the olaf a european policy to fight against economic and finacial fraud

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The European Anti-Fraud Office (OLAF): a Europeanpolicy to fight against economic and financial fraud?Vronique Pujas aa Institut d'Etudes Politiques , Grenoble, FrancePublished online: 04 Feb 2011.

To cite this article: Vronique Pujas (2003) The European Anti-Fraud Office (OLAF): a European policy to fight againsteconomic and financial fraud?, Journal of European Public Policy, 10:5, 778-797, DOI: 10.1080/1350176032000124087

To link to this article: http://dx.doi.org/10.1080/1350176032000124087

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Journal of European Public Policy 10:5 October 2003: 778797

The European Anti-Fraud Office(OLAF): a European policy to fightagainst economic and financialfraud?Veronique Pujas

ABSTRACT The setting-up of the European Anti-Fraud Office (OLAF) isstudied, exploring the genesis and the institutionalization of a new paradigm inEuropean policy, the protection of the Communities financial interests, in thecontext of increasing public anxiety regarding issues of security. It is argued thatthe European Commission actually took advantage of being cast as the scapegoatin the 1999 crisis by progressively strengthening its own powers within the thirdpillar, progressing towards the construction of a single judicial area in Europe. Inthat respect, anti-fraud fighting is both a means and a strategy to reinforce thelegitimacy of European governance. Nevertheless, such a strategy is risky when weobserve that the effectiveness of European anti-fraud policy is highly dependent onthe operational means mobilized by the member states, strictly managed byintergovernmental rules.

KEY WORDS Financial fraud; governance; legitimacy; OLAF; security; trans-national crime.

In order to understand the historical and institutional background which ledto the creation of the Unit for the Co-ordination of Fraud Prevention (UCLAF)in the late 1980s, which made way for the European Anti-Fraud Office(OLAF) a decade later, it is necessary to highlight the emergence of a newpriority in the member states institutions and policies. This new field ofactivity in public action is in its infancy but its place on the public agendarecently became a priority owing to the political circumstances of September 11.It is therefore interesting to study the development of the new phenomenonof fighting fraud and corruption at the European level. The emergence andidentification of the problem thus defined, and its progressive transformationinto a new paradigm of public action at a supranational level, are neitherfortuitous nor trivial and therefore deserve analysis. How can we account forthe emergence of such widespread practices of fraud and corruption in aparticular context, which may act as an obstacle to European construction? Isit the mere transfer of the difficulties met by national authorities in their fight

Journal of European Public PolicyISSN 1350-1763 print; 1466-4429 online 2003 Taylor & Francis Ltd

http://www.tandf.co.uk/journalsDOI: 10.1080/1350176032000124087

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V. Pujas: The European Anti-Fraud Office 779

against domestic corruption on to the European level? Or is it that theemergence of a single market and the progressive integration of the states withina border-free European area create new opportunities for the development ofEurope-wide fraudulent practices? In such a case, is the incorporation of anti-fraud fighting on the European agenda the concrete and objective representa-tion of new problems to be addressed, or can we assert that it is the creationof a new public enemy which would make it possible to institutionalize onthe European level new domains of public policies as a guarantee of nationalsovereignty? In short, who are the European and/or national actors who havecontributed to the emergence of this new public policy? What are the stakesin such an issue? To what extent is the implementation of a new anti-fraudpolicy part and parcel of the establishment of a new mode of legitimacy inEuropean integration? Could it reduce the democratic deficit that plaguesEuropean institutions?

We will first study the emergence of this new paradigm in European publicaction the prevention and repression of fraud and other illegal activitiesdetrimental to the Communities financial interests and more particularlyits links with the creation of UCLAF and its subsequent transformations. Suchinstitutional innovations have been brought about by the discovery of fraudu-lent practices within the Commission as well as by its alleged incapacity to actagainst mismanagement of Community funds by member states. Our aim isto identify the national and supranational actors who may play a role in theinstitutionalization process of this new problem on the European level, as well ashighlight their converging and diverging interests. Two traditional approaches, aneo-institutional and an intergovernmental one even if declared obsolete bythe Convention on the future of the European Union (EU)1 are still veryuseful and will provide us with the necessary general framework to interpretthe orientations of anti-fraud fighting in Europe. The second part will bedevoted to a more intra-institutional approach in order to account for thefailure of the first taskforce of fraud prevention, better known by the acronymUCLAF. In contrast, its successor, OLAF, which was set up under exceptionalcircumstances, was the fruit of a political will to increase European citizenstrust in the European institutions which nevertheless still lack the necessarymeans for such a purpose.

THE PROTECTION OF THE COMMUNITIES FINANCIALINTERESTS AND THE EMERGENCE OF UCLAF/OLAF

The historical and institutional process which has led to the setting-up of theanti-fraud taskforce is linked to the institutional development of two keysectors in European construction the budgetary and financial competencesgranted to the supranational European institutions and the furthering ofmember states integration within a single judicial area (first and third pillars).These sectors have gone through turbulence and show that fighting fraud, thelame duck in Community politics, is still embryonic in Europe. Also, we

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need to acknowledge the fact that fighting fraud and corruption should bedealt with by the European institutions and is more an artefact of politicaldynamics than the actual nature of problems which need to be addressed. Theconstruction of this public problem is, in fact, the result of tensions betweenthe Commission, whose strategy aims at strengthening supranational institu-tions, and member states, who want to reinforce intergovernmentalism underthe third pillar the real stake in anti-fraud fighting. They are opposed to theidea that European supranational institutions should have responsibility forleading an anti-fraud and anti-corruption policy, a highly salient issue indomestic politics.2

Agenda-setting of a new public issue: fraud and other illegal activitydetrimental to Community financial interests

The actors of the European supranational institutions became aware that fraudand corruption were of direct concern when the Community institutions weregranted own resources independent from member states in the 1970s.Fraud, which had always existed and only became visible under certaincircumstances, was then presented as a problem which ought logically to beaddressed by the European Community (EC), within the frame of theCommunity building process, and no longer by member states alone. Paradox-ically, the institutional and economic evolution which fostered the emergenceand shaping of the notion that Community-wide fraud and corruption shouldbe addressed on the supranational level was to prove detrimental to the actualresolution of the problem, as we will see.

