Commission report to the European Parliament and to the Council - Protection of the Communities’ financial interests – Fight against fraud – Annual Report 2007 [SEC(2008) 2300] [SEC(2008) 2301]
Date: 2008-07-22
Institutions: European Commission
Subjects: European Anti-fraud Office, activity report, financial control, fraud, fraud against the EU, statistics

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 22.7.2008 
COM(2008) 475 final 

COMMISSION REPORT TO THE EUROPEAN PARLIAMENT AND TO THE 
COUNCIL 

Protection of the Communities’ financial interests – Fight against fraud – Annual report 
2007 
[SEC(2008) 2300] 
[SEC(2008) 2301] 

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CONTENTS 

Introduction ................................................................................................................................ 4 

1. 

1.1. 

Results of the fight against fraud: statistics on fraud and other irregularities.............. 5 

Statistics on fraud and other irregularities reported by the Member States and 
Commission departments in 2007................................................................................ 5 

1.1.1.  Traditional own resources ............................................................................................ 8 

1.1.2.  Agricultural expenditure (EAGGF and EAFRD) ........................................................ 8 

1.1.3.  Structural measures ...................................................................................................... 9 

1.1.4.  Pre-accession funds.................................................................................................... 10 

1.1.5.  Statistics on expenditure directly managed by the Commission.................................. 5 

1.2. 

Statistics on OLAF's activities ................................................................................... 11 

2. 

Major developments in 2007...................................................................................... 12 

2.1. 

Progress in the customs field ..................................................................................... 12 

2.1.1.  Mutual assistance under the first pillar ...................................................................... 12 

2.1.2.  Conventions under the third pillar and specific national measures............................ 13 

2.2. 

2.3. 

2.4. 

2.5. 

2.6. 

2.7. 

3. 

Efforts to combat the smuggling and counterfeiting of cigarettes ............................. 14 

Irregularities and suspected fraud in the area of “direct expenditure”....................... 15 

The new approach to fraud proofing.......................................................................... 15 

Protection of the euro against counterfeiting ............................................................. 16 

The Hercule II programme......................................................................................... 16 

Other measures taken in 2007 to protect the Community's financial interests .......... 17 

Checks to identify fraud and other irregularities........................................................ 18 

3.1. 

Checks concerning the Structural Funds.................................................................... 19 

3.1.1. 

Improvement of the control framework ..................................................................... 19 

3.1.2.  Management checks by the Member States in the area of the ERDF........................ 20 

3.2. 

3.3. 

3.4. 

4. 

The framework for checks in the agricultural sector ................................................. 21 

Control of traditional own resources.......................................................................... 23 

On-the-spot checks and inspections under Regulation (Euratom, EC) No 2185/96.. 24 

The limitation period applicable to proceedings and decisions concerning 
irregularities ............................................................................................................... 25 

4.1. 

Limitation period for proceedings concerning irregularities ..................................... 25 

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4.2. 

4.3. 

5. 

5.1. 

5.2. 

5.3. 

5.4. 

5.5. 

Limitation period for implementing the decision establishing an administrative 
penalty........................................................................................................................ 26 

Limitation period for implementing the decision establishing an administrative 
measure (recovery)..................................................................................................... 26 

Recovery .................................................................................................................... 26 

Agriculture ................................................................................................................. 27 

Structural Funds ......................................................................................................... 28 

Own resources............................................................................................................ 29 

Direct expenditure...................................................................................................... 29 

Recovery following an OLAF case............................................................................ 29 

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INTRODUCTION 

in  which  responsibility 

Protection  of  the  Communities’  financial  interests  and  the  fight  against  fraud  are 
the 
areas 
Member States. Each year the Commission, in cooperation with the Member States, 
produces a report presenting statistics and the new measures they have taken to meet 
their obligations in this field, in accordance with Article 280 of the EC Treaty. The 
report is sent to the European Parliament and the Council and is published.1 

the  Community  and 

is  shared  between 

The  first  part  of  the  report  gives  a  summary  of  the  statistics  concerning 
irregularities  reported  by  the  Member  States  in  those  areas  where  the  Member 
States implement the budget (agricultural policy, Structural Funds and pre-accession 
funds,  i.e.  approximately  80%  of  the  budget)  and  for  the  collection  of  the 
Community's  own  resources.  It  also  gives  an  estimate  of  the  irregularities  that 
occurred  in  the  field  of  expenditure  managed  directly  by  the  Commission  and  an 
overview of the operational activities of the European Anti-Fraud Office (OLAF). 

The statistics must be read and used with great care: a reported irregularity is not in 
most cases a possible fraud (which is a deliberate act). A reported suspicion of fraud 
is  not  necessarily  a  fraud  confirmed  by  a  court  judgment.  All  the  irregularities 
presented  are  being  dealt  with  and  are  subject  to  different  forms  of  follow-up,  as 
described in parts 3 and 5. 

By their very nature, the figures set out in this report are indicative, preliminary and 
non-final. As a precaution, the amounts indicated often cover the whole of the action 
concerned,  before  the  irregular  part  has  been  established  precisely.  Although  the 
Member  States  are  under  an  obligation  to  report  irregularities,  they  do  so  with 
different  degrees  of  compliance.  It  is  also  the  Member  States  that  identify  in 
principle  from  among  the  reported  irregularities  those  which  they  see  as  being 
suspected fraud. And only at the end of legal proceedings conducted by the national 
authorities, often after a considerable time lag, is it established whether or not fraud 
is  involved  and  what  the  real  financial  impact  of  the  fraud  is.  When  it  comes  to 
finally classifying a case as fraud or not, the Commission depends for its information 
on the Member States (which may or may not be forthcoming with it). 

The second part of the report sets out the main developments of 2007 at the level 
of fraud prevention and repression and in the area of other irregularities.  

The  third  part  concerns  checks  to  detect  fraud  and  other  irregularities,  with  a 
large  section  being  devoted  to  checks  in  the  field  of  the  Structural  Funds  and  in 
particular  management  checks.  The  fourth  part  discusses  the  limitation  period  for 
proceedings  concerning 
the 
implementation  of  a  decision  establishing  an  administrative  measure  or  penalty. 
These two parts are based on Member States' replies to a questionnaire. 

limitation  applicable 

irregularities  and 

the 

to 

The fifth part, for which the same kinds of reservation apply as for part 1, deals with 
recoveries made in 2007 in all budget areas. 

1 

Previous years' reports: http://ec.europa.eu/anti_fraud/reports/anti-fraud_en.html 

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1. 

1.1. 

The report is accompanied by two Commission working papers.2 

RESULTS  OF  THE  FIGHT  AGAINST  FRAUD:  STATISTICS  ON  FRAUD  AND  OTHER 
IRREGULARITIES 

Statistics on fraud and other irregularities reported by the Member States and 
Commission departments in 2007 

In the fields where the Member States implement the budget and for the collection of 
the Community's own resources, Community legislation requires the Member States 
to report suspicions  of fraud and other detected  irregularities. The  information thus 
collected  is  used  for  analysis  and  monitoring  purposes.  It  provides  a  better  insight 
into the impact of irregularities on the Community budget. 

It is important to distinguish between fraud and other irregularities. An irregularity is 
any infringement of a Community provision by an economic operator which has, or 
would have, the effect of prejudicing the Communities’ financial interests.3 Fraud is 
an  irregularity  committed  intentionally  which  constitutes  a  criminal  offence.4  The 
Member  States  identify  among  the  irregularities  reported  those  which  constitute 
suspected fraud. The real financial impact of fraud can be measured only at the end 
of legal proceedings. 

The  Commission  working  paper  Statistical  evaluation  of  irregularities5  presents  an 
in-depth analysis of the information reported by the Member States and for the first 
time  includes  statistics  on  fraud  and  other  irregularities  detected  by  Commission 
departments in the areas of the budget under centralised direct management. 

Conclusions concerning the irregularities reported by the Member States  

– 

– 

The  number  of  irregularities  reported  has  decreased  in  every  area  apart  from 
that of structural measures. 

The  estimated  financial  impact  of  the  irregularities  has  increased  in  every 
sector. As regards own resources and agriculture, the increase relates in part to 
irregularities  occurring  or  discovered  in  previous  years  but  reported  only  in 
2007. In the area of expenditure, the accession of new Member States and the 
recent  increase  in  payments  in  those  countries  goes  some  way  towards 
explaining  the  increase.  In  budget  percentage  terms,  the  financial  impact 
remains  fairly  stable.  A  number  of  irregularities  with  a  financial  impact 
estimated to  be heavy have  been  detected in the context of the  closure of the 
programming period of the pre-accession funds for the 10 new Member States. 

– 

The  estimated  impact  of  the  cases  with  suspected  fraud  remains  stable  for 
expenditure and shows a slight decrease for own resources. It should again be 

2 
3 

4 

5 

SEC(2008) 2300 and SEC(2008) 2301. 
Article 1(2) of Council Regulation (EC, Euratom) No 2988/95 of 18 December 1995 on the protection 
of the European Communities’ financial interests (OJ L 312, 23.12.1995). 
Article  1(1)(a)  of  the  Convention  of  26  July  1995  on  the  protection  of  the  financial  interests  of  the 
European Communities (OJ C 316, 27.11.1995). 
SEC(2008) 2301. 

