East Midlands Liberal Democrats

Busting European Fraud

Is the EU missing a very effective U.S. trick in dealing with fraud?

Could American-style fraud busting measures save the European Union money?

Fraud allegations have already brought down the last European Commission and may yet bring down a number of individual commissioners in this commission.

Despite the damage fraud and fraud allegations do to the EU, its response has been largely ineffective. The EU only has an underresourced antifraud coordination and investigation unit in Brussels. Most fraud control is left to the uneven and irregular supervision of the member states.

By contrast the U.S. has a very effective civil detection, investigation and penal regime, the Civil False Claims Act (CFCA) of 1986. Since it came into force,the U.S. Treasury has obtained billions of dollars in fraud recoveries. Even more valuably, the probability of detection and the level of penalties if caught has been a major deterrent factor in protecting U.S. federal budgets from fraud.

Although the headlines focus on fraud within the EU institutions, the EU's EUR98 billion budget suffers its biggest financial hit from fraud at member state level, which is not surprising since the member states collect all the revenue and spend 80% of the budget.

What should also not come as a surprise is that there are major disincentives for the member states to protect EU revenue and expenditure. Fundamentally, as the revenue and expenditure does not belong to the member states, they do not give its protection a very high priority. In particular, in relation to customs duties, 100% of the revenue goes to the EU budget. Any expenditure on protecting customs-duty revenue represents a net loss from state budgets.

Equally, on the expenditure side, which state wants to own up to the commission and highlight to the world that it has a very large number of fraud cases? The commission may freeze funding allocations, state enforcement agencies look incompetent and there may be political problems at home.

The member states are also often unable to protect the EU budget. Around 80% of EU budget fraud is cross-border, usually related to VAT, customs duties and agricultural expenditure. National antifraud regimes and the enforcement agencies are restricted to national territories. Cooperation has been attempted, but it often is only as effective as the weakest enforcement agency in the chain. The EU's antifraud office, OLAF, has sought to coordinate member-state agencies' operations. However, such cooperation has proved very difficult. A major problem has been the unwillingness of national trial courts to accept evidence from agencies based in other states. One solution being pushed by the commission, and which has found its way into the draft EU Constitution, is the proposal for a European public prosecutor. However, the EPP proposal must overcome significant political opposition to the idea of creating EU criminal law.

From the other side of the Atlantic, the EU looks as if it is missing a trick. Before the EU seeks to adopt any criminal law in this field, it should have a look at the effective U.S. civil fraud-busting rules contained in the CFCA. That act imposes a minimum civil fine of $5,500 per false invoice plus a fine of three times the loss to the U.S. government.

Whistleblowers can obtain up to 25% of the recovery. If the U.S. government decides not to prosecute the whistleblowers can prosecute on behalf of the United States and if successful receive up to 30% of the recovery.The CFCA is undeniably effective.

Since the act came into force it has raked in over $6 billion of recoveries for the U.S. government, and the whistleblowers have walked away with over $900 million.

Perhaps even more important than the direct recoveries has been the deterrent effect. This is difficult to estimate. However, research carried out by Taxpayers Against Fraud, a nonprofit organization, suggests that whistleblower complaints under the CFCA were a critical factor in the fall in the Medicare error rate (including both wastage and fraud) to 7% from 14%, during the 1990s. If that research is correct the CFCA is responsible for deterring tens of billions of dollars of fraud.

In the EU context, enacting a European CFCA would create an effective civil detection, investigation and penalty regime. The commission would carry out investigations, possibility on the existing investigatory model that it uses in the competition field, where it is able to require documents and answers to questions, and carry out unannounced inspections.

A hearing would be held before an EU court before civil penalties would be imposed and the EU courts would rule on the appropriate percentage of the recovery that should go to the whistleblower.

The CFCA also offers an attractive means of fixing the Eurostat problem of a reluctant commission delaying action against alleged internal EU fraud. The U.S. procedure, whereby the whistleblower can run the fraud case in the name of the United States if the U.S. does not take the case, could be transplanted to Europe. Hence, if the commission does not act against future allegations of fraud, whistleblowers can prosecute on behalf of the union, recover the funds lost through fraud for EU taxpayers and then receive their percentage.

A European CFCA offers the EU the possibility of an effective means of protecting its budget, and in terms of cross-border civil investigation and penal rules already has a precedent in EU competition law. EU policy makers should take a look across at fraud busting across the Atlantic.

Mr. Riley is a senior lecturer in law at the Center for Legal Research, Nottingham Law School, and an associate research fellow at the Center for European Policy Studies in Brussels.