Alongside the allocation of own financial resources, the European Court ofAuditors was created in 1978. The task of this independent body was toevaluate and control Community expenditure. As early as the 1980s, theCourts reports revealed instances of fraud and irregularities, notably concerningmismanagement of agricultural subsidies (the common agricultural policyaccounted for 70 per cent of all Community expenditure at that time) (Nugent1999: 390). These critical reports were presented to Members of the EuropeanParliament (MEPs) by the Budgetary Control Committee respectively in 1984,3

1994,4 19955 and 19986 on the occasion of the budget discharge procedure.With the task of auditing the Community institutions, the Court of Auditorswas not granted the necessary means and competences to investigate instancesof fraud.7 While acknowledging these shortcomings, the Court upheld thedenunciations by the Budgetary Control Committee which called for a realCommunity action plan in order to fight against European funds evasion.

On the basis of an internal report about anti-fraud fighting activities, theCommission decided on the creation of the Unit for the Co-ordination ofFraud Prevention (UCLAF8) in 1987. It was to be divided into anti-fraudunits among the various expenditure and revenue departments. It becameoperational in July 1988. However, the Court of Auditors reports still revealedinstances of fraud and irregularities. Within the framework of the discharge

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procedure in 1990 and 1994 by the European Parliament, UCLAFs compe-tences remained divided between Directorate-General (DG) VI (Agriculture,the most important budget in the EC), DG XIX (Budgets), DG XX (FinancialControl) and DG XXI (Customs and Indirect Taxation), although its staff wasincreased. In 1995, UCLAF was placed under the responsibility of MrsGrandin, the Swedish Commissioner in charge of financial control, andconsequently of fraud protection. In the same year, all UCLAF operationalactivities were centralized. Nevertheless, in 1996 the investigation committeecreated by the European Parliament on the common transit regime9 pointedto the shortcomings and failures in UCLAFs activities. It advocated thedevelopment of the role of UCLAF as an information-gathering unit on crimeand the creation of a central bureau to exchange information in order to helpnational courts in their transnational legal activities.

With the support of the Commission and the European Parliament, themember states, during the 1993 Copenhagen European Council, admitted theirinadequate management of Community funds and came to the unanimousconclusion that they had to address Community fraud in the same way thatthey dealt with the problem of domestic fraud and its detrimental impacton their national budgets. This issue was debated during the meeting of Justiceand Home Affairs Ministers in Essen in December 1994 who requested thatthe member states should adopt common measures. This collaboration wasformalized in an agreement in principle during the 1994 Corfu EuropeanCouncil and led to the adoption of a Convention on the protection of theCommunities financial interests10 in 1995, which defined the general frame-work of the Commissions anti-fraud fighting activities.11

Europes concerted policy against fraud, hampered by the slow ratificationprocess of the Convention and of its additional protocols signed in 199612 and199713 (PIF (Protocol for the Convention on the Protection of the EuropeanCommunities financial interests) instruments for the protection of Communityfinancial interests) which granted the necessary legal and judicial means toconduct such actions, nullified any concrete European collaboration on thisissue. It also cast doubt on the member states real political will to fighteffectively against fraud and corruption. Indeed, the practical enforcement ofmeasures for the recovery of misallocated funds and the judicial follow-upwere still under the sole responsibility of member states, some of which hadnot been very efficient in their fight against domestic fraud and corruption(Pujas and Rhodes 1999; Pujas 2000, 2001).

The context was one of political awareness by member states within theCouncil that such a problem existed objectively, while the enforcementmeasures remained essentially in the hands of the selfsame states. The creationof UCLAF, a Community body in charge of fighting against corruption withinthe Commission, complemented the internal financial supervisory activitieswhich already existed within DG XX. In spite of UCLAFs various mutationsbetween 1987 and 1999, its more numerous staff, and the successive declara-tions of intent and official statements in support of the fight against all

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forms of fraud detrimental to Community interests, the financial auditingdepartments repeatedly revealed cases of very flexible and twisted adaptationsof the rules in the European institutions. The shortcomings revealed in thediscovery of fraud and irregularities, as well as in the related investigations,and the absence of any efficient and coherent legal proceedings at the level ofthe European Union were denounced by Herbert Bosch, the BudgetaryControl Committee rapporteur on 7 October 1998. In his conclusion, heinsisted on the necessity of reforming UCLAF, which was also the object ofstrong criticism within the Commission itself.

Thus, the European Parliament expressed its mistrust of the Commissionon several occasions, by highlighting the Commissions responsibility for theemergence of irregularities and instances of nepotism, as revealed in theAuditors report. This new stance, as a counter-force, allowed the EuropeanParliament to strengthen its new co-decision and budget control powers,whereas its legislative activities had decreased over the previous years. It wasalso the opportunity to reveal to the public its activism in its fight fortransparency. During the budget discharge procedure of 1998, two motions ofcensure were voted, but none with the necessary majority to be adopted.Nevertheless, the first motion led to the creation of a Committee of Independ-ent Experts, also known as the Committee of Wise Men, whose non-politicalreport, outside the Community institutions, was aimed at calming thingsdown while highlighting the accusations made by the Parliaments BudgetaryControl Committee. The so-called Bosch Report was very critical and con-firmed the Commissions failure to prevent and punish the instances ofmismanagement within its own services. Its conclusions led to the resignationof the Santer Commission in March 1999. The Bosch Report was adopted bythe Parliament in May 1999 and the creation of OLAF was confirmed,alongside the adoption of related legislation according to the co-decisionprocedure.

