1

Fraud PreventionThe role of the Managing

Authorities

Johan KHOUW, European Commission, OLAF

2

WHAT IS FRAUD?

• Fraud is a “criminal law” notion.

• In 1995, through the Convention on the Protection of the Communities’ Financial Interests (PIF Convention), Member States reached an agreement concerning the definition of EU fraud under criminal law (some elements: intentional act or omission, use of false/incorrect documents, non disclosure of information leading to a loss for the Community budget and misappropriation)

• Only a final decision of a judicial authority can qualify a suspected fraud as a fraud case.

Fraud

Prevention

The role of

Managing

Authorities

3

FRAUD AS A “SUB-SPECIES” OF IRREGULARITY

Definition of irregularity:

“any infringement of a provision of Community law resulting from an act or omission by an economic operator which has, or would have, the effect of prejudicing the general budget of the European Union by charging an unjustified item of expenditure to the general budget.”*

* Article 2(7) of Council Regulation (EC) N. 1083/2006

Irregularities

Fraud

Fraud

Prevention

The role of

Managing

Authorities

4

THE COSTS OF FRAUD

• Economic costs

• Social Costs

• Threat to the trust between institutions and civil society (damage to the reputation of the institutions)

Fraud

Prevention

The role of

Managing

Authorities

5

• 12,161 irregularities

• € 1.78 billion involved

• € 0.54 billion recovered

• € 0.8 billion to be recovered

• € 0.44 billion suspended before payment

THE FIGURES ON IRREGULARITIES IN THE STRUCTURAL ACTIONS AREA PROGRAMMING

PERIOD 2000-2006

Fraud

Prevention

The role of

Managing

Authorities

6

THE FIGURES ON FRAUD IN THE STRUCTURAL ACTIONS AREA PROGRAMMING

PERIOD 2000-2006

• 12-15% of irregularities are or can be described as suspected fraud

• 20-25% of related amountsFraud

Prevention

The role of

Managing

Authorities

7

WHY IS FRAUD COMMITTED? THE FRAUD TRIANGLE: A

SOCIOLOGICAL/CRIMINOLOGICAL CONCEPT

The existence of "need or greed" factors can trigger individuals to find a way to meet their needs

Even if a person has a motive, he or she cannot perpetrate a fraud without being given an opportunity

Human nature dictates that

people will not commit an act

unless they can justify it to

themselves (“culture”)

Fraud

Prevention

The role of

Managing

Authorities

8

Group of individualscomplying with rules

Group of non-deliberateoffenders

GOALS OF FRAUD PREVENTION

Group of individualscomplying with rules

Group of non-deliberateoffenders

Group of individualscomplying because of

fear of sanctions

Group of deliberateoffenders

Group of individualscomplying because of

fear of sanctions

Group of deliberateoffenders

Fraud

Prevention

The role of

Managing

Authorities

9

WHY IS FRAUD PREVENTION SO IMPORTANT?

- OLAF’s EXPERIENCE -

• Prevention is a cost-effective approach to dealing with fraud

• Investigation and prosecution remain costly and are the

responsibility of agencies which may have different priorities

and objectives

• Investigation and prosecution may take years to achieve

results

• Fraud prevention can be pursued and achieved at different

levels in the management “chain”

Fraud

Prevention

The role of

Managing

Authorities

10

WHO IS RESPONSIBLE FOR FRAUD PREVENTION?

MEMBER STATES

COMMISSION OLAF

FRAUD PREVENTION

FRAUD DETECTION

AND REPRESSION

Fraud

Prevention

The role of

Managing

Authorities

11

RESPONSIBILITIES OF THE MEMBER STATES - SHARED MANAGEMENT/ Art. 53b (2) of Financial

Regulation (1605/2002)

[…] Member States shall take all the legislative, regulatory and administrative or other measures necessary for protecting the Community’s financial interests. To this effect they shall in particular:

(a) satisfy themselves that actions financed from the budget are actually carried out and to ensure that they are implemented correctly;

(b) prevent and deal with irregularities and fraud;(c) recover funds wrongly paid or incorrectly used or funds lost as a

result of irregularities or errors;(d) ensure, by means of relevant sector-specific regulations […],

adequate annual ex post publication of beneficiaries of funds deriving from the budget.