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– 

– 

– 

made  clear  that  what  is  involved  here  is  reported  suspicions  of  fraud  and  not 
cases confirmed by the courts, and that the real financial impact, after recovery 
and  financial  correction,  can  be  known  only  at  the  end  of  the  legal  and 
administrative proceedings. 

Although  most  irregularities  are  reported  to  the  Commission  within  the  time 
limits provided for, there is room for improvement here: the average time lapse 
for  notifications  in  the  agricultural  sector  is  1.2 years,  while  in  the  area  of 
structural  measures  it  is  0.9  years.  Some  Member States  often  notify  their 
irregularities well after the event. Speedy notification is essential if there is to 
be an effective follow-up. 

The proportion of Member States which notify irregularities electronically, and 
in  particular  with  the  AFIS/ECR6  electronic  modules  proposed  by  the 
Commission for the agricultural and structural fund sectors, is increasing. Use 
of the modules simplifies the processing of data and improves their quality and 
comparability. Some Member States still notify irregularities on paper or make 
use of electronic means other than AFIS/ECR. 

Thanks  to  the  efforts  of  national  authorities  (briefing  and  training  of  staff 
responsible for reporting) and the increased use of ECR modules, the quality of 
notifications  has  steadily  improved  in  all  sectors,  allowing  a  better  follow-up 
and easing the strategic analysis of data. Further efforts have still to be made 
by several Member States, notably in relation to classifying the different types 
of irregularity. 

6 

Anti Fraud Information System/External Communications Registry. 

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Table 1: Number of irregularities and amounts – 2007 

Area 

Number of 
irregularities 
reported 

Total estimated 
financial impact of 
irregularities, including 
suspected fraud (€ 
million) 

Estimated financial impact of suspected 
fraud only (€ million)  

Agriculture 
(EAGGF 
Guarantee 
Section) 

Structural 
Funds and 
Cohesion 
Fund 

Pre-
accession 
funds 

Direct 
expenditure 

Total 
expenditure 

Own 
resources9 

20067 

2007 

2006 

2007 

2006 

2007 

3 249 

1 548 

87 

155 

29.8 (~0.06% of 
allocations) 

44.8 (~0.1% of 
allocations) 

3 216 

3 832 

703 

828 

157.56 (~0.41% of 
allocations) 

141 (~0.31% of 
allocations) 

395 

332 

14 

32 

1.57 (~0.03% of 
allocations) 

5 (~0.38% of 
allocations) 

- 

411 

- 

33 

- 

18.1 (~0.17% of 
allocations8) 

6 860 

6 123 

804 

1 048 

5 705 

5 321 

353 

377 

188.93 (~0.2% of 
the expenditure in 
the four areas) 

208.9 (~0.22% of the 
expenditure in the 
four areas) 

134.39 (~0.94% of 
the total amount of 
own resources) 

106.57 (~0.62% of 
the total amount of 
own resources10) 

7 
8 
9 
10 

The figures have been updated for certain sectors since the 2006 report. 
The calculation covers the entire 2000-06 financial perspectives period. 
Customs duties and agricultural levies. 
This  percentage  is  calculated  on  the  basis  of  an  estimate  of  traditional  own  resources  in  the  2007 
general budget, and not on the basis of accounts. 

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1.1.1.  Traditional own resources 

The  number  of  cases  of  irregularities  reported  was  down  7%  (5 321  cases  in  2007, 
compared  with  5 705  in  2006).  The  estimated  amount  involved  (€377 million)  rose 
by  over  6%.  Suspected  fraud  accounted  for  approximately  23%  of  the  cases  of 
irregularities  reported,  with  an  estimated  financial  impact  of  €106.57 million, 
equivalent  to  approximately  0.62%  of  the  total  amount  of  own  resources  in  2007 
(compared with €134.39 million, or around 0.94%, in 2006). It should again be made 
clear  that  what  is  involved  here  is  reported  suspicions  of  fraud  and  not  cases 
confirmed  by  the  courts,  and  that  the  real  financial  impact  has  not  yet  been 
established. 

The  goods  most  affected  were,  as  in  previous  years,  electronic  and  multimedia 
products,  especially  TVs  and  monitors.  The  most  frequent  irregularities  were 
incorrect  product  classification  and  misdescription  of  origin.  The  second  most 
affected product was tobacco. The Commission continues to pay particular attention 
to  these  sectors.  Vegetables  (in  particular  garlic)  increased  in  importance,  as  did 
footwear, car and motor cycle parts and clothing, whereas meat, articles of iron and 
steel  and  cereals  declined  in  importance.  However,  it  must  be  borne  in  mind  when 
analysing the figures that the date on which a fraud or irregularity is discovered and 
notified to the Commission is not necessarily the date on which it occurred. 

Graph  1:  Number  of  irregularities  reported  and  estimated  financial  impact  - 
traditional own resources – 2003-07 

7000 

6000 

5000 

Number of cases 

4000 

3000 

2000 

1000 

0 

2003 

2004

2005

2006

2007

400 

350 

300 

Irregular amounts 

Number of cases reported

Irregular amounts (€ million)

250 

200 

150 

100 

50

0

1.1.2.  Agricultural expenditure (EAGGF and EAFRD) 

The  number  of  irregularities  reported  was  down  53%  (1 548  cases,  compared  with 
3 294 in 2006). This sharp decrease was foreseeable and is due to the application as 

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to 

the  Commission.  The  amount 

from 1 January 2007 of a new Commission Regulation11 which raised from €4 000 to 
€10 000  the  threshold  above  which  Member   States  are  required  to  report 
irregularities 
involved  (€155 million,  or 
approximately 0.33% of total appropriations for the agricultural sector) was up 44%. 
The increase relates in part to cases with a significant financial impact which arose or 
were discovered in previous years but were reported only in 2007. Suspected fraud 
accounted  for  around  10%  of the cases of irregularities reported, with an estimated 
financial impact of €44.8 million, or 0.1% of total appropriations, in 2007 (compared 
with €29.8 million, or around 0.06% of total a ppropriations, in 2006). It should again 
be made clear that what is involved here is reported suspicions of fraud and not cases 
confirmed  by  the  courts,  and  that  the  real  financial  impact  has  not  yet  been 
established. 

The  highest  amounts  related  to  milk  and  milk  products,  fruit  and  vegetables,  sugar 
and  rural  development.  These  four  sectors  together  account  for  about  77%  of  the 
total amount affected by irregularities. 

Graph  2:  Number  of  irregularities  reported  and  estimated  financial  impact  - 
agricultural expenditure - 2003-07 

4000 

3500 

3000 

Number of cases 

2500 

2000 

1500 

1000 

500 

0 

2003 

2004

2005

2006

2007

Irregular amounts 

Number of cases reported

Irregular amounts (€ million)

180

160

140

120

100

80

60

40

20

0

1.1.3. 

Structural measures 

The  number  of  irregularities  reported  concerning  the  Structural  Funds  and  the 
Cohesion  Fund  was  up  19.2%  (3 832  cases,  compared  with  3 216  in  2006).  Their 

11 

Regulation  (EC)  No  1848/2006  of  14  December  2006  concerning  irregularities  and  the  recovery  of 
sums  wrongly  paid  in  connection  with  the  financing  of  the  common  agricultural  policy  and  the 
organisation of an information system in this field and repealing Council Regulation (EEC) No 595/91 
(OJ L 355, 15.12.2006). 

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estimated  financial  impact  (€828 million,  or  around  1.83%  of  commitment 
appropriations) was up 17.7%. Suspected fraud accounted for approximately 12.4% 
of  the  cases  of  irregularities  reported,  with  a  financial  impact  estimated  at 
€141 million,  or  around  0.31%  of  total  commit ment  appropriations  (compared  with 
€157.56 million,  or  0.41%,  in  2006).  It  should  again  be  made  clear  that  what  is 
involved here is reported suspicions of fraud and not cases confirmed by the courts, 
and that the real financial impact has not yet been established. 

As  in  previous  years,  the  ERDF12  and  the  ESF13  accounted  for  most  irregularities 
(around  83%).  76%  of  irregularities  affected  projects  or  operations  implemented  in 
Objective 1 and 2 regions. 

Graph  3:  Number  of  irregularities  reported  and  estimated  financial  impact  - 
structural measures - 2003-07 

4,500

4,000

3,500

Number of cases

3,000

2,500

2,000

1,500

1,000
500 
0 

2003 

2004

2005

2006

2007

Irregular amounts

Number of cases reported

Irregular amounts (€ million)

900

800

700

600

500

400

300

200

100

0

1.1.4.  Pre-accession funds 

The  number  of  irregularities  reported  concerning  the  PHARE,  SAPARD  and 
ISPA Funds  decreased  by  13%  (332,  compared  with  395  in  2006).  The  presumed 
financial  impact  increased  from  €14  million  in  2006  to  €32  million  in  2007 
(approximately  1.92%  of  the  total  eligible  amount).  Suspected  fraud  accounted  for 
approximately  15.5%  of  the  irregular  amounts  reported  in  2007,  with  a  financial 
impact estimated at €5 million, or around 0.38% of the total annual budget. It should 
again be made clear that what is involved here is reported suspicions of fraud and not 
cases  confirmed  by  the  courts,  and  that  the  real  financial  impact  has  not  yet  been 
established. 

12 
13 

European Regional Development Fund. 
European Social Fund. 

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The most frequently reported type of irregularity for each of the pre-accession funds 
was “non-eligible expenditure”. 