European anti-fraud strategy in context

After the presentation of the historical and institutional evolution which hasled to the emergence of a new European anti-fraud policy and the appearanceof a new paradigm in public politics and its institutional foundation (theprotection of Community financial interests), the somewhat blurred but con-sensual perception of this issue needs to be analysed. Indeed, a number ofnational experts and scientific studies have confirmed that fraud and irregular-ities had reached unprecedented levels in the context of global trade14 and theabolition of borders linked to the creation of the single market (Salbu 1999;Abbot 1999). It is difficult to evaluate to what extent the scandals in the1990s caused by the discovery of acts of corruption and misuse of power byrepresentatives from many member states (Italy, France, Belgium, Spain, Portu-gal or even Germany and the United Kingdom) added to the alarmist rhetoricabout the Mafias activities from Eastern countries after the end of the Cold

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War. The extravagant evaluations that organized crime activities accounted fora third of global monetary exchanges certainly contributed to a climate ofanxiety about economic and financial crime in general. Indeed, politicians wereobliged to react to the concerns of European citizens in a unique context ofgeneral denunciation of fraud at European and global level. A Eurobarometersurvey in Spring 1996 showed that, in answer to the question of what Europesvoters think are high priorities for the EU, 87 per cent answered fightingorganized crime and 86 per cent answered fighting drug trafficking. So politi-cians had to adapt their rhetoric and political initiatives to this new concern.

For all that, the idea that Community institutions should be in charge offighting fraud has not emerged easily considering the volume and distributionof fraud in the special structure of EU expenditure. Indeed, fraud concerningadministrative expenditure only 1.4 per cent of the EUs total budget wastrivial but proved much more significant as regards resources from Europeansubsidies, by far the most important part of the budget under the directmanagement of the member states.

We are thus forced to recognize that the Commission played the role of ascapegoat in the general condemnation of corruption problems, notablywhen the budget discharge procedures were repeatedly postponed, and moreparticularly during the legitimacy crisis which led to the resignation of theCommissioners. Such an interpretation, and the perception that the EU hasto deal urgently with cross-border crime have been reinforced by the crisisfollowing the attacks of September 11, as well as the Enron scandal in theUnited States. Indeed, it appeared that operational details of the September 11attack were largely planned within Europe. Also, efforts to fight organizedcrime and issues of financial transparency became a key concern for theEuropean Parliament. Two hypotheses explaining these developments can besuggested: either the Commission chose to play the strategy of strengtheningsupranational institutions even if it meant assuming total responsibility forthe crisis of confidence caused by the revelation of recurring problems of fraudin its management or the member states, so attached to reinforcingintergovernmental judicial and police co-operation, deliberately stigmatizedthe Commissions poor management and stressed the importance of newtransnational crime in order to weaken the Commission and achieve their ownpolitical preferences.

First hypothesis: towards reinforced institutions in the EU and EP

According to the first (neo-functionalist) hypothesis, the placing of fraud onthe agenda as a new problem to be addressed was made by supranationalactors the European Parliament and the Commission who were intention-ally alarmist and wished to develop a new field of competence for thesupranational institutions with a view to reinforcing their activities. Indeed,the fact that the Commission systematically put the problems of fraud on theagenda during Council meetings (notably the Tampere Summit in 1999), as

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well as during parliamentary discussions of mismanagement by some Europeancivil servants and even some Commissioners, paved the way to the creation ofa new agency. With the initial task of investigating instances of mismanagementin the internal administration, the new agency progressively imposed itself notonly as an inquiry agency endowed with important powers (and increasinglyindependent from the Commission), but also as an agency co-ordinatingnational sanctions. The Commissions role as an agenda-setter and also as co-ordinator and legislator is also definitively strengthened in many areas, notonly in the administrative first pillar, but also in the intergovernmental thirdpillar with significant developments in matters such as immigration or eco-nomic and financial crime which were presented both as a threat and as theresult of insufficient internal security within the EU.

Under the first pillar, the Council regulation which established the protec-tion of the European Communities financial interests15 was first conceived toprovide a legal framework for the fight against fraud led by the Communityand de facto by the Commission as its executive arm. Likewise, the Councilregulation concerning on-the-spot checks and inspections conducted bythe Commission for the protection of the Communities financial interestsempowered the Commission in practice UCLAF then OLAF to carry outadministrative investigations into member states, acting on its own initiativeand responsibility. Its fields of action were greatly extended regarding its powerof internal investigation into the administrative activities which were under itsdirect responsibility.

Under the third pillar, the Commission made more significant progress asit led to promoting the necessary establishment of a general framework whichpaved the way to judicial integration. Though the convention on the protectionof the Communities financial interests had not yet been ratified by a majorityof member states, it dealt with the judicial dimension of fraud. Emphasis waslaid on co-operation between member states and co-ordination in theirinvestigating, judicial and sanctioning actions. It must also be added thatEUROPOL was created in 1998 with the explicit task of promoting co-operation between police forces, customs authorities and other competentauthorities in the member states. The Commission was openly granted anextended role as it could from then on conduct administrative investigationsin the same way as member states.

Though progress was less significant on legal matters, European integrationwas furthered by reinforced operational co-operation between police forcesand other policing bodies, improved information-gathering and processing,and heightened judicial co-operation.16 The Commission17 was from then onmore concretely involved in the development of inter-state co-operation owing to its obligation to provide technical help, or exchange information.On this basis, a first institutional compromise was reached; it confirmed thereinforcement of the third pillar with the creation of EUROJUST in March2002, a temporary unit of judicial co-operation, composed of fifteen publicprosecutors, in charge of fighting serious transnational crime. Presented as the

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judicial counterpart of EUROPOL which had taken the lead, this newform of co-operation mirrored police co-operation which was already wellestablished; it was greeted by the Italian Justice and Home Affairs Minister asa reorientation of the European justice and security area in favour of justice.Even though this aspect appears to support the intergovernmental theoreticalapproach which we consider later, the Member states commitment to justiceand home affairs matters was reinforced by numerous initiatives taken by theCommission, notably via the Maastricht Treaty which explicitly referred to theCommissions task of reinforcing judicial co-operation. The Commissions rolewas also strengthened by various European conventions although many ofthem have not yet been ratified on justice and police issues. Such develop-ments may herald future strengthening of the third pillar towards morecommunitization, through the need for a corpus juris18 and the appointmentof a European Public Prosecutor, suggested (and highly publicized) by theCommission in the Green Paper of January 2001, thus confirming the majorinfluence of European institutions in the area of high politics (Hoffmann1966).19 In support of this proposal, the European convention relaunched thedebate on the creation of a European Prosecutors Office in December 2002.A revision of the EC Treaty in terms of strengthening the criminal lawdimension in the fight against fraud could facilitate re-examination of theinstitutional basis of OLAF. However, by addressing a major source of anxietyin European society (namely the rise in crime), and proposing an institutionalresponse through the creation of a specialized taskforce to fight fraud, theCommission has made a symbolic political move, thus enabling it to increaseits legitimacy and possibly restore the citizens trust in European institutions.