To that effect, the Member States shall conduct checks and shall put in place an effective and efficient internal control system […]

Fraud

Prevention

The role of

Managing

Authorities

12

SECTORAL LEGISLATION STRUCTURAL ACTIONS (Reg. 1083/2006)

• Member States are responsible for the management and control of operational programmes, in particular through the following measures:

– preventing, detecting and correcting irregularities

– recovering amounts unduly paid

– notifying these to the Commission

– keeping the Commission informed of the progress of administrative and judicial proceedings

• When amounts unduly paid to a beneficiary cannot be recovered, the Member State is responsible for reimbursement of amounts lost when it is established that the loss has been incurred as a result of fault or negligence on its part (“deterrent effect”).

Fraud

Prevention

The role of

Managing

Authorities

13

INITIATIVES ADOPTED BY THE COMMISSION IN RELATION TO FRAUD PREVENTION

• SEC(2001)2029 of 7.11.2001, Communication

concerning the fraud proofing of legislation and contract

management

• COM(2007)806 of 17.12.2007, Communication from the

Commission: "Prevention of fraud by building on

operational results: a dynamic approach to fraud-

proofing".

Fraud

Prevention

The role of

Managing

Authorities

14

NOTIFICATION OF IRREGULARITIES TO THE EC

• The notification of irregularities is of great value for the EC

– Provides first/overall impression of what goes or could go wrong

– Provides information for OLAF/EC analyses to identify risks and

threats, in order to improve provisions and controls and strengthen

fraud prevention

– Particular interest for those irregularities classified by MS as

“suspected frauds” giving the Commission services a more exact

idea about the level of fraud

– Allows the competent EC services to follow-up the financial impact

• The role of the managing authorities to contribute to the correct

implementation of the reporting obligation is essential

Fraud

Prevention

The role of

Managing

Authorities

15

HOW CAN MANAGING AUTHORITIES PREVENT FRAUD ?

1. By putting in place an effective control system, e.g.:• Administrative verifications including written standards and

procedures

• On-the-spot verifications of individual operations including sampling

methods for selection

2. Ensuring that the provisions of the regulations are understood

and applied by all (guidance and training)

3. Action plan of the Commission to strengthen its supervisory

role Structural Actions [COM (2008)97 final]

Fraud

Prevention

The role of

Managing

Authorities

16

INTERNAL(within the organisation)

• Integrity / impartiality• Specific attention to

tendering procedures– Composition of

selection committees• Appropriate

remuneration of staff

EXTERNAL(outside the organisation)

• Specific attention to tendering procedures– Economic viability of

recipients– Integrity of recipients

1HOW CAN MANAGING AUTHORITIES PREVENT FRAUD?

1Fraud

Prevention

The role of

Managing

Authorities

17

INTERNAL

• Internal controls• Information exchange and

cooperation/partnerships• Adequate staffing• Training

EXTERNAL

• Transparency / publication of beneficiaries

• Controls• Specific attention to

tendering procedures

2HOW CAN MANAGING AUTHORITIES PREVENT FRAUD?

2Fraud

Prevention

The role of

Managing

Authorities

18

INTERNAL

• Fraud awareness raising

– Promoting internal awareness

– Promoting an anti-fraud/integrity culture

• Training / “Motivation” of staff managing the funds

EXTERNAL

• Fraud awareness raising– Promoting public

awareness (free phone and other tools)

– Promoting an anti-fraud culture

3HOW CAN MANAGING AUTHORITIES PREVENT FRAUD?

3Fraud

Prevention

The role of

Managing

Authorities

19

RECOMMENDATIONS

• MA should develop their own fraud prevention strategy,

Specific:

– Identify risks – analysis of types of operation/beneficiary

and of already reported cases of irregularities and fraud

– Take the appropriate actions to mitigate risks

General:

– Training

– Fraud awareness raising (internally and externally)

– Fraud hot-line

Fraud

Prevention

The role of

Managing

Authorities

20

Fraud awareness

Sound financial managementPartnership

CONCLUSIONS – KEY WORDS

National law enforcement agencies,

the Commission, OLAF, etc.

Effective and efficient internal

control systems, etc

Fraud

Prevention

The role of

Managing

Authorities