Graph  4:  Number  of  irregularities  reported  and  estimated  financial  impact  -  pre-
accession funds – 2003-07 

Number of cases

450 
400 
350 
300 
250 
200 
150 
100 
50 
0 

2003 

2004

2005

2006

2007

Irregular amounts

Number of cases reported

Irregular amounts (€ million)

35

30

25

20

15

10

5

0

1.1.5. 

Statistics on expenditure directly managed by the Commission 

This  is  a  first  step  towards  integrating  the  areas  of  the  budget  directly  managed  by 
the  Commission  into  this  report.  As  the  system  for  classifying  suspected  cases  of 
irregularity  and  fraud  was  set  up  in  2008  (see  point  2.3),  it  has  been  necessary  to 
limit  the  scope  of  the  analysis  for  2007.  The  data  presented  should  therefore  be 
treated with extreme caution and not as empirical evidence of the level of fraud and 
irregularity. 

The  presumed  number  of  irregularities  in  this  area  came  to  411,  with  a  presumed 
financial  impact  of  €33 million,  €18.1 million  of  which  was  accounted  for  by 
136 reported cases of suspected fraud. The irregular amount notified in the sector of 
external actions was €19.1 million and in th e area of internal policies €13.9 million. 
As  far  as  the  2000-06  financial  framework  is  concerned,  the  estimated  financial 
impact of possible fraud cases amounts to 0.17% of the total value of the contracts 
concluded directly by the Commission. 

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1.2. 

Statistics on OLAF's activities 

Following a preliminary evaluation of the information received, OLAF can decide to 
open one of four types of case: an internal investigation, an external investigation, a 
coordination  case  or  a  criminal  assistance  case.  The  number  of  cases  opened  each 
year is stable (210 in 2007, against 194 in 2006 and 216 in 2005). Since 2004, the 
number of investigations opened by OLAF on its own initiative (internal and external 
investigations) has equalled then exceeded the number of cases opened by OLAF to 
provide  assistance  and  coordination  to  national  authorities  (coordination  cases  and 
criminal  assistance  cases).  Since  2005,  OLAF’s  own-initiative  investigations  have 
accounted for around 75% of all cases opened. 

The number of active cases has fallen (408 at the end of 2007, compared with 431 at 
the  end  of  2006  and  452  at  the  end  of  2005),  owing  in  large  measure  to  efforts  by 
OLAF to deal with the backlog of old cases. 

Table  2:  Cases  ongoing  as  at  31  December  2007  by  sector,  and  their  financial 
impact 

Sector 

Cases pending at 31 
December 2007 

Estimated financial 
impact (€ million)  

Customs/VAT 

Agriculture 

Structural Funds 

Direct expenditure 

Internal investigations 

Total

76 

50 

48 

140 

94 

408 

781.3 

108.8 

172.4 

206.7 

289.6 

1 558.8 

For more details and a comparison with previous years, see the OLAF report.14 

2. 

MAJOR DEVELOPMENTS IN 2007 

2.1. 

Progress in the customs field  

2.1.1.  Mutual assistance under the first pillar 

In  response  to  a  proposal  from  the  Commission,15  the  Council  amended  the 
Regulation  on  the  monitoring  carried  out  at  the  time  of  export  of  agricultural 
products16  so  that  Member  States  applying  risk  analysis  in  conformity  with 
Community  law  can  choose  to  apply  the  minimum  checking  rate  at  national  level 

14 
15 
16 

http://ec.europa.eu/comm/anti_fraud/reports/index_en.html 
COM(2007) 489. 
Council Regulation (EC) No 14/2008 amending Regulation (EEC) No 386/90 (OJ L 8, 11.1.2008). 

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rather than at the level of the customs office of export, in order to achieve a better 
spread of checks among national customs authorities. 

The Regulation of the Parliament and of the Council on controls of cash entering or 
leaving the Community17 came into force in June 2007. This Regulation refers to the 
provisions of Regulation (EC) No 515/9718 on mutual assistance and stipulates that 
information must be sent to the Commission where there are indications that sums of 
cash  are  related  to  the  proceeds  of  fraud  or  any  other  illegal  activity  adversely 
affecting the financial interests of the Community. 

The  Commission  proposal19  for  the  amendment  of  the  Regulation  on  mutual 
assistance  in  customs  and  agricultural  matters20  moved  through  the  legislative 
process  in  2007.  The  European  Parliament  approved  it  at  first  reading  in  February 
2008, with certain amendments. The instrument lays down the legal framework for 
the European Customs Files Identification Database (FIDE) and makes provision for 
the  creation  of  a  European  data  directory.  The  FIDE  should  enable  national  and 
Community  (OLAF)  operational  bodies  to  identify  departments  which  investigated 
the same person(s) or enterprise(s). The aim of the directory is to collect, for analysis 
purposes,  data  commonly  used  in  international  trade.21  The  proposal  is  due  to  be 
finally adopted sometime in 2008. 

Two proposals22 arising from the Lisbon Strategy are aimed at modernising customs 
procedures.  With  the  entry  into  force  of  the  new  Customs  Code,  use  of  electronic 
declarations  will  gradually  become  the  norm  and  under  the  e-customs  project  data 
from  national  customs  IT  systems  will  become  increasingly  compatible  thanks  to  a 
central  platform.  These  reforms  will  reduce costs,  ensure  that  data  can  be  accessed 
more quickly and make it possible to carry out risk assessments at European level. 

2.1.2.  Conventions under the third pillar and specific national measures 

In 2007 Malta signed the Convention on mutual assistance and cooperation between 
customs administrations (“Naples II”).23 The Convention has been ratified and is in 
force  in  all  Member  States  except  Italy,  but  it  is  already  applicable  between 
22 Member States.24 

Malta has ratified the Convention on the use of information technology for customs 
purposes.25 The Convention, which creates a Customs Information System (CIS) and 
came into force at the end of 2005, has now been ratified by all the Member States. 

17 
18 
19 
20 
21 
22 

23 
24 
25 

Regulation (EC) No 1889/2005 (OJ L 309, 25.11.2005). 
OJ L 82, 22.3.1997. 
COM(2006) 866. 
Regulation (EC) No 515/97, referred to above. 
For example, the movement of containers. 
These proposals were adopted in 2008: Regulation (EC) No 450/2008 of the European Parliament and 
of  the  Council  of  23  April  2008  laying  down  the  Community  Customs  Code  (Modernised  Customs 
Code)  (OJ  L  145,  4.6.2008),  and  Decision  No  70/2008/EC  of  the  European  Parliament  and  of  the 
Council of 15 January 2008 on a paperless environment for customs and trade (OJ L 23, 26.1.2008).  
Convention of 18 December 1997 (OJ C 24, 23.1.1998). 
In accordance with the declarations provided for in Article 32(4) of the Convention. 
Convention of 26 July 1995 (OJ C 316, 27.11.1995). 

EN 

13 

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After being ratified by Sweden and Finland, the Protocol amending the Convention 
on the use of information technology for customs purposes26 came into force. Latvia 
acceded to the Protocol in 2007.27 The Protocol creates the FIDE (referred to above). 

Romania  and  Bulgaria  acceded  to  the  above-mentioned  two  Conventions  and 
Protocol when they joined the EU.28 

Belgium has signed bilateral agreements with several third countries. The definition 
of  smuggling  has  been  modified  and  clarified  in  the  Hungarian  Criminal  Code. 
Finland  reported  on  a  major  reorganisation  of  its  customs  authority  which  targets 
better risk management. In Ireland a new computerised system has been put in place 
with the same objective.  

2.2. 

Efforts to combat the smuggling and counterfeiting of cigarettes 

In 2004 the European Community and 10 Member States29 concluded a cooperation 
agreement  with  Philip  Morris  International  (PMI).  During  the  period  between  the 
signing  of  the  agreement  and  the  end  of  2007,  PMI  paid  almost  USD 575  million 
(approximately €364.5 million). Since that time, 16 Member States 30 have signed the 
agreement,  which  provides  for  the  payment  of  approximately  USD 1 250  million 
over a 12-year period for possible use in combating the smuggling and counterfeiting 
of cigarettes.  

In  December  2007  the  European  Commission  and  26  Member  States31  signed  a 
cooperation  agreement  with  Japan  Tobacco  International  (JTI).  The  agreement, 
which  runs  for  15  years,  makes  provision  for  the  payment  of  USD  400  million 
(approximately  €253.6 million),  which  may  be  used  to  combat  the  smuggling  and 
counterfeiting of cigarettes.  

One of the key features of the two agreements is the establishment of a mechanism to 
prevent  the  smuggling  of  PMI  and  JTI  cigarettes  in  the  long  term  on  the  European 
market. In cooperation with OLAF and the Member States, the agreements provide 
for procedures to monitor and trace products in order to determine the point at which 
real  cigarettes  (of  the  PMI  and  JTI  brand)  are  diverted  from  the  legal  supply  chain 
and fall into the hands of smugglers. 

In  2007  the  new  strand  of  the  Hercule  II  programme  on  combating  the  smuggling 
and counterfeiting of cigarettes (see point 2.6) provided for the co-financing by the 
Community budget of scanning equipment used to detect smuggled cigarettes, for a 
total  estimated  amount  of  more  then  €5  million.  The  programme  also  continues  to 
provide funding for training courses, the purchase of specialist technical equipment 
and technical support for the monitoring of illegal activity in this area.  