Second hypothesis: shifting fraud fighting to the supranational level

The intergovernmentalist (Moravcsik 1993, 1998) theoretical approach high-lights the stigmatization of the Commission both as the instigator and thetarget in the denunciation process of the fraudulent management of Commun-ity resources. Above all, by presenting the European institutions as accountablefor fighting transnational crime, member states avoid public responsibility forthe lack of effective anti-corruption policy. This has been a convenient wayfor member states to find a culprit which is part and parcel of such adenunciation process (Pujas 1999). Thus, member states laid the blame on theCollege of Commissioners, who were discredited and eventually forced toresign in March 1999; the Commissioners therefore paid a high price for thedeveloping legitimacy crisis when it became obvious that Europes anti-fraudpolicy was a failure. In reality, some national governments were incapable orlacked the political will of initiating institutional reform in order to reducemismanagement of public funds.20 Instead, they saw a window of opportunity(Lascoumes 2001; Pujas 2001) to gain public credit by taking action againstthe Commission which they blamed for misuse of Community funds, whilethey themselves were actually in charge of the management of these funds.

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Moreover, the new political priority of fighting fraud is mainly the result ofdecisions made by national actors regarding the European integration of nationaladministrations in charge of domestic security matters. Indeed, fighting corrup-tion necessarily implies the progressive integration of national judicial systemswithin a more global and standardized European judicial area. Fraud cannot befought effectively in the absence of European penal legislation. However, allCommunity decisions on questions of penal jurisdiction have always been highlysensitive matters as they could potentially threaten national sovereignty. Inmatters of justice and home affairs co-operation, the states, not bound by theEuropean directives or regulations that are instrumental in the implementationof Community policies, have kept total autonomy in such matters, which hasconsequently hindered the enforcement of coherent and standardized policies.

The distinction between the strictly administrative competences and thepenal jurisdiction of UCLAF and OLAF is far from clear, and reflects the twocontrasting theoretical perspectives on European integration discussed above namely, neo-functionalist and intergovernmentalist approaches. In practice,some national administrations engaged in the process of European integrationhave favoured an intergovernmental approach, yet hope to draw some advan-tages from it (rent-seeking). Other actors have actually been keen to developEuropean police and judicial co-operation. In security matters, for example,the involvement of national civil servants in transnational security networkshas increased their room for manoeuvre away from the supervision of theirhome administrations, but has also created a new situation in terms of powerand legitimacy in a national context of strong competition between securityagencies.21 Needless to say, national security agencies, like the judicial policeservices, are often anti-European and deeply hostile to the very existence ofEUROPOL and the creation of UCLAF/OLAF. This may partly explain itsfailure. The report which led to the resignation of the Santer Commission hadclearly shown UCLAFs shortcomings in terms of co-ordination between thevarious authorities in the member states. Several reasons may be put forwardto account for the lack of trust in OLAF expressed by its national counterpartsand interlocutors, notably sensitive questions of sovereignty, lack of knowledgeabout UCLAFs role, reluctance to give judicial information to a body whichis part of the Commission, and probably scepticism as regards UCLAFscompetences and way of working.22 We must also add that at least two of themost important players, France and the United Kingdom, do not seem to beready to see the emergence of a European Prosecutor in the near future.

In many ways fighting fraud at a European level is a classic catch-22situation. On the one hand, the 1999 scandal worsened the already bad imageand lack of legitimacy that have hampered the Commission ever since itscreation. On the other hand, any initiative in matters of fighting fraud is likelyto fail as long as there is no effective co-operation between national bodies andagencies. The European institutions, and more particularly the Commission,therefore took a high risk when they became active in this new policy area: ifthe results were poor it would further erode the institutions legitimacy. The

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audit in the aftermath of the 1999 crisis called for reinforced financial anddisciplinary control. But conversely, far from bringing more transparency andlegitimacy to European governance, such measures could make it more opaque.However, the dramatic events of September 11 reinforced co-operation betweenthe judiciary, police and information services of the fifteen EU member states.Measures that had been discussed for years, but remained blocked for politicaland technical reasons, were now incorporated in an action plan to combatterrorism and organized crime. The plan explicitly included corruption in allthe relevant texts. For example, in November 2001 a new directive on moneylaundering was adopted, obliging member states to combat laundering of theproceeds of all serious crime, including corruption. The European ArrestWarrant adopted in June 2002 is another illustration of the new, commonEuropean approach. Introduced to fight transnational crimes including corrup-tion, it replaces extradition procedures and requires that an arrest warrantissued in one EU country be recognized and executed in all other EU memberstates. EU ministers reached political agreement on the warrant in December2001, but the process was contentious. Italys Prime Minister Silvio Berlusconiagreed to the warrant only under intense pressure from other EU memberstates. His opposition was based on the inclusion of provisions on moneylaundering, corruption and fraud. Furthermore, the requirement that nationalparliaments ratify the warrant may delay its implementation (scheduled forJanuary 2004) even though six states have decided to implement it so far.Such rapid improvements (as well as substantial obstacles such as the late ornon-ratification of most conventions adopted by the Council) confirm that,in the present state of development of the third pillar, the member states holdthe key.

