Protection of the Financial Interests of the European Communities: the Fight Against Fraud and Corruption

PROTECTION OF THE FINANCIAL INTERESTS OF THE EUROPEAN COMMUNITIES: THE FIGHT AGAINST FRAUD AND CORRUPTION by Simone White A dissertation submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Law The London School of Economics and Political Science January 1997 UMI Number: U615548 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U615548 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 F 7 Mb S°j6 if 19 ABSTRACT The protection of the financial interests of the European Communities ('PIF'), as a political/legal endeavour presents unique features. Firstly it is central to the future of the Communities; increasingly it has been perceived as an essential ingredient to preserve the credibility of the 'European Project'. Secondly it has opened up a penal-administrative space at EC level, which many regard as a fore-runner to a European Criminal Legal Space - a vision fraught with difficulties. Notwithstanding the high profile of 'PIF', on the whole progress in fraud control has been uneven, due to the sectoral approach adopted. On the expenditure side of the budget, the most regulated area remains the part of the EAGGF-Guarantee Section Fund, whilst Structural Funds remain fairly un-policed. Of late it has been recognized that procurement fraud, involving the corruption of officials who work with Structural Funds, is rife in many Member States, and legislative solutions have been sought at EC level. On the income side of the budget, the control of VAT fraud rests mainly with the Member States. Other duties have become increasingly difficult to collect in view of the near-collapse of the transit system: solutions advocated include the computerisation of the transit system and various improvements in Customs' modi operandi. All Member States have experienced difficulties in recovering EC funds obtained through irregularities: a case study is offered, which compares the British and Danish approaches to the recovery of EC funds. In relation to VAT and excise regimes, the organisation of Customs, and recovery of funds, greater integration would be more effective that Commission supervision of the Member States. ii TABLE OF CONTENTS ABSTRACT ..................................... (i) LIST OF TABLES . ........................ (v) INTRODUCTION ................................... 1 PART I. EVOLUTION OF CONTROL AND INSTITUTIONS' ROLE . 9 CHAPTER 1. EVOLUTION OF CONTROL: A PANORAMIC VIEW ................................. 11 CHAPTER 2. THE INSTITUTIONS AND THE FIGHT AGAINST FRAUD .......................... 37 PART II. THE CONTROL OF INCOME AND EXPENDITURE FRAUD 77 CHAPTER 3. THE CONTROL OF FRAUD AFFECTING EC REVENUE ............................... 79 CHAPTER 4. THE CONTROL OF FRAUD AFFECTING EC EXPENDITURE..............................133 PART III. RECOVERING UNWARRANTED PAYMENTS ......... 175 CHAPTER 5. THE RECOVERY OF UNWARRANTED PAYMENTS 177 PART IV. WIDENING THE ENFORCEMENT A G E N D A ........... 249 CHAPTER 6. PROCUREMENT, INTERNATIONAL TRADE AND CORRUPTION ..............................251 CHAPTER 7. ENLARGEMENT OF THE EUROPEAN UNION . 297 CHAPTER 8. CURRENT PROPOSALS FOR DEVELOPMENT OF THE LEGAL SPACE .......................... 303 CONCLUSION ....................................... 315 APPENDICES ....................................... 319 APPENDIX A: GLOSSARY OF TERMS AND ABBREVIATIONS 321 APPENDIX B: COUNCIL REGULATION 2988/95 ....... 323 APPENDIX C: CORPUS JURIS .................... 331 APPENDIX D: RESPONDENTS (IN ALPHABETICAL ORDER) 347 APPENDIX E: TABLE OF CASES .................... 351 APPENDIX G: BIBLIOGRAPHY OF OFFICIAL PUBLICATIONS .......................... 355 APPENDIX F: BIBLIOGRAPHY OF OTHER MATERIAL . 363 iii iv LIST OF TABLES Table 1.1........................................ 12 EC Budget and EAGGF Guarantee Section appropriations Table 1.2........................................ 19 Anti-fraud appropriations - comparative table for 1994, 1995 and 1996 financial year (in thousand ECU) Table 3.1........................................ 89 TIR/Common Transit procedures: main differences Table 3.2........................................ 95 On the spot inspections carried out by the Commission in 1990, 1991 and 1992. Table 3.3...................................... 108 Computerization of transit system: implementation, timetable and cost for central development Table 4.1...................................... 156 Breakdown of Structural Funds by Objective and by Member State (in million ECU) Table 5.1...................................... 