26 
27 
28 

29 
30 
31 

Protocol of 8 May 2003 (OJ C 139 of 13.6.2003). 
UK and MT ratified the Protocol on 15 January 2008. AT, BE, EL, IT, IE and PT have not ratified it. 
Council  Decision  2008/39/JHA  of  6  December  2007  (OJ  L  9,  12.1.2008)  and  Council 
Decision 2007/764/EC of 8 November 2007 (OJ L 307, 24.11.2007). 
BE, DE, EL, ES, FR, IT, LU, NL, PT and FI. 
UK is not a party to this agreement.  
UK is not a party to this agreement. 

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14 

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The  Commission  (OLAF  and  SANCO)  actively  participated  in  preparations  for  the 
negotiations  on  a  protocol  to  the  WHO  Framework  Convention  on  Tobacco 
Control,32 dealing specifically with the efforts to combat the illicit trade in tobacco 
products.  An  OLAF  official  has  been  elected  Chairman  of  the  Intergovernmental 
Negotiating Body which is negotiating the Protocol. 

2.3. 

Irregularities and suspected fraud in the area of “direct expenditure” 

Until this year data on detected irregularities and suspected fraud and the corrections 
made were collected only in the case of shared management expenditure. To remedy 
this  situation  and  to  improve  reporting  on  irregularities  and  suspected  fraud  within 
the framework of this report, the Commission’s departments are henceforth going to 
enter  in  the  Commission’s  accounting  system,  ABAC,  more  information  about  the 
findings and corrections made.  

In  order  to  provide  an  initial  analysis  already  this  year,  the  Commission’s 
departments  have  identified  cases  of  detected  irregularities  and  suspected  fraud  in 
those areas of the budget that are subject to the centralised direct management mode. 

2.4. 

The new approach to fraud proofing 

In  2001  the  Commission  decided33  to  put  in  place  a  fraud-proofing  mechanism  to 
make  legislation  and  the  management  of  contracts  more  “resistant”  to  fraud.  Since 
2002, new legislative initiatives and new legal bases of Community financing (such 
as standard contracts) which specifically seek to protect the financial interests of the 
Community have been identified jointly with the other departments and services and 
have  been  identified  and  examined  as  to  their  resistance  to  fraud  and  improved 
whenever necessary.34 

In December 2007 the Commission took another step forward by introducing a new 
approach to fraud-proofing,35 the cornerstone of which involves exploiting the results 
of investigations conducted by OLAF. This operational experience will be used on a 
more  structured  and  adequate  basis  and  shared  more  effectively  with  the  other 
Commission departments and with other EU bodies and institutions. The purpose of 
this  new  approach  is  to  identify  shortcomings  not  only  in  legislative  proposals  but 
also in the implementation of EU legislation and in management and control systems. 

The new policy, which will apply initially to direct expenditure, will improve fraud 
prevention  by  using  all  the  information  available  (results  of  investigations,  audits, 
analyses, etc.). 

32 
33 
34 

35 

Document OMS WHA 56.1 of 21 May 2003, entered into force on 27 February 2005. 
Communication from the Commission SEC(2001) 2029 final. 
The results of implementing the fraud-proofing mechanism for the period 2002-07 were the subject of a 
detailed report (SEC(2007) 1676 final). 
COM(2007) 806 final. 

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2.5. 

Protection of the euro against counterfeiting 

A  proposal  for  a  Council  Regulation36  is  aimed  at  improving  protection  against 
counterfeiting by introducing an obligation for the institutions concerned to check the 
authenticity of coins and notes before they are put back into circulation. The proposal 
also  aims  to  authorise  the  transfer  of  counterfeit  money  between  the  national 
authorities and the EU institutions and bodies so that the authenticity of money can 
be checked. 

In a report, the Commission took stock of the criminal penalties and other sanctions 
against  counterfeiting  adopted  by  the  Member  States,37  following  the  framework 
decision adopted by the Council in 2000.38 The measures introduced would generally 
appear to be as effective and efficient as they are required to be under the framework 
decision, given that the requisite charges and penalties have, for the most part, been 
incorporated into the legislation of the Member States. 

At  operational  level,  the  Commission  has  continued,  through  the  measures  taken 
under  the  Pericles  Programme,39  to  promote  cooperation  between  the  national, 
European  and  international  authorities  responsible  for  combating  the  counterfeiting 
of the euro. More than 80% of the 2007 Pericles budget having been implemented, 
twelve projects have been launched, of which seven proposed by the Member States 
and five by the Commission (OLAF). 

Most  of  these  projects,  designed  for  experts  in  the  Member  States  and  candidate 
countries,  were  training-related  (organisation  of  training  sessions  and  activities  to 
familiarise  participants  with  counterfeit  detection  techniques,  etc.).  Pericles  also 
contributed  to  two  large-scale  seminars  bringing  together  representatives  from  the 
Member  States,  Latin  America  and  the  Caribbean  for  the  purpose  of  strengthening 
cooperation with third countries on combating euro counterfeiting.  

In  2007  approximately  211 000  euro  coins  were  withdrawn  from  circulation.  This 
figure  is  some  29%  up  on  2006,  thanks  largely  to  increased  cooperation  with 
Member States’ competent authorities.  

2.6. 

The Hercule II programme  

The  Hercule  programme  was  set  up  to  promote  activities  aimed  at  protecting  the 
Communities’ financial interests.40 In 2007 the European Parliament and the Council 
decided to extend the programme for the period 2007-13.41  

The  budget  for  the  programme  has  been  increased  by  €6  million  a  year  to  include 
within it a new strand to provide financing for training measures and the purchase of 
equipment in order to combat cigarette smuggling. 

36 
37 

38 
39 
40 
41 

Proposal for a Council Regulation amending Regulation (EC) No 1338/2001 (COM(2007) 525 final). 
Third report from the Commission based on Article 11 of the Council Framework Decision of 29 May 
2000 (COM(2007) 524 final). 
Framework Decision 2000/383/JHA (OJ L 339, 21.12.2001). 
Council Decision of 17 December 2001 (OJ L 339, 21.12.2001). 
http://ec.europa.eu/anti_fraud/programmes/index_en.html 
Decision No 878/2007/EC (OJ L 193, 25.7.2007). 

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The 2007 budget of €13.574 million has made it po ssible to co-finance 15 projects in 
the education field, 21 projects in the field of technical assistance and 10 actions in 
the  field  of  legal  research.  Among  these  projects  there  are  several  activities  at  the 
international level, such as conferences to ease theoretical and operational exchanges, 
but  also  individual  support  to  certain  national  authorities,  such  as  the  purchase  of 
equipment  to  facilitate  smuggling  detection  or  technical  assistance  for  a  specific 
investigation.  

2.7. 

Other measures taken in 2007 to protect the Community's financial interests  

As part of the European Transparency Initiative,42 it was proposed that information 
on the beneficiaries of EU funds be systematically published, irrespective of how the 
funds were managed. After the inclusion of this obligation in 2006 in the Financial 
Regulation43  and  in  the  Commission  Regulation  on  the  Structural  Funds  and  the 
Cohesion  Fund44,  two  Regulations45  were  adopted  in  2007  which  place  the 
Member States  under  an  obligation  to  publish  a  list  of  the  beneficiaries  of  the 
agricultural  funds  and  of  the  European  Fisheries  Fund,  together  with  the  amounts 
they receive.  

In response to the Communication on a European strategy against fiscal fraud46 and 
the  request  made  by  the  EU  Council  of  Ministers  in  June  2007,  the  Commission 
adopted  a  Communication  containing  key  elements  to  combat  VAT  fraud,  in 
particular  missing  trader  fraud.47  In  their  contribution  to  this  report,  several 
Member States reported having taken measures at national level to fight VAT fraud 
more effectively.48  

The  Convention  on  the  Protection  of  the  European  Communities’  Financial 
Interests49  and  its  protocols50  were  ratified  in  2007  by  Slovenia.  Romania  and 
Bulgaria  automatically  acceded  to  it  when  they  joined  the  EU.51  The  Commission 
urges the Member States that have not ratified the Convention and/or its protocols to 
do so as soon as possible.52  

42 
43 

44 
45 

46 
47 
48 
49 
50 

51 
52 

COM(2007) 127. 
Council  Regulation  (EC,  Euratom)  No  1605/2002  of  25  June  2002  on  the  Financial  Regulation 
(OJ L 248, 16.9.2002), as amended by Regulation (EC, Euratom) No 1995/2006 of 13 December 2003 
(OJ L 390, 30.12.2006). 
Commission Regulation (EC) No 1828/2006 of 8 December 2006 (OJ L 371, 27.12.2006). 
Council  Regulation  (EC)  No  1437/2007  of  26  November  2007  (OJ  C  181,  3.8.2007);  Commission 
Regulation (EC) No 498/2007 of 26 March 2007 (OJ L 120, 10.5.2007). 
COM(2006) 254.  
COM(2007) 758. 
BE, CZ, HU, MT and RO. 
Referred to above. 
First  protocol  of  27  September  1996  (OJ  C  313,  23.10.1996).  Protocol  of  29  November  1996  on  the 
interpretation, by way of preliminary rulings, by the CJEC of the Convention (OJ C 151, 20.5.1997). 
Second protocol of 19 June 2007 (OJ C 221, 19.7.1997). 
Council Decision 2008/40/JHA of 6 December 2007 (OJ L 9, 12.1.2008). 
To date, CZ, HU, MT and PL have not ratified the Convention or its protocols. EE has not ratified the 
protocol on the interpretation of the Convention by the CJEC. IT has not ratified the second protocol, 
thereby delaying its entry into force. In its second report on the implementation of the Convention and 
its  protocols  (COM(2008)  77  final),  the  Commission  also  notes  shortcomings  in  the  transposal  of  a 
number  of  provisions  in  seven  Member  States.  The  Commission  will  contact  the  Member  States 
individually in order to ensure that transposal is completed.  