Our two chosen theoretical approaches present different perspectives on theproblem, as both supranational actors, such as the Parliament or the Commis-sion, and national actors have tried to hijack and exploit the denunciation offraud to their own advantage. In the real world, a European anti-fraud policywill succeed only if a compromise between these two visions of Europeanintegration is found. Also, much will depend on the progressive evolution ofthe third pillar towards more communitization, especially on enlargement andthe difficulties of dealing with yet more diversity, heterogeneity, and numbersof partners needed to implement such policy. Also, the elaboration of a generalnormative framework which may account for the emergence of Europeanpublic anti-fraud policy cannot overlook a more intra-institutional approachthat can explain the internal balance of power within the European institutionswhich prompted the evolution of UCLAF/OLAF. It is to the important inter-and intra-institutional matters that we now turn.

INTER-INSTITUTIONAL AND INTRA-INSTITUTIONALTENSIONS DURING THE CREATION OF UCLAF

Two types of tension may account for the evolution and predicted failure ofUCLAF. The treatment of cases related to instances of fraud and irregularities

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in Europe has caused tensions which have occasionally worsened betweenEuropean institutions such as the Parliament and the Commission, but alsowithin the Commissions own agencies and bodies. UCLAF applied pressure,with the support of some MEPs, for the creation of an anti-fraud structurewithin the Commission. In fact, the very genesis of UCLAF may account forthe diverging views and interests of the Commission and the Parliament.Besides, the creation of UCLAF and its subsequent reform into OLAF haveobviously modified the balance of power between intra-Community services.

A successful outcome for both the EP and the Commission

The European Parliament conducted its campaign against fraud and corruptionin the management of Community funds through the Budgetary ControlCommittee (Georgokakis 2000).23 The initiative in this domain was thereforepolitical. As the Parliaments role and influence are restricted in the decision-making process, it is no surprise that it should have devoted resources to thelimited domain of activity conceded to it; indeed, since 1977, it has played anincreasing part in budgetary control activities and has used to the full itscapacity to create inquiry committees. The budgetary discharge is, in fact, themain instrument of control over the budget as implemented by the Commissionand is based on the annual report of the Court of Auditors and the declarationof assurance (a function which is now exercised during the whole term of officeof the Commission). By using such institutional possibilities the EuropeanParliament has gained a double advantage: the control of Community expendi-ture has allowed it to advertise what it regards as a weakness in the EU, but ithas also made it possible for the Parliament to take on a moral image as theguardian of good governance in the European institutions, on behalf of aEuropean public already sensitive to problems of domestic corruption. Thishas helped to present the Parliament as an institution which defends Europeantaxpayers and which can overcome its own political differences and chaoticparliamentary debates.

In the 1990s, four opportunities were offered to the European Parliamentto express its lack of trust in the way the Commission managed Communityresources. The first episode took place in 1994 when the Parliament providedfor fifty new posts in the 1994 budget for UCLAF agents, and insisted thatclear supervisory responsibilities be established. It postponed the dischargeprocedure of the 1992 budget in order to compel the Commission to take thenecessary measures. Likewise, in 1995, the Parliament used its new right tocreate an inquiry committee, as stipulated in the Treaty of European Union(TEU). The inquiry committee issued a report on allegations of fraudand misadministration in the Community transit system. It called for thedevelopment of the role of UCLAF as an information-gathering unit on crime,together with the creation of an information exchange central office (whichin fact now exists in OLAF) in order to help national prosecutors in theirtransnational legal proceedings. Again in December 1998, the Parliament

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postponed the discharge procedure of the 1996 budget following the discoveryof serious irregularities in the calculation of travelling expenses within theEconomic and Social Committee, during an investigation by the Court ofAuditors. Then in 1999 the Parliament voted two motions of censure oninstances of favouritism and nepotism by some Commissioners.

In addition to the institutional opportunity offered to the Parliament tohighlight its supervisory role by systematically denouncing problems of fraudand urging the Commission to provide for the necessary means to addressthese problems, the political context during the first quarter of 1999 may alsoexplain the scale and timing of the crisis over financial irregularities. Europeanelections were approaching. As Le Monde put it, the opportunities offered bythe affaires for some MEPs, notably from the Greens, to come to the fore,has certainly not helped to calm things down.24 In the same vein, the ongoingnegotiations Agenda 2000 on the financing of Europe up to 2006 and thereform of the common agricultural policy and the structural funds (which,combined, represent the second main source of misuse of Community funds)were an excellent occasion for the Parliament to highlight its role and positions.

One of the direct consequences of this winning strategy was the postpone-ment of the appointment of the new Commission until the election of thenew Parliament. Indeed, the representatives of the member states lost groundto the Parliament when they agreed not to appoint, as initially planned, thepresident of the new Commission (20002004) before the mid-June 1999European elections. The European Parliament was seen by public opinion asthe great winner in this crisis.25

Paradoxically, the confrontation between the Commission and the EuropeanParliament and the ensuing institutional crisis seem to have strengthened bothinstitutions, albeit via different dynamics. The democratic legitimacy of theParliament and its role as political counterweight have certainly been consoli-dated thanks to its dual role as denouncer and initiator of anti-fraud policies.Though at first sight the new institutional balance of power seems to havebeen more in favour of the Parliament to the detriment of the Commission,the Commissions initiative and management capacity were also confirmedwithin the first, and more particularly the third, pillars, thanks to the reformof UCLAF which then became OLAF. Contrary to the commonly held opinionthat the Parliament was the great victor in the 1999 crisis, the fact that thereport, written by the Committee of Independent Experts, led to the resignationof the Santer Commission actually weakens the theory of a binding democraticcontrol by the European Parliament. The creation of the Committee of WiseMen was indeed the result of a compromise between the Parliament and theCommission, in order not to further exacerbate tensions between the twoinstitutions. It confirmed the highly symbolic position and authority of theCommission as the embodiment and defender of Community interests.Likewise, the first motion of censure was intended to give new legitimacy tothe Commission, in agreement with the majority Socialist group. Lastly, thevery critical report on UCLAF which was issued during the debate on the

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motion of censure was aimed at reinforcing the governmental position of theCommission with a heightened and reformed role given to UCLAF/OLAFwithin the Commission. All these elements tend to confirm the neo-institu-tionalist approach according to which, thanks to the emergence of the idea ofthe absolute necessity for anti-fraud policies, Community institutions havebeen strengthened and vested with new powers.

