2003, the main task of the Commission is to examine
and evaluate together with the Member States how the arrange-
ments for administrative cooperation are working and how their
effectiveness could be improved.

IV. ADMINISTRATIVE COOPERATION IN THE FIELD OF VALUE

ADDED TAX

20.
In its Annual Report for 2001 (2), the Court drew atten-
tion to the increasing problems of carousel fraud and to the need
to address this problem through enhanced administrative coop-
eration in order to protect VAT revenue (3).

On 1 January 2004, Council Regulation (EC)
21.
No 1798/2003 (4) on administrative cooperation in the field of
value added tax came into force. Its purpose is to strengthen
cooperation between Member State tax authorities in combating
VAT fraud. Regulation (EC) No 1798/2003 eventually set up a
single legal framework. Before it came into force, the coexistence
of two separate legal instruments for cooperation on VAT had
hampered effective cooperation between tax administrations.

25.
According to the new proposal, OLAF would be system-
atically involved in coordinating individual anti-fraud operations
and might even play a central role in such operations through
centralizing and analysing relevant information and through the
possibility of requesting Member States to arrange for a special
watch or to carry out administrative enquiries.

26.
The Court draws attention to its recommendation in Spe-
cial Report No 1/2005 (7), that OLAF’s activities should be
focused on its investigative function. A role as a coordinator of
Member States’ operations in fighting cross-border VAT fraud,
which is attributed to OLAF under the proposed regulation, might
diminish OLAF’s capacity to carry out its primary function
effectively.

27.
Furthermore, practical difficulties would arise as the new
proposal, unlike Regulation (EC) No 1798/2003, does not pro-
vide for direct contacts and cooperation with tax inspectors or
staff of anti-fraud units. It is proposed that information shall be
channelled through the respective central liaison offices and other
tax investigation authorities only. This entails a strong risk that
rapidity and flexibility of coordination activities would be
hampered.

22.
According to the Commission, those Member States
which have already implemented specific detection and control
measures to tackle carousel fraud have been successful (5).

Comments made in paragraphs 17 to 19 of this opinion

28.
also apply to administrative cooperation in the field of VAT.

23.
The Court notes that the provisions of the newly pro-
posed regulation are to a large extent similar or even identical to
those already contained in Regulation (EC) No 1798/2003, nota-
bly with regard to exchanges of information and rules for admin-
istrative enquiries (6).

(1) See Article 5(3) of the proposal.
(2) See paragraphs 1.45 to 1.55 of the Annual Report for 2001 (OJ C 295,

28.11.2002, p. 1).

(3) In the case of VAT, fraud impacts indirectly on the Communities’ own
resources. The Communities’ ability to meet its expenditure obliga-
tions does not depend on the degree of efficiency in collecting VAT
and preventing fraud. The own resource based on gross national
income (GNI) is meant to cover the balance of total expenditure not
covered by other resources. The consequences of VAT fraud are thus
borne not only by the Member State in which that fraud occurred but
by all the Member States through an increased call for GNI own
resources.

(4) Council Regulation (EC) No 1798/2003 of 7 October 2003 on admin-
istrative cooperation in the field of value added tax and repealing
Regulation (EEC) No 218/92 (OJ L 264, 15.10.2003, p. 1).

(5) See Commission report on the use of administrative cooperation
arrangements in the fight against VAT fraud, COM(2004) 260 final of
16.4.2004, p. 18.

(6) In its Explanatory Memorandum, the Commission explicitly mentions
that it used the standards developed in Regulation (EC) No 1798/2003.

V. ADMINISTRATIVE COOPERATION TO COMBAT MONEY

LAUNDERING

29.
Pursuant to Council Decision 2000/642/JHA (8) Member
States have set up ‘financial intelligence units’ (FIU). These FIUs
have the task of collecting and analysing information with the
aim of establishing links between suspicious financial transactions
and underlying criminal activity in order to combat money
laundering.

The Commission proposes

30.
that FIUs be included
amongst the competent authorities which are required to coop-
erate under the proposed regulation on mutual administrative
assistance for the protection of the Community’s financial inter-
ests. The Commission would thus be allowed to request their
assistance and ask them for the transmission of all information of
relevance for the detection and prevention of irregularities.

(7) See paragraphs XI and 94.
(8) Council Decision 2000/642/JHA of 17 October 2000 concerning
arrangements for cooperation between financial intelligence units for
the Member States in respect of exchanging information (OJ L 271,
24.10.2000, p. 4).

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The Court draws attention to the fact that the current
31.
wording of Council Decision 2000/642/JHA does not provide for
any role for the Commission in relation to the FIUs. Some of its
provisions (1) could even be interpreted as excluding the Commis-
sion’s services from any access to information collected and com-
municated through FIUs. Pursuant to Article 19 of the guidelines
for the quality of drafting of Community legislation (2), it would
therefore be advisable to clarify the situation.

Comments made in paragraphs 17 and 19 of this opin-
32.
ion are also relevant for administrative cooperation in combating
money laundering.

VI. CONCLUSIONS AND RECOMMENDATIONS

33.
The Court agrees with the analysis of the Commission
that there is a need for more effective cooperation amongst Mem-
ber States and between Member States and the Commission to
protect the financial interests of the Community against fraud and
other illegal activities.

The existing legal

framework for combating fraud
34.
and irregularities is complicated and, as the Court’s audits have
shown, difficult to implement. The proposed new regulation adds
further complexity, notably in terms of definitions and criteria for
reporting.

Furthermore, the proposal to add another legal instru-
35.
ment conflicts with the objective agreed between the European
to update
the Council and the Commission (3)
Parliament,
and condense Community legislation and significantly to
simplify it.

36.
The Court suggests that the Commission should make an
effort to propose a simplification and consolidation of Commu-
nity anti-fraud legislation with a view to avoiding duplications
and overlapping or contradictory provisions. Existing weaknesses
in cooperation between the Commission and the Member States
could be addressed in the framework of such an overhaul.

37.
The Court recalls its recommendations on focusing
OLAF’s activities on its investigative function. Widening the scope
of OLAF’s role in coordinating Member States’ anti-fraud opera-
tions might conflict with this objective.

38.
The notion of the ‘financial interests of the Community’,
which is central to all anti-fraud legislation, should be clearly
defined. A single definition of ‘irregularities’ should be used
throughout anti-fraud legislation.

39.
As far as cooperation in the field of value added tax is
concerned, the Court reiterates its recommendation (4) that the
Commission should concentrate on its responsibility for identi-
fying malfunctions in the national systems in the field of the fight
against VAT fraud and putting forward adequate remedies to the
Member States concerned.

This opinion was adopted by the Court of Auditors in Luxembourg at its meeting of 27 October
2005.

For the Court of Auditors
Hubert WEBER
President

(1) See for example Article 5(4) which says that the FIUs shall undertake
all necessary measures, including security measures, to ensure that
information submitted under this Decision is not accessible by any
other authorities, agencies or departments.

(2) Interinstitutional Agreement of 22 December 1998 on common
guidelines for the quality of drafting of Community legislation.

(3) Interinstitutional Agreement of 16 December 2003 on better law-

making.

(4) See paragraphs 4.1. to 4.8. of Special report No 9/98 concerning the
protection of the financial interests of the European Union in the field
of VAT on intra-Community trade together with the Commission’s
replies (OJ C 356, 20.11.1998, p. 1).