EN 

17 

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In  2007  the  Commission  signed  administrative  cooperation  arrangements  with  the 
competent authorities in certain third countries53 to combat fraud, corruption and any 
other illegal activity which harms the financial interests of the Community or of the 
signatory  third  country.  It  is  holding  negotiations  in  order  to  conclude  similar 
agreements  with  other  third  countries  which  receive  financial  assistance  from  the 
EU. 

Slovakia adopted a national strategy to protect Community financial interests which 
provides  for  measures  in  all  relevant  fields  in  the  coming  years.  The  Romanian 
Criminal  Code  and  other  annexed  laws  were  amended  in  order  to  introduce  the 
criminal  liability  of  legal  persons.  In  Italy  the  Committee  for  the  Prevention  of 
Community Fraud has been tasked with coordinating all activities in the fight against 
fraud  and  other  irregularities  in  the  fiscal,  agricultural  and  structural  fund  sectors. 
Sweden  reinforced  its  internal  control  system  applicable  to  national  and  European 
funds. 

New  administrative  penalties  applicable  to  certain  serious  irregularities  were 
introduced  into  Maltese  and  Romanian  law.  Latvia  increased  the  level  of  criminal 
sanctions  applicable  to  infringements  against  Community  Funds  perpetrated  by  an 
organised group. Several Member States reported that they had adopted or modified 
manuals  and  guidelines  aimed  at  harmonising  the  treatment  and  communication  of 
irregularities.54 In Estonia all irregularities for which a definitive solution was found 
are published on the Finance Ministry's website.  

In Belgium and France the criminal law as it applies to corruption was amended in 
order  to  comply  with  European  and  international  conventions  in  this  field.  In 
Slovakia  an  inter-service  group  was  created  in  order  to  update  the  National 
Programme  against  Corruption.  In  Portugal  several  control  authorities  launched  a 
joint action against corruption which led to the publication of a final report in 2007. 
Belgium and Cyprus adopted measures to fight money laundering more effectively. 

With regard to recovery, debts to the European Communities are now dealt with in 
the same way as national tax debts in Romanian law.  

3. 

CHECKS TO IDENTIFY FRAUD AND OTHER IRREGULARITIES 

For  the  collection  of  the  Community’s  own  resources  and  in  those  areas  where  the 
Member  States  implement  the  budget,  responsibility  for  carrying  out  checks  to 
identify  fraud  and  other  irregularities  is  shared  between  the  authorities  of  the 
Member States and the Community authorities. 

This chapter briefly describes the conduct and the results of these checks. 

53 

54 

The  national  authorities  in  Morocco  (this  agreement  also  covers  the  customs  field),  Djibouti,  Congo 
Brazzaville, Senegal, Argentina and the Forum des inspections générales d’État d’Afrique (FIGE). 
DE, IT and SK. 

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18 

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3.1. 

Checks concerning the Structural Funds 

In  order  to  lend  new  impetus  to  improving  the  financial  management  of  the 
EU funds,  in  particular  those  managed  by  the  Member  States,  and  in  the  light  of 
Opinion  No  2/200455  of  the  Court  of  Auditors,  the  Commission  adopted  an  action 
plan  towards  an  integrated  internal  control  framework  in  January  2006.56  The 
strategic  aim  is  to  obtain  a  positive  statement  of  assurance  from  the  Court  of 
Auditors.  

3.1.1. 

Improvement of the control framework 

The new legislation on structural expenditure57 which has been applicable since the 
start  of  the  2007-13  programming  period  simplifies  and  clarifies  certain  aspects  of 
the procedure for granting and paying funds. It improves the provision of information 
to  all  those  involved,  in  particular  to  potential  beneficiaries,  on  the  applicable 
legislation. The systems of internal control are defined more clearly.  

For each operational programme the Member States designate a managing authority, 
responsible  for  the  proper  implementation  of  the  programme  and  for  carrying  out 
management checks.  

The  Member  States  also  designate  a  certifying  authority  (“paying  authority”  in  the 
legislation  which  applied  to  the  period  2000-06),  responsible  for  sending  the 
Commission certified statements of expenditure and requests for payment. It is also 
responsible for following up any irregularities which are discovered (including fraud) 
and providing the Commission with regular reports on this.  

The Member States finally designate an audit authority (“winding-up body” for the 
period 2000-06). The rules governing the control and auditing of transactions by the 
audit  authority  have  been  harmonised  for  the  new  programming  period  and  the 
exchange of information with the Commission has been reinforced. Henceforth, the 
audit authority is required to submit to the Commission an auditing strategy for the 
operational programme for which it is responsible.  

The audit authority sends the Commission an annual report summarising the results 
of  its  audits.  For  the  new  programming  period,  this  report  must  be  drawn  up  in  a 
standard format and must mention the margin of error identified. Another important 
step  forward  is  the  requirement  that  the  audit  authorities  deliver  an  opinion  every 
year as to whether the management and control systems work effectively in order to 

55 
56 

57 

OJ C 107, 30.4.2004. 
COM(2006)  9  and  SEC(2006)  49.  “Integrated  control  framework”  should  be  taken  to  mean 
complementary systems of oversight and scrutiny which are sufficient to provide reasonable assurance 
that the risk of error is properly managed at all transaction levels. In late 2008 the Commission will be 
publishing  a  communication  on  the  costs  and  benefits  of  control  relative  to  the  residual  risk.  On  the 
other  aspects,  see  the  first  report  (COM(2007)  86)  and  the  final  report  (COM(2008)  110)  on  the 
implementation of the action plan.  
Council Regulation (EC) No 1083/2006 of 11 July 2006 laying down general provisions on the ERDF, 
the ESF and the Cohesion Fund; Regulation (EC) No 1080/2006 of the European Parliament and of the 
Council of 5 July 2006 on the ERDF; Commission Regulation (EC) No 1828/2006 of 8 December 2006 
setting  out  rules  for  the  implementation  of  Regulations  (EC)  Nos  1083/2006  and  1080/2006.  Similar 
rules apply in the fisheries sector, Regulation (EC) No 1198/2006 (OJ L 223, 15.8.2006). 

EN 

19 

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provide  reasonable  assurance  that  the  statements  of  expenditure  are  correct  and  the 
underlying transactions are legal and regular.  

all 

and 

The  Member  States  are  now  required  to  produce  annual  summaries  of  all  declared 
expenditure 
the 
2000-06 programming  period.  At  the  end  of  April  2008,  almost  all  Member  States 
had  produced  annual  summaries  that  were  in  compliance  or  largely  in  compliance 
with the minimum conditions laid down. The Commission has taken steps to initiate 
legal proceedings against one Member State. 

audits.58  This 

performed 

applies 

also 

to 

For  its  part,  the  Commission  has  put  in  place  a  procedure  for  assessing  the 
compliance of Member States’ management and control systems in accordance with 
Article 71  of  Regulation  (EC)  No  1083/2006.  It  examines  and  approves  the  audit 
strategies  produced  by  Member  States’  audit  authorities.  On  the  basis  of  its  own 
checks  and  audits  and  the  information  provided  by  the  Member  States,  the 
Commission  evaluates  the  assurance  provided  by  the  systems  in  place  in  the 
Member States.  This  evaluation  is  contained  in  the  annual  activity  report  of  each 
competent Directorate-General and in the summary report by the Commission. This 
evaluation is based on the harmonised indicators of legality and regularity. 

The Commission has the power to interrupt or suspend payments. It can also apply 
financial corrections. 

3.1.2.  Management checks by the Member States in the area of the ERDF 

The  information  contained  in  this  point  is  based  solely  on  data  transmitted  by  the 
Member  States  on the  basis  of  a  questionnaire59  and  concerns  only  the  ERDF.  The 
questionnaire requested  information on  control systems  in place  at  the end of  2007 
and statistics concerning checks conducted in 2005.  

Most irregularities inevitably occur at the level of the final recipients or at the level 
of final beneficiaries. The management authorities carry out “management”, or “first-
level”,  checks  to  discover  these  irregularities  at  an  early  stage  in  the  procedure. 
These checks comprise administrative checks of documents relating to each request 
for reimbursement submitted by the beneficiaries and on-the-spot checks. 

The  vast  majority  of  Member  States  stated  that  during  desk-based  administrative 
checks  all  the  documents  concerning  the  projects  and  the  expenditure  claims  are 
systematically  submitted  to  in-depth  checks.  In  all  Member  States,  in-depth  checks 
cover  the  eligibility  of  expenditure.  In  approximately  half  of  Member  States, 
authorities also systematically check the adequacy of supporting documents; in one 
third of them the authorities check the delivery of products or services co-financed.  

The  checking  rate  for  the  budget  verified  in  2005  by  on-the-spot  checks  was 
considerably  different  from  one  Member  State  to  another  and  even  from  one 
programme to another. When the rate was less than 100%, Member States combined 
representative or random sampling methods with risk analysis to direct the controls.  