The creation of UCLAF was the result of the confrontation between theParliament and the Commission, but the emergence of this new agency alsogenerated competition within the internal services of the Commission whichpartly explains its failure and subsequent recent reform. Indeed, internalcompetition between the Commissions and UCLAFs services is the origin ofa predictable failure. The tensions between the internal financial controlservices of the Commission and UCLAF reveal the ambiguous dimension oftheir supervisory function and have not really been addressed by the subsequentreforms initiated by the new Commission. The tensions were also obviousbetween the personnel departments and UCLAF on the questions of sanctionsagainst deviant civil servants, and performance incentives intended to lessenadministrative mismanagement which was at the origin of irregularities orfraud.

Competition between DG XX and UCLAF

Competition appeared at the very inception of UCLAF and was the con-sequence of rivalries between UCLAFs investigation services for the detectionof administrative and/or financial irregularities and the Commissions financialservices (DG XX). UCLAF was obliged to work from case files drafted by theaudit division of DG XX in order to establish instances of fraud. In fact, theauditors expertise was very important for the drafting of fraud files as UCLAFstaff lacked expertise in that domain. Such encroachment between the missionof the services in charge of internal auditing and those of the anti-fraud unittriggered competition strategies which proved detrimental to effective anti-fraud fighting. The de facto exclusion of DG XX was really sterile in so far asthe auditors expertise remained essential for OLAF investigations.26 Likewise,the DG XX services rigidly retained information because they felt UCLAFhad no legitimate right to have access to information which DG XX hadgathered, in terms of expertise, allocations27 and staff.28 In their report, theWise Men listed a number of grievances against UCLAF. They criticized thefact that an excessive number of UCLAF staff were temporary agents, whichcreated endless turnover and a lack of continuity in the organization. TheWise Men also commented that the staff had not been selected carefully andthe rules on the confidentiality of information were not complied with in acoherent way. It was also noted that, as for documentation or investigationfollow-up, there was no standardized procedure, nor was there any measureguaranteeing that case files followed norms demanded by judicial proceduresin the Member States. Electronic resources were not entirely operational either,

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or lacked efficiency, and the concrete use of databases was therefore verylimited. Finally, they observed that the co-operation between the MemberStates was hampered by the attitude of the Commission about the privilegesand immunity of EU staff. It was left to a member of the Commissionsfinancial control unit out of desperation at not receiving any response fromhis supervisors to denounce publicly to politicians and the media the abusivepractices of some services and civil servants on whom he had drawn up detailedreports. His explicit and irrevocable criticisms of UCLAF made a majorcontribution to the ensuing crisis (Van Buitenen 2000).

Even if the auditors role was not to detect and investigate criminal acts,UCLAF was not granted the necessary means to remedy such shortcomings.Indeed, the criminal jurisdiction of UCLAF depended on collaboration withthe national authorities which were endowed with the necessary powers ofinvestigation. It can therefore easily be understood that rivalry developedbetween both services, given the fact that the Anti-Fraud Unit had originallybeen integrated in DG XX services (and in DG VI, XIX and XXI as well) buthad progressively become more independent (in 1994 and 1995), thanks tothe centralization of its services and its more numerous staff, to the detrimentof DG XX though the Unit officially remained a structurally dependent unitwithin the DG.

In the aftermath of the 1999 crisis, the Court of Auditors, an external auditunit, produced reports which were clear and to the point, but it appears thatonly one branch of the budgetary authorities, the Budgetary Control Commit-tee, used them efficiently. In contrast, the audit and control mechanismswithin the Commission did not function properly, for seemingly politicalreasons. The small size of the audit unit within DG XX did not enable it toexamine all cases, and it was incapable of developing the necessary proceduresto prevent further irregularities and instances of fraud. The creation of OLAFtherefore offered the opportunity to highlight the weaknesses of the financialcontrol units within the European institutions and more particularly withinthe Commission.

We must also stress the ambiguous situation of UCLAF/OLAF regardingthe control function of the highly bureaucratic European institutions. TheUCLAF investigations were of an inquisitorial (as a unit hunting down fraud)and delegitimizing nature for the services under scrutiny which objectedstrongly to what they considered as interference. The anti-fraud unit wasaccused of conveying a negative image of the Commission services. Thus, theCommission services were very reluctant generally to collaborate with anagency with such weak legitimacy.29

Several operational services with which the Committee of IndependentExperts had contact were critical about the way UCLAF worked, while otherssaw its activities as a concrete obstacle to the resolution of some cases a viewconfirmed by some UCLAF staff interviewed over the period 199495.30 Thiscritical stance was reinforced by the fact that the agency, which was under theCommissions Secretariat General, was often perceived as preventing any

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presentation of compromising information to other services or arenas. Likewise,the August 1998 report of the Court of Auditors on UCLAF revealed manyproblems in matters of internal and external communication and collaborationwith other services. For the agents of the other services of the Commission,UCLAF was seen as a very secretive unit which might even distort informationon fraud, without any legal redress. The report also revealed that far fromconsidering UCLAF as an ally in the fight against fraud, some services perceiveit as a rival with which only minimal and essential collaboration should bemaintained.31 From this viewpoint, UCLAF appeared to produce results quiteopposite to those originally intended. Some services have even contested itsmonopolistic position regarding information about fraud. UCLAF was some-times considered as some sort of censor which would arbitrarily decide onfraud issues. This lack of trust was intrinsically linked to the creation ofUCLAF, and its staff found it difficult to restore its image as a positive andimpartial control unit.

