Cause and Effect in European Politics and Law

Brussels Wages War Against Fraud with EU Funds

Ralitsa Kovacheva, July 13, 2012

Against the backdrop of the need for budget cuts at national level and calls to freeze the EU budget for the next seven years, the European Commission recalled another important dimension of a responsible attitude toward public funds: the fight against frauds. On 11 July the Commission proposed a Directive on the fight against fraud to the Union's financial interests by means of criminal law. The mere fact that there is a proposal for a directive can be described as revolutionary, given the sensitivity of member states regarding any involvement in their justice and home affairs.

But especially in times of a crisis, "EU money must not be pocketed by criminals," EU Justice Commissioner Viviane Reding said while presenting the draft directive. She recalled that in 2010 alone Member States reported cases of fraud totalling 600 million euros (the EU budget for 2010 was 141 billion euros). And given that more than 90% of the EU budget is managed by national authorities, common definitions of fraud with European funds are needed, so it can be considered a crime everywhere in the EU, as well as common minimum levels of penalties, the Commissioner explained.

It is a crime to use or present false, inaccurate or incomplete statements or documents; failure to disclose information in violation of a specific obligation; the misapplication of liabilities or expenditure for purposes other than those for which they were granted.

It is a crime when a public official, directly or through an intermediary, requests or receives advantages of any kind whatsoever, for himself or for a third party, or accepts a promise of such an advantage, to act or refrain from acting in accordance with his duty or in the exercise of his functions in a way which damages or is likely to damage the Union's financial interests (passive corruption). The same but with the opposite sign (to promise or give advantages) is defined as “active corruption” and is also a criminal offence.

The misappropriation is also a crime, which the directive defines as “intentional act by a public official to commit or disburse funds, or appropriate or use assets, contrary to the purpose for which they were intended and with the intent to damage the Union's financial interests”. Incitement, aiding and abetting, as well as attempt to commit the criminal offences described above is also considered a crime.

"Conviction rates for fraud range from 80% to as low as 14%, depending on the Member State in question. And penalties for the same crime range from many years in jail to a mere fine, depending where you are in the EU," EU Taxation and Fraud Commissioner Algirdas Semeta said in turn. Therefore, the draft directive sets minimum penalties of six months in jail (and up to five years) for damage beyond 100 000 euro in fraud cases and 30 000 euro for money laundering or corruption. In case the offence was committed within a criminal organisation, the maximum penalty should be at least 10 years of imprisonment.

The draft directive defines a minimum time limitation for criminal proceedings of at least five years from the time when the offence was committed, because the current periods are too short. Also, Member States undertake to ensure freezing and confiscation of proceeds and instrumentalities from the offences.

The directive requires Member States to ensure that legal persons will be held liable and could be sanctioned by criminal or non-criminal fines or other sanctions, such as: exclusion from entitlement to public benefits or aid; temporary or permanent disqualification from the practise of commercial activities; placing under judicial supervision; judicial winding-up; temporary or permanent closure of establishments which have been used to commit the offence.

Thanks to the harmonised EU framework for prosecuting and punishing crimes involving the EU budget, criminals will no longer be able to exploit today's large differences between national legal systems, Commissioner Reding said.

The directive is aimed at one of the most serious problems in the fight against fraud - differences in national laws and practises. In its Communication on the subject issued last year, the Commission notes that there are large differences across countries in the definition of embezzlement or abuse of power and the related penalties. As a result, in some countries certain cases of highly inappropriate conduct are not covered by criminal law provisions at all. Due to differences in anti-corruption rules, there are “cases of impunity” in some Member States while in other countries the same behaviour would result in a penal sanction and removal from public office.

A common problem is also the definition of conflict of interest - in some Member States the beneficiary of a public procurement can participate in the design of the public tender without this being considered a criminal offence, the EC notes. Therefore, the directive sets out clear definitions of what should be considered a crime and how to be punished. This will also facilitate cooperation between national authorities on cross-border fraud cases.

However, the same Communication points to another problem that is not addressed by the current draft directive. National authorities do not investigate the reports of OLAF, as "sometimes it is difficult to discern the specific motive for such lack of action," the Commission says. In some cases, national authorities point as a reason not to open an investigation the lack of public interest or low priority. “Since 2000, 93 out of a total of 647 OLAF cases were dismissed by national prosecution services for no specific reason. 178 cases were dismissed due to discretionary reasons.” Another problem is that OLAF evidence is not used in the national criminal courts, and sometimes they are not considered sufficient even to open an investigation. Generally, it takes a period of five years for a judicial decision to be taken after OLAF has opened a file, the European Commission notes.

The Bulgarian public is well aware of the problems in prosecuting and punishing fraud with EU funds thanks to the regular reports of the Commission under the Cooperation and Verification Mechanism. Fraud with EU funds is not only one of the main topics in the reports but it was the reason for the unprecedented freezing of EU funds for Bulgaria in 2008. Not surprisingly, these days, shortly before the release of the big five-year report by the EC, European experts arrived in Sofia to check the course of several "emblematic cases", including EU funds frauds. The monitoring mechanism is imposed only on Bulgaria and Romania because of weaknesses in the judiciary and the fight against corruption (in the case of Bulgaria the organised crime as well). Apparently, however, there are weaknesses in disclosing and punishing crimes related to EU funds in all Member States, albeit in varying degrees.

The conclusion is that as in terms of budgetary and economic policies so in terms of Justice and Home Affairs Member States should increasingly act together and in a synchronised manner. This process has already started, although it is still difficult if we look at the developments in the reform of Schengen. But while arguing about principles, under the pressure of real challenges Member States are increasingly sharing their sovereignty. And this is understandable because you cannot have common problems and individual national solutions. You cannot have a common budget without common rules on how it will be spent and how it will be protected. And moreover, you cannot impose austerity measures on European citizens without punishing those stealing public money. This is an essential element of restoring social justice and regaining the trust of European citizens.