58 
59 

Article 53b(3) of the Financial Regulation. 
This information has not been cross-checked with data available in the Commission’s Regional Policy 
DG. All the replies have been published in document SEC(2008) 2300. 

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20 

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In  2005  on-the-spot  checks  were  in  general  carried  out  by  intermediate  bodies.  In 
five Member States the management authorities themselves carried out such checks 
in  a  large  proportion  of  cases.  Only  one  Member  State  significantly  externalised 
on-the-spot checks.  

All  Member  States  stated  that  checks  carried  out  and  irregularities  detected  are 
recorded  for  each  project  in  the  programme  monitoring  database.  However,  they 
were  rarely  in  a  position  to  supply  reliable  statistics  on  the  results  of  the  controls 
carried out in 2005. This indicates that these data are not centralised.  

On  the  basis  of  the  statistics  provided,  the  most  frequent  cases  of  detected 
irregularities  concerned  ineligible  expenditure,  missing  or  incomplete  supporting 
documents  and  non-compliance  with  horizontal  rules  or  the  terms  of  the  grant 
agreement.  The  largest  number  of  irregularities  was  in  general  detected  during 
desk-based administrative checks, but the proportion of irregularities detected during 
on-the-spot checks remains significant (between 20% and 50%).  

Detecting  the  irregularities  at  this  early  stage,  close  to  the  beneficiaries,  facilitates 
taking  simple  and  effective  measures,  such  as  requesting  provision  of  the  missing 
documents, or withdrawing and re-allocating funds to another expenditure or project 
if  the  expenditure  is  non-eligible.  When  an  irregularity  is  detected,  Member  States 
must ensure follow-up, sometimes by means of integrated computer systems. When 
the  irregularity  exceeds  a  certain  threshold,  it  is  communicated  to  the  Commission 
(OLAF).  

Among the more frequent causes of irregularities referred to by Member States are 
unclear  eligibility  rules,  lack  of  guidance,  and  staff  issues.  Some  also  mention 
bankruptcies,  the  risk  of  over-financing,  or  criminal  behaviour.  The  recent 
improvements  to  the  control  framework  seek  to  reduce  the  number  of  beneficiaries 
who submit, either deliberately or otherwise, spurious requests (at least for ineligible 
expenditure) and to limit the risk of error for the competent authorities. 

3.2. 

The framework for checks in the agricultural sector 

Controls by national authorities. Under the common agricultural policy, according to 
the  principle  of  shared  management  the  Member  States  are  responsible  for  paying 
subsidies  to  the  final  beneficiaries  through  paying  agencies60  accredited  by  the 
Member States. They are responsible in particular for checking the admissibility of 
claims and their compliance with EU rules before payment. 

For  each  aid  scheme,  the  relevant  sector  regulations  lay  down  detailed  rules  on 
checks  carried  out  by  the  paying  agencies  or  by  delegated  bodies  operating  under 
their supervision. 

All aid applications are subject to administrative checks before any payment is made. 
On-the-spot checks are carried out on a sample basis, which normally ranges between 
5%  and  10%  but  may  or  must  go  up  to  100%  depending  on  the  risk  in  the  sector 
concerned. 

60 

Regulation (EC) No 1290/2005 (OJ L 209, 11.8.2005). 

EN 

21 

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The  most  important  control  system  is  the  Integrated  Administration  and  Control 
System  (IACS).  It  covers  all  direct  payments  to  farmers.  The  IACS  includes  a 
computerised database, an identification system for farmers, for agricultural parcels 
and for animals in case of payments linked to animals, and a system for identification 
and registration of payment entitlements and aid applications. The European Court of 
Auditors  has  repeatedly  confirmed  that,  where  properly  applied,  the  IACS  is  an 
effective control system to limit the risk of irregular expenditure. 

For  aid  schemes  which  do  not  fall  under  the  IACS,  such  as  storage  of  products  or 
export refunds, complementary checks must be carried out after the payment to the 
beneficiary has been made. 

At the end of each financial year, the certification body draws up a certificate stating 
whether  it  has  gained  reasonable  assurance  that  the  accounts  transmitted  to  the 
Commission are true, complete and accurate and that the internal control procedures 
have operated satisfactorily. 

The Member States must send to the Commission the annual accounts of each paying 
agency,  accompanied  by  a  statement  of  assurance  signed  by  the  paying  agency’s 
director.  The  statement  of  assurance  may  be  qualified  by  reservations,  which  must 
quantify  their  financial  impact.  In  that  case,  it  must  include  a  remedial  action  plan 
and  a  precise  timetable  for  its  implementation.  The  statement  must  provide  for 
effective supervision of the management and control system in place throughout the 
year.  

Starting in 2007,61 Member States with more than one paying agency must also draw 
up at the end of the financial year an annual summary report (synthesis) covering the 
statements of assurance and certificates issued by the certification bodies. Coming on 
top of the statement of assurance and certification, this is designed to strengthen the 
chain of responsibility between the Member States and the Commission. 

Controls  by  the  Commission.  The  Commission  verifies,  firstly,  the  completeness, 
accuracy and veracity of the paying agencies’ accounts (clearance of accounts) and, 
secondly, mostly by means of on-the-spot checks, whether the expenditure has been 
effected  by  Member  States  in  conformity  with  the  Community  rules.  Where  this  is 
not  the  case,  it  excludes  the  expenditure  concerned  from  Community  financing 
(financial  corrections).  This  latter  mechanism,  called  “conformity  clearance”,  has 
over  the  years  proved  to  be  a  very  effective  means  of  protecting  the  Community's 
financial interests. 

Conformity clearance shields the Community budget from expenditure which should 
not  be  charged  to  it.  It  is  not  a  mechanism  by  which  irregular  payments  to  final 
beneficiaries  are  recovered,  something  which,  according  to  the  principle  of  shared 
management,  is  the  sole  responsibility  of  the  Member  States.  Its  purpose  is  to 
examine  the  management  and  control  systems  implemented  by  the  Member  States 
and to recover from national authorities any expenditure which is not in conformity 
with Community law. Financial corrections are determined on the basis of the nature 
and gravity of the infringement and the financial damage caused to the Community. 

61 

Regulation (EC) No 885/2006 (OJ L 171, 23.6.2006). 

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22 

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The amount is calculated on the basis of the loss actually caused or on the basis of an 
extrapolation. Where this is not possible, flat-rates are used which take account of the 
severity of the deficiencies in order to reflect the financial risk for the Community. In 
2007  the  Commission  excluded  approximately  €686.6  million  from  Community 
financing  under  the  EAGGF  and  the  EAFRD62  on  grounds  of  its  non-compliance 
with Community rules. 

Where  individual  irregular  payments  are  or  can  be  identified  as  a  result  of  the 
conformity clearance procedures, Member States are required to follow them up by 
recovery  actions  against  the  final  beneficiaries.  However,  even  where  this  is  not 
possible  because  the  financial  correction  relates  exclusively  to  deficiencies  in  the 
Member  State's  management  and  control  system,  correction  remains  an  important 
means  of  improving  the  functioning  of  that  system  and  thus  of  preventing  or 
detecting  and  recovering  irregular  payments  to  final  beneficiaries.  Conformity 
clearance thereby contributes to the legality and regularity of transactions at the level 
of final beneficiaries. 

3.3. 

Control of traditional own resources 

The Member States are responsible for recovering traditional own resources, keeping 
accounts and conducting the necessary checks and investigations.63 They must keep 
“A accounts”  for  the  registration  of  paid  and/or  guaranteed  customs  debts,  and 
“B accounts”  for  the  registration  of  either  unpaid  or  not  guaranteed  debts  (or  debts 
guaranteed but contested). Many debts appearing in the B accounts are the result of 
fraud  or  detected  irregularities.  Primary  national  inspections  (either  physical 
inspections or inspections of documents) and national post-clearance inspections are 
the detection methods which reveal most frauds and other irregularities (80% in 2006 
and 2007). 

The  Commission  monitors  the  correct  functioning  of  the  traditional  own  resources 
system.  It  ensures  that  traditional  own  resources  are  made  available  on  time  and 
charges  interest  for  failure  to  do  so.  The  control  methods  include  on-the-spot 
inspections  in  the  Member  States,  Joint  Audit  Arrangements,64  follow-up  of 
statements of preliminary findings (ex-sector letters) and annual reports of the Court 
of  Auditors  and  specific  monitoring  in  case  of  signals  from  other  Commission 
departments (e.g. signals from OLAF in individual cases with a significant financial 
impact and which involve mutual assistance).  

In  its  32  inspections  in  2007  DG  Budget  detected  114  anomalies  in  the  area  of 
traditional  own  resources.  As  in  previous  years,  only  a  very  limited  number  of 
anomalies  had  to  be  treated  as  infringements  (no  new  files  were  opened  in  2007; 
currently  31  files  are  pending),  as  they  are  regularly  discussed  bilaterally  with 
Member States and submitted to the Advisory Committee on Own Resources.  

62 

63 
64 

Decisions  2007/243/EC  (OJ  L  106,  24.4.2007),  2007/247/EC  (OJ  L  261,  6.10.2007)  and  2008/68/EC 
(OJ L 18, 23.1.2008). 
Council Regulation (EC, Euratom) No 1150/2000 (OJ L 130, 31.5.2000). 
Joint Audit Arrangements cover AT, DA and NL. These Member States do the audits themselves on a 
subject agreed on with DG Budget, which then monitors the process and the results of the audit during 
an evaluation visit.  