OLAF: an ambiguous step towards a European area of freedom, security and justice

OLAF is the fruit of exceptional circumstances in the aftermath of a scandal.It reflects the necessity of restoring credibility.32 Born in a context of institu-tional crisis, it was created to bring renewed legitimacy to the Commission andwas granted a dual statute which aimed at giving the Office the necessaryoperational independence, desired by the political authorities, while it remainedwithin the Commission for its budget and administration. In fact, OLAFsmany problems are mainly due to this semi-autonomous state. OLAF is anadministration with investigative powers but it lacks a legal personality, has norecognized power to impose penalties and is overseen by a Supervisory Com-mittee designed to control and guarantee its independence. As a consequenceof such deficiencies, the legitimacy of OLAF is regularly questioned by nationaland European institutions because of the lack of guarantees regarding theobjectivity and transparency of its investigations as well as the deficient protec-tion of the fundamental rights and freedoms for the personnel investigated.(There are no guidelines about the conduct of investigations or the collectionof evidence and very few investigations lead to action before a court.)

The end result is that relationships between OLAF and the other Europeaninstitutions and organs remain problematic. With regard to the EuropeanParliament, when the request for information is designed to put the Commis-sion under political pressure, the provision of documents and information hasremained the focus of serious tension.33 In particular, the circumstances of theinvestigations (begun in February 2002) into the alleged misuse of EU fundsdonated to the Palestinian Authority illustrate the ambiguity of the institutiondesigned to investigate fraudulent practices. Indeed, in this case (probablyinfluenced by the memory of the 1999 crisis) three different initiatives havebeen taken at the European level. In a first stage, the European Parliament hastaken up the issue, with 170 MEPs signing a petition calling for a parliamentary

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investigation. The day after this petition, OLAF announced the start of a newinvestigation. Finally, the Foreign Affairs Parliamentary Commission andCOCOBU (French acronym for the Budgetary Control Committee) proposedsetting up a working group to control the use of European subsidies by theArafat administration. Obviously, each of these institutions judged itself themost capable of investigating such issues, but it again opens the debate aboutwho is the legitimate European actor to tackle the problem of the misuse ofEU funds. Thus, the question has not been resolved even with the creation ofOLAF. With regard to OLAFs position within the European Judicial Area andits new components EUROPOL and EUROJUST (added to the previouslycreated European Judicial Network), it is symptomatic that the decision to setup these institutions was not planned in the light of the relationships betweenthem. Only very recently have agreements been made for co-operation betweenthe Commission (and through it OLAF) and EUROPOL,34 and EUROJUSTand OLAF.35 These bodies respective tasks have not been clearly defined eventhough their powers have been extended and reinforced.

Finally, they were several disputes about the new inter-institutional internalinvestigation system which illustrate the lack of legitimacy of OLAF withinthe European institutions. The European Central Bank (ECB) and theEuropean Investment Bank (EIB) each adopted an internal decision incom-patible with OLAFs investigative power which covered all the institutions ofthe EU. Court action was launched by the Commission through the EuropeanCourt of Justice. The opinion of the Advocate-General (presented in October2002) recommended the annulment of the decisions of the ECB and EIB,which has been approved by the ECJ in July 2003. The question of whetherMEPs immunity protects them from action taken by OLAF has also beenbrought before the Court of First Instance (in February 2002).36

The lack of support by other European agencies which have not yet agreedto co-operate with OLAF contrasts with the multiplication of sub-bodiescreated to support OLAF in its task. At least three new institutions have beenset up by the Commission since 1992: the Investigation and DisciplinaryOffice (IDOC) with the function of conducting administrative investigationand preparing disciplinary procedures,37 the creation of independent Authori-ties specializing in financial irregularities for each institution,38 and finally theOLAF Anti-Fraud Communicators Network (OAFCN) whose aim is to createdialogue and work to inform, raise awareness and develop a prevention cultureamong the professional circles and national authorities.39 It is difficult toimagine how such a mosaic of bodies will be able to co-ordinate their actionefficiently, not only at the European level but also in relationships with themyriad of national institutions aimed at fighting crime. The complexity of theinstitutional tools created by the European institutions is in stark contrast withthe need for simplicity and clarity in order to make an anti-fraud policyoperational and efficient.

To sum up, OLAF, which was created to protect the European communitiesfinancial interests, notably under the first pillar, comes rather under the

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intergovernmental framework of the third pillar. Indeed, as long as the questionof the evolution of the third pillar towards more communitization is notaddressed implying a more concerted and binding management of Europeanjustice and policing policies all forms of anti-fraud activity are probablybound to fail. The role of the European Parliament and the Commission maybe reinforced because of their commitment to anti-corruption fighting, butthis is a short-term outcome: the European institutions remain prisoner of theprevailing intergovernmental doctrine and they run the risk of being unableto offer satisfactory results and eventually resuming their former role of ascapegoat, should a new crisis occur.

CONCLUSION

The protection of the communities financial interests and anti-fraudfighting: would they provide a new legitimacy for European integration?

The creation and institutionalization of this new paradigm in public action,the protection of the European communities financial interests, offers a newtool that may be used to heighten and renew European governance aschampioned by the Commission. More widely, the emergence of Europeananti-fraud policies brings into question the integration process of the memberstates in new domains of Community action. They are not trivial as theypertain to security and justice affairs, the last sanctuary of national sovereigntyagainst European integration.

By promoting anti-fraud policies, the EU spurred on by the EuropeanParliament and the Commission has clearly adopted a strategy of judicialintegration, following on from economic integration. As is the case withEuropean immigration policy, anti-fraud policies highlight the turning pointin the development of the new control paradigm under the third pillar, whichis currently rather weak.

The development of an anti-corruption strategy is therefore linked to therealization of a much bigger project, i.e. the construction of a single judicialarea in Europe. In that respect, anti-fraud policy is both a means and a strategyto reinforce the legitimacy of European governance in the present criticalsituation in the construction of Europe. It is symbolic as it embodies a politicalwill to strengthen European institutions, while means and resources still dependon intergovernmental decisions under the third pillar. We cannot, therefore,say if the introduction of this new policy domain (the fight against abuse ofCommunity funds), which is based on a discrepancy between the objectives(the strengthening of the Parliament and the Commission) and its means(intergovernmental decisions under the third pillar), will eventually contributeto making good the deficit in the legitimacy of the European institutions.