187 Communications of Member States on Irregularities, EAGGF Guarantee Section 1991-94 Table 5.2...................................... 187 Recovery of Traditional EAGGF Guarantee Section, 1991-94 (first two quarters of 1994) Table 5.3...................................... 188 Communications of Member States on Irregularities, Traditional Own Resources, 1991-94 (first two quarters of 1994) Table 5.4...................................... 188 Recovery of Traditional Own Resources, 1991-94 (first two quarters of 1994) Table 5.5...................................... 208 Outcomes of court cases and compounded resolutions: CAP offences, 1992-94 Table 6.1...................................... 259 Transposition of procurement directives as of 30.6.96 v vi INTRODUCTION 'Fraua omnia corrumplt' (Julius Caesar) There are three reasons why the protection of the financial interests of the European Communities should concern and interest all European citizens. Firstly, whether employed or not, they are tax payers and indirectly contribute to the budget. The protection of the financial interests of the European Communities is therefore a legitimate concern. Every year the Member States now pay the equivalent of between 4% to 5% of their GNPs into the Community budget.1 Although this constitutes a relatively small contribution in percentage terms, the political significance of the EC budget2 should not be underestimated. It exists to give expression to common policies, and to implement jointly agreed programmes, which both are an integral part of the European Project. Yet every year a proportion3 of the EC budget is misappropriated, through frauds and irregularities which increasingly involve more than one jurisdiction. Costly irregularities cast a shadow over the prospect for further integration (and enlargement), and raise political and legal issues for 'euro-sceptics' and 'euro-philes' alike. 1 European Court of Auditors (1995) The European Court of Auditors, Auditing the finances of the European Union, June, page 13. 2 Total estimated appropriations for 1997 show a grand total of 89 186 million ECU. In November 1996 one ECU was worth 57 pence. 3 Reported frauds entered into the Commission IRENE database point to a percentage of 1% to 3% of the budget being misappropriated, whilst much higher estimates have been ventured, to take into account unreported irregularities. 1 Secondly, the sharing of competencies between the Communities and the Member States is generally a delicate matter, due to the absence of clear principles in the Treaty for the allocation of regulatory powers.4 In no other area maybe is the balance more delicate than in matters relating to the protection of the financial interests of the European Communities, where the budget is the Communities', yet the enforcement the Member States'. Ambiguity starts with the budget itself. The Member states are responsible for the collecting and making available of resources to the Community. They are also responsible for spending over 80% of the same budget. Yet the Commission is responsible for the implementation of the budget in accordance with the principles of sound financial management.5 Furthermore the Community has no criminal jurisdiction, and relies entirely on the Member States for the protection of EC funds. Such an arrangement does not correspond to any of the models of public financing, and of protection of public funds we already know well.6 This means that there has been no blueprint for the protection of the financial interests of the European Communities. As a unique creative experiment in post-national rule making, it continues to be controversial. Thirdly, in a political space that is neither wholly federal nor inter-governmental, there h a W been persisting concern about uneven and ineffective enforcement of EC law at national level. Fundamental 4 On this point, see Weatherill, S (1995) Implementation as a constitutional issue, in Implementing EC law in the United Kingdom: Structures for indirect rules, ed: T. Daintith, IALS London, Chancery Law Pubs, 325-360. 5 Articles 201 and 205 EC; Article 22(1), first subparagraph of the Financial Regulation. 6 Such arrangements include those evident in centralised states, federal governments or international organisations. 2 issues concerning Member States' attachment to common goals and trust continue to be raised. In the field of the protection of the financial interests of the European Communities,

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