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23 

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As  part  of  the  follow-up  to  anomalies  described  in  the  Court  of  Auditors’  Annual 
Reports  and  Preliminary  Findings,  20  new  letters  containing  observations  were 
received by DG Budget in 2007.  

The  control  findings  do  not  change  the  general  picture  of  timely  and  prompt 
financing of the EU budget by traditional own resources. All in all, Member States 
comply with the Community legislation in this field. 

3.4. 

On-the-spot  checks  and 
No 2185/9665 

inspections  under  Regulation 

(Euratom,  EC) 

Regulation (Euratom, EC) No 2185/96 confers on the Commission responsibility for 
carrying  out  on-the-spot  checks  and  inspections  in  the  Member  States  and,  in 
accordance  with  the  cooperation  agreements  in  force,  in  third  countries.  Since 
1 June 1999, this responsibility has been borne by OLAF.66 

On-the-spot  checks  and  inspections,  conducted  on  the  premises  of  economic 
operators, are actions which are typically carried out during external investigations, 
i.e.  administrative  investigations  conducted  by  OLAF  outside  the  Community 
institutions  and  bodies  in  order  to  combat  all  forms  of  illegal  activity  which 
undermine the financial interests of the European Union. 

The  way  in  which  OLAF  implements  Regulation  2185/96  corresponds  to  the 
guidelines contained in a Vademecum67 which was  adopted in October 1997  and is 
currently being updated. 

In  2007  OLAF  carried  out  74  on-the-spot  checks  within  the  meaning  of 
Regulation 2185/96 (comparable to the 72 checks carried out in 2006), including: 

– 

– 

– 

– 

25 relating to agriculture; 

26 relating to structural policies; 

21 relating to direct expenditure and external aid; and 

2 relating to internal investigations. 

All  the  on-the-spot  checks  took  place  within  the  territory  of  the  European  Union, 
apart from one which was carried out in a third country in the field of external aid.  

Experience  has  shown  that  on-the-spot  checks  constitute,  quantitatively  and 
qualitatively, a very important tool for conducting external investigations. 

However,  the  operational  outcome  is  very  much  dependent  on  the  effectiveness  of 
the  cooperation  forthcoming  from  national  authorities.  In  this  connection,  OLAF  is 
currently  preparing  a  new  report  on  the  implementation  of  Regulation  2185/96 

65 
66 
67 

Council Regulation (Euratom, EC) No 2185/96 (OJ L 292, 15.11.1996). 
Regulation (EC) No 1073/1999 and Regulation (Euratom) No 1074/1999 (OJ L 136, 31.5.1999). 
UCLAF/12/SEC(97)9989. 

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24 

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outlining “good practices” for each stage in the on-the-spot checks. The report should 
be adopted in 2008 together with the new version of the Vademecum. 

4. 

THE  LIMITATION  PERIOD  APPLICABLE  TO  PROCEEDINGS  AND  DECISIONS 
CONCERNING IRREGULARITIES 

The  Member  States  are  responsible  for  bringing  proceedings  against  the  authors  of 
irregularities committed in areas covered by shared management and traditional own 
resources.  They  are  also  responsible  for  the  application  of  any  penalties  and 
administrative measures which are imposed as a result of such proceedings.  

The limitation periods provide legal certainty. However, when the limitation period 
has  passed,  the  irregularity  cannot  be  proceeded  against  or  the  penalty  applied.  In 
order  to  protect  the  Communities’  financial  interests,  Article 3  of  Regulation  (EC, 
Euratom) No 2988/95 provides for minimum limitation periods. The Member States 
can provide for a longer period. 

In order to identify which national laws make provision for longer periods than the 
minimum periods and which periods apply in cases not regulated by Community law, 
the Commission asked Member States to answer a questionnaire. A summary of the 
answers  is  presented  below.  The  analysis  has  been  limited  to  administrative 
procedures.68  

For expenditure managed directly by the Commission, the five-year limitation period 
laid  down  in  Article 73a  of  the  Financial  Regulation,  as  defined  more  closely  in 
Article 85b of the implementing rules,69 is applicable. This area is not dealt with in 
this report. 

4.1. 

Limitation period for proceedings concerning irregularities 

“Normal”  limitation  period.  Article 3(1)  of  Regulation  2988/95  lays  down  a 
limitation period for proceedings70 of four years from the time when the irregularity 
was committed. European sectoral rules may provide for a shorter period, which may 
not  be  less  than  three  years.  These  periods  are  directly  applicable  in  the 
Member States, unless national rules provide for longer periods.  

In all, 21 Member States provide for longer periods than those set by the Community 
rules.  Usually  the  periods  range  between  5  and  10  years  and,  in  exceptional  cases, 
12 or even 20 years. 

Regulation 2988/95 provides that the limitation period is interrupted by any act of the 
competent  authority,  notified  to  the  person  concerned,  relating  to  investigation  or 
legal proceedings concerning the irregularity. Moreover, some national laws consider 

68 

69 
70 

Some Member States expressly indicated that the rules of civil procedure applied also to administrative 
procedures. The civil law rules alone have been taken into account in these cases.  
Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 (OJ L 357, 31.12.2002). 
Proceedings  are  administrative  or  judicial  procedures  initiated  in  order  to  discover  or  establish 
irregularities. 

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25 

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also  as  grounds  for  interruption  the  negotiation  of  a  settlement  procedure  with  a 
potential debtor.  

“Absolute” limitation period. Regulation 2988/95 provides that, without prejudice to 
any  interrupting  acts,  the  limitation  becomes  effective  if,  after  an  “absolute” 
limitation  period  equal  to  twice  the  “normal”  limitation  period  has  passed,  the 
competent  authority  has  not  imposed  a  penalty,  except  where  the  cause  of  the 
interruption is the initiation of criminal proceedings against the person concerned in 
connection with the same facts.  

Nine  Member  States  have  established  longer  “absolute”  periods  in  certain  specific 
sectors. These periods are generally 10 years, except in one case where it is 20 years. 

4.2. 

Limitation period for implementing the decision establishing an administrative 
penalty  

Regulation  2988/95  lays  down  a  limitation  period  of  three  years  for  implementing 
the decision establishing an administrative penalty.71 

Altogether  15  Member  States  reported  that  they  have  laid  down  longer  periods 
ranging from 4 to 10 years following the decision establishing the penalty. A period 
of  5  years  is  the  most  common.  In  general,  the  period  starts  to  run  as  soon  as  the 
decision  is  taken,  but  in  some  Member  States  it  starts  to  run  on  1 January  of  the 
following  year,  after  notification  of  the  decision  or  after  expiry  of  the  payment 
deadline  set  in  the  decision.  The  grounds  for  interruption  are  similar  to  those 
generally applying to proceedings.  

4.3. 

Limitation period for implementing the decision establishing an administrative 
measure (recovery)  

Community  law  does  not  provide  for  a  limitation  period  for  implementing  the 
decision taken in  national  proceedings  establishing  an administrative measure.  This 
period is, however, of particular importance for the success of recovery procedures. 
Whereas one would expect all 27 Member States to provide for such periods in their 
national  laws,  only  21  indicated  national  provisions,  which  nevertheless  differ 
considerably as they allow time limits ranging from 3 to 10, or even 20, years.  

The starting point of the period and the grounds for interruption are similar to those 
applying  to  the  limitation  period  for  implementing  the  decision  establishing  an 
administrative penalty. 

5. 

RECOVERY 

Where the budget is implemented under shared management and for traditional own 
resources,  responsibility  for  recovering  amounts  from  final  beneficiaries  lies  in  the 
first instance with the Member States. At Commission level, the authorising officers 
by  delegation  have  sole  responsibility  for  financial  follow-up.  OLAF  contributes 

71 

This  concerns  the  enforcement  of  penalties  within  the  meaning  of  Article  5  of  the  above-mentioned 
Regulation. 

EN 

26 

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solely  to  financial  follow-up  activities  directly  linked  to  operational  activity. 
However,  where  the  Structural  Funds  are  concerned,  OLAF  contributes,  during  a 
transitional  period  as  part  of  a  phasing  out  of  its  activities  in  this  area,  to  the 
follow-up  of  irregularities  notified  by  the  Member  States  relating  to  the  1994-99 
programming period.72 A new electronic interface will establish a direct link between 
each  authorising  officer's  data  warehouse  and  the  register  of  notifications  of 
irregularities (ECR). 

5.1. 

Agriculture 

Article 32  of  Council  Regulation  (EC)  No  1290/2005  introduced  a  new  clearance 
mechanism  for  unsuccessful  recoveries  of unduly paid amounts.  If  a Member State 
fails to recover an unduly paid amount from the beneficiary within four years of the 
primary  administrative  or  judicial  finding  (or,  in  the  case  of  proceedings  before 
national  courts,  within  eight  years),  50%  of  the  non-recovered  amount  is 
automatically  charged  to  the  budget  of  the  Member  State  concerned  within  the 
framework of the annual financial clearance of the EAGGF and EAFRD accounts. In 
certain cases of negligence on the part of the Member State, the entire amount may 
be charged to it. 

This mechanism was first applied by a Commission decision of April 200773 which 
cleared all pending non-recovered cases dating from before 2003 or 1999 (cases that 
were four or eight years old respectively) by charging €131.7 million to the Member 
States.  A  further  €100 million  was  or  will  be  charged  to  the  Member  States  by 
subsequent Commission decisions clearing the accounts for the 2006 financial year, 
having been disjoined in April 2007. 