Address for correspondence: Veronique Pujas, Research Fellow CNRS, CIDSP,Institut dEtudes Politiques BP 48, 38040 Grenoble Cedex 9, France. Tel:04 76 82 60 45. Fax: 04 76 82 60 50. email: [email protected]

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NOTES

1 The European Conventions working group on freedom, security and justice,Conv. 426/02, proposes substituting the communitization and inter-governmentalism approaches with a clearer distinction between legislation (legalinstruments, legislative procedures, implementation in large part to be alignedwith Community procedures law) and reinforced co-ordination of operationalcollaboration at the European level. http://register.consilium.eu.int/pdf/en/02/cv00/00426en2.pdf

2 Developments in December 2001 in Italy (not included in this article) regardingthe failure to agree on the European arrest warrant, after the events of September 11,tend to confirm the hypothesis that the fight against corruption is a sensitive issuefor domestic politics. Some member states, without severe problems of corruptionin their political life, will be much more receptive to a European policy to fightcorruption, whereas countries with corruption problems involving the politicalelite in Italy and France, for example, will be more reluctant to implementEuropean norms.

3 Jan. 1984, Doc. 11346/83.4 The Bosch Report, A4-0297/98, 22 September 1998, p. 10.5 Parliamentary Inquiry Committee on the transit system.6 A4-0097/1998 resolution informing the Commission about the reasons for

postponing the discharge decision on the execution of the EU general budget forthe year 1997, adopted on 30 March 1998.

7 OJC C348 of 18 November 1997, Court of Auditors covering 1996, Vol. 2.8 COM (87) 572 and COM (87) 891.9 The Common Transit Procedure which permits goods to enter the territory of the

Union and its EFTA partners (and that of Poland, Hungary and the CzechRepublic) without paying customs duties or excise, provided that they are re-exported, has been the subject of serious frauds which had an impact on publicbudgets. In Fraud and the EU Budget, DG Research, EP 167.114, p. 9.

10 OJC C316 of 27 November 1995, EP Resolution of 19 September 1996, OJCC320, 28 October 1996.

11 Reg. no. 2988/95.12 The first protocol on 27 September 1996 defines corruption that is detrimental to

the Communitys financial interests, and the obligation by the member states tofight and punish it. The protocol on 29 November 1996 is about the interpretationof the PIF Convention and of its protocols by the ECJ.

13 The second protocol on 19 June 1997 is about the obligation of the memberstates to fight money laundering, and provides for the responsibility of legalpersons. It makes provision for the seizure and confiscation of crime-relatedinstruments and revenues. It also makes provision for the rules governing co-operation between the Commission and the member states, and for the protectionof data.

14 In the mid-1990s and in the context of globalization awareness, the World Bankand the IMF began to devote more resources to research into the economic impactof corruption. Several leading economists including Vito Tanzi, Paulo Mauro andDaniel Kaufman produced IMF and Bank publications, detailing empirical evi-dence about the costs of corruption to international business and developmentefforts.

15 Council Regulation 2988/95.16 Notably with the creation of liaison judges for each member state with the task of

co-ordinating judicial co-operation.17 We can therefore infer that the Commission, thanks to the mobilization of

Community institutions on fraud problems, is taking the initiative in taking on

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the role of agenda-setter that the observers of the third pillar deplored so much.This hypothesis is confirmed by the directive drafted by the Commission on23 May 2001 which aimed at ensuring the criminal protection of European funds.According to this directive (adopted according to the co-decision procedure by theCouncil and the European Parliament), the member states were to adopt commondefinitions of offences (fraud, corruption, money laundering) that are detrimentalto the Communitys financial interests, together with common rules in matters ofaccountability, sanctions and co-operation with the Commission. This directive isinteresting as it made provision for the control mechanisms of the first pillar.

18 Corpus juris would introduce an autonomous code for the investigation, prosecutionand punishment of fraud and other crimes against the Communitys finances. Thiscode would apply in a single legal/judicial area comprising all member states.

19 High politics issues are those which touch on the fundamental definition, identityand security of the nation-state.

20 Cf. the failure of some member states to prevent and punish public funds evasionthrough fraudulent management of public contracts, invitations for tenders,subsidies.

21 Ibid.22 Report of the Committee of Wise Men, ch. 5, p. 20.23 Didier Georgokakis explains the denunciation role of the Budgetary Control

Committee in a number of ways: it is not a prestigious parliamentary committeeand it consequently gathers members from minority groups such as the Liberalsand the Greens; it was under the presidency of a German member of the EuropeanPeoples Party at a time when pressure on the Commissions budget was strongand the accused Commissioners were socialist.

24 Le Monde, 20 January 1999.25 Ibid.26 Report of the Committee of Wise Men.27 UCLAF, as a statutory administrative body, does not have the same legal arsenal

of attributions as a police force, which is necessary to carry out more thoroughwork than than of the auditors (Report of the Committee of Independent Experts,p. 21). We may add that the creation of OLAF has not solved the problem.

28 Before 1995: 25 customs inspectors, 15 agricultural inspectors, 8 tax inspectors, 8financial inspectors/accountants, 7 police officers; i.e. a total staff of 163.

29 Interviews with UCLAF/OLAF staff conducted in December 2000.30 Ibid.31 Report of the Committee of Wise Men, ch. 5, p. 20.32 Interview with a member of the OLAF staff, December 2000.33 Supervisory Committee, Report September 2001June 2002, 18 June 2002, p. 52.34 18 February 2003, www.europol.eu.int35 On 14 April 2003, OLAF and EUROJUST signed a memorandum of understand-

ing putting in place the modalities for their future co-operation. http://europa.eu.int/comm/anti_fraud/press_room/pr/index_en.html

36 There is currently an appeal to the Court of Justice against the judgment of theCourt of First Instance.

37 2 April 2003, Commission Report, Evalutation of OLAF, COM (2003) 150Final, p. 21.

38 Ibid. p. 22.39 Ibid. p. 29.

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