Massive fraud of EU funds rarely reported by member states

03.07.12 @ 16:47

  1. By Nikolaj Nielsen
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BRUSSELS - Public authorities in member states are sealing their lips when it comes to passing on allegations of fraud, corruption, and criminal activities to the EU anti-fraud office, Olaf.

  • Olaf investigators recovered €388 million of EU funds from an EU-funded highway project in Italy's Calabria region. (Photo: OLAF)

“The decrease of information from public authorities is something which is worrying us,” Olaf’s director-general Giovanni Kessler told reporters in Brussels on Tuesday (July 3).

Of the 1046 reported leaks from both public and private sources in 2011, only 54 came member state authorities. More than half came from companies, lawyers, and anonymous individuals.

Kessler noted public sources are becoming more reluctant to denounce fraud because of an inherit fear of being labelled corrupt at the EU-level.

Olaf, which audits how EU funds are spent and scrutinizes ethics within the EU institutions, said unspent structural funds attracts the vast majority of fraud and usually involves criminal organisations spread across the EU and the world.

The structural funds, which make up the bulk of the EU budget, are entirely managed by member state or regional authorities without any oversight from the European Commission.

“The mechanism of control on how the money is spent is the weakest and where we see most of the problems,” said Kessler.

Olaf’s investigations led in 2011 to the recovery of €691 million - over a ten-fold increase compared to 2010. Over €520 million of the money came directly from EU structural funds alone. In comparison, the total amount recovered from structural funds in 2010 was €32 million.

Italian mob nicks €388 million

The single biggest haul came when the investigators uncovered a racketeering scheme on a EU-funded highway construction project, near Salerno, in southern Italy’s Calabria region.

Olaf, along with the Italian investigators, found evidence of transport authorities who had written off €388 million in EU funds.

The investigators uncovered conflicts of interests where Italian officials were awarding contracts to companies they also worked for.

Judicial trials are on going but an Olaf official told EUobserver that the money returned to the EU budget invariably came from the Italian taxpayer.

The Olaf official also pointed out that most of these cases come to light when audits are carried out at the end of the EU’s seven-year multiannual financial framework budgetary cycle.

Meanwhile, customs fraud jumped from €7.6 million recovered in 2010 to €113.7 in 2011. The recovery of funds from agricultural subsidies also increased from €11.4 to €34.

Another anomaly, compared to 2010, is the recovery of funds from EU staff. In 2010, Olaf recovered around €100,000 whereas in 2011 they netted €600,000.

In one case, Olaf received allegations that a EU official employed as a project manager in a European Commission delegation was accepting bribes from contractors.

Criminals shop weak EU member states

Criminals also actively seek out member states where criminal legislation is weak, riddled with loopholes, or where prosecution is uncommon.

“Criminals choose the member states where to pay the bribe according to the legislation of the member state,” said Kessler.

Bribes are not necessarily cash stuffed in envelopes but rather payments made to a fake company placed in another member state.

Kessler declined to cite which member states are the preferred bribery point by criminals but EUobserver understands that Hungary, Romania, Bulgaria, and the Czech Republic top the list.

”If only one member state has inappropriate legislation, it could affect the whole of Europe,” stated Kessler.

The European Commission, for its part, will table a “substantive criminal law” directive in July that will specifically target financial fraud.

The Commission is also hoping to set-up its European Public Prosecutor office in the first half of 2013. The office would initially have the power to investigate and indict crimes that affect the EU budget but could eventually expand to other sectors.