For  the  2007  financial  year,  the  Member  States  reported  the  financial  information 
about  recovery  procedures  by  DG  AGRI.  On  the  basis  of  the  final  situation  as 
established  on  11  April  2008,  €154.3 million  wa s  recovered  by  the  Member  States 
during the 2007 financial year, and the outstanding amount still to be recovered at the 
end  of  that  financial  year  was  € 1.438 b illion.  The  financial  consequences  of 
non-recovery for cases dating from 2003 or 1999 were determined according to the 
“50-50”  rule  mentioned  above  by  charging  €137.6 million  to  the  Member  States  in 
the  April  2008  accounts  clearance  decision.74  Moreover,  €165 million  will  be 
charged  to  the  Community  budget  for  cases reported irrecoverable  during  the  2007 
financial year. 

After the first 50% has been charged to the national budget, Member States are still 
required  to  continue  their  national  procedures  for  recovering  the  unduly  paid 
amounts  from  the  beneficiaries  and  to  credit  50%  of  the  amounts  effectively 
recovered afterwards to the Community budget.  

72 

73 
74 

Communication  C(2007)  5709  on  the  clarification  of  activities  in  the  Commission  concerning  the 
financial follow-up of irregularity cases. 
Decision 2007/327/EC (OJ L 122, 11.5.2007). 
Decision 2008/396/EC (OJ L 139, 29.5.2008). 

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27 

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5.2. 

Structural Funds 

In  the  area  of  the  Structural  Funds,  the  recovery  from  the  beneficiaries  of  amounts 
unduly paid owing to irregularity or fraud is also carried out by the Member States. 
The  recovery  of  these  amounts  at  Commission  level  can  be  done  by  reduction  or 
cancellation of the financial contribution. 

The programmes co-financed by the Structural Funds are multiannual and based on 
interim payments. Recovery of amounts unduly paid may take place before or after 
conclusion of the programme. For the 1994-99 programming period, the deadline for 
presentation of the request for final payment to the Commission was 31 March 2003. 
In that period, the Community co-financed around 1 000 programmes worth around 
€159 billion  in  total. 75  The  Commission’s  authorising  and  managing  departments, 
assisted  by  OLAF,  are  responsible  for  administrative  and  financial  follow-up  once 
these programmes have been concluded.  

the  1994-99  programming  period, 

the  Member  States  communicated 
For 
11 647 cases  of  irregularities  (74  in  2007)  corresponding  to  a  financial  impact 
estimated at €1.52 billion 76 for the Community contribution (€68 million for 2007). 

Of  these  cases,  5 686  have  been  closed  definitively  at  Commission  level  and  an 
amount of €630 million was taken into acc ount during final payment or decommitted 
after closure or reimbursed to the Community budget. Member States indicated that 
administrative  and  judicial  procedures  had  been  finalised  at  national  level  in 
1 610 cases,  with  a  financial  impact  of  €101 million  for  the  same  period.  The 
Commission  departments  have  started  reconciliation  procedures  with  a  view  to 
closing these cases. 

Furthermore,  in  2007  the  Commission  adopted  a  Commission  decision  on  the 
financial treatment to be applied to expenditure financed by the EAGGF, Guidance 
Section, for 27 notifications for which the Member States concerned had asked that 
the irrecoverable amounts be charged to the Community budget. 

For the 2000-06 programming period, the Member States have so far communicated 
12 161  cases  of  irregularities  (3 428  in  2007)  with  a  financial  impact  of 
approximately €1.79 billion for the Commun ity contribution (€630 million for 2007). 

The  Member  States  have  informed  the  Commission  that  administrative  and/or 
judicial procedures have been finalised at national level for 4 471 of these cases and 
that some €509 million has been recovered. 

The  total  amount  of  financial  corrections  concerning  the  1994-99  and  2000-06 
programming periods was €2 141 million (€176 million in 2007) and €1 569 million 
(€220 million  in  2007)  respectively.  These  fi nancial  corrections  are  the  result  of 
audits  by  the  Commission  and  the  Court  of  Auditors,  OLAF  investigations  and  the 
closure procedure for programmes from the 1994-99 period. They consist of official 
irregularity, 
financial  correction  decisions 

the  detection  of  an 

following 

75 

76 

These  are  multiannual  programmes.  This  figure  does  not  include  projects  directly  financed  under  the 
Structural Funds and Cohesion Fund. 
Situation according to the data in the ECR database as at 15 April 2008. 

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28 

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decommitments  on  programme  closure  because  the  Member  State  did  not  declare 
sufficient eligible expenditure, and reimbursements of amounts recovered following 
the  completion  of  court  cases  still  pending  when  the  programmes  in  question  were 
closed.77  

Most  of  the  amounts  taken  into  account  following  irregularities  notified  to  the 
Commission  are 
these  financial  corrections.  However,  some 
irregularities are notified, but deductions are made before payment and hence are not 
included in the financial corrections. 

included 

into 

5.3. 

Own resources 

The  Member  States  have  to  recover  established  amounts,  including  those  they 
register  in  the  shared  database  OWNRES.  The  amount  to  be  recovered  following 
irregularities detected in 2007 is approximately €377 million.  

An  established  amount  may  not  be  completely  recovered,  despite  Member  States’ 
efforts.  Amounts  established  may  change  because  of  additional  information  or 
judicial  procedures,  or  else  the  debt  may  be  deemed  irrecoverable  because  of  the 
debtor's financial problems. 

At  present,  the  recovery  rate  for  irregularities  occurring  in  2007  is  40% 
(approximately €150 million). 78 This is a good starting position: the overall recovery 
rate for 2006 recorded in last year’s report was 32% and it has since climbed to 40%. 
Over the last decade the recovery rate has varied between 40% and 55%. 

When non-recovery of an established debt is not attributable to a Member State, the 
Member State may request that the irrecoverable amount be written off. In 2007 the 
Commission  refused  Member  States'  write-off  requests  in  16  cases  totalling  some 
€28 million  because 
the 
Member States. 

that  non-r ecovery  was  attributable 

it  deemed 

to 

Moreover,  certain  Member  States  were  held  financially  responsible  for  a  total  of 
more  then  €20 million  because  they  did  not  establish  customs  debts  where  they 
should have done so. 

5.4. 

Direct expenditure 

In  the  areas  where  funds  are  managed  directly  by  the  institutions,  amounts  unduly 
paid are recovered directly by them, without the intervention of the Member States. 

The  Financial  Regulation  and  its  implementing  rules  set  out  the  different  stages  in 
the recovery procedure:  

– 

estimate  and  establishment  of  the  entitlement  by  the  authorising  officer  (who 
must ensure that the claim is certain, of a fixed amount and due),  

77 

78 

The figures do not include financial corrections that did not result in recovery, such as those made when 
a  Member  State  detected  an  irregularity  or  accepted  the  financial  correction  proposed  by  the 
Commission and the irregular amount was reallocated to another project. 
The figures used have been calculated on the basis of data available as at 9 March 2008. 

EN 

29 

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– 

– 

establishment  of  a  recovery  order  (instruction  from  the  authorising  officer  to 
the accounting officer to proceed with recovery) followed by a debit note to the 
debtor, and  

recovery by the accounting officer who will, if possible, effect the recovery by 
offsetting  if  the  debtor  has  a  claim  on  the  Communities  that  is  certain,  of  a 
fixed amount and due. 

If, after reminders and letters of formal notice have been sent out, the debtor has not 
paid the debt and the accounting officer has not been able to recover the amount due 
by offsetting or calling in a bank guarantee provided by the debtor, the authorising 
officer  determines,  without  delay,  what  method  of  enforced  recovery  should  be 
applied to the debt. 

There are two mutually exclusive ways of obtaining an enforcement order: 

– 

– 

the  adoption  of  a  decision  constituting  an  enforcement  order  within  the 
meaning  of  Article 256  of  the  EC  Treaty  (formalises  the  establishment  of  the 
entitlement in a decision which constitutes an enforcement order); 

the  securing  of  an  order  before  the  national  or  Community  courts.  This  also 
includes a civil action within criminal proceedings in those jurisdictions where 
this is possible. 

In those cases where recovery orders were launched during the course of 2007, full 
or partial recovery has already been announced in 226 reported cases. Commission 
departments have recovered €3.7 million. In 184 cases the full irregular amount has 
been  recovered,  and  in  223  cases  the  amount  to  be  recovered  has  yet  to  be 
determined.  An  amount  of  €10.7 million  stil l  remains  to  be  recovered,  concerning 
204 cases. 

5.5. 

Recovery following an OLAF case 

Where the final report of an OLAF case concludes that certain sums have probably 
been  paid  to  a  beneficiary  against  the  rules  or  that  sums  that  should  have  been 
collected  have  not  been,  the  relevant  authorities  (generally  the  authorities  in  the 
Member States or third countries concerned) must recover the amounts in question. 
OLAF follows the course of these recovery proceedings.  

In 2007, OLAF formally closed the financial follow-up for more than €203 million. 
€197.67 million  was  recovered  in  the  field  of  the  Structural  Funds,  following  the 
closure of 53 cases of which 35 were part of the backlog of “old” cases. This amount 
appeared  in  the  Commission’s  accounts  for  previous  financial  years.  Substantial 
amounts were also recovered in 2007 in connection with cases not yet closed. 

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30 

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