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Calling for strategic fraud management

Juhan Parts, ECA Member.

The ECA’s special report 1/2019 assessed the state of the fight against fraud in EU spending. Juhan Parts is the reporting Member for this report, which received considerable attention from ECA’s institutional stakeholders. He explains his interest in the topic, analyses the current state of the EU’s anti-fraud strategy and highlights the report’s main recommendations for the Commission and the EU Anti-Fraud Office, OLAF.

Interview with Juhan Parts, ECA Member
By Derek Meijers and Gaston Moonen

Pay attention to fraud…

ECA Member Juhan Parts has extensive experience with combatting fraud , or in what he calls ‘a never-ending fight against it’. Juhan Parts: ‘ In the 25 years before I came to the ECA, so basically during all my professional career, fraud and corruption have always been somewhere on my agenda. In Estonia in the 1990s, I was directly responsible for setting up a new justice system after the fall of communism. My responsibilities as deputy Secretary General included the development of a new legal framework and the government’s anti-corruption strategy. So I always had to deal with the topic in one way or another in my different posts, and in Estonia in the 1990s, fraud and corruption, just as anywhere else, was important to tackle!’

… in general, when there is less fraud, an economy is better developing.

Juhan Parts is a passionate and committed proponent of anti-fraud measures and a fierce opponent of fraudsters, underlining that it is essential to root out all forms of fraud and corruption in society. ‘The lower the levels of fraudulent behaviour are in government and public administration, the cleaner the business world is and the better it is for your country’s economic development.’ He explains: ‘Take for example the Transparency International Corruption Perception Index, the CPI. One point there equals one percent point GDP growth. So, in general, when there is less fraud, an economy is better developing.’

Juhan Parts underlines that anywhere you go, the economic situation will profit from anti-fraud measures. ‘The research we did in preparation for our special report 1/2019: Fighting fraud in EU spending: action needed showed this as well. Something we need to keep in mind when talking about EU investments and fraud risks. Money can bring good or bad ethics.’ He recalls to have seen this in Estonia as well, where the first wave of foreign investments after the era of communism came from neighbouring Scandinavian countries. ‘The important lesson was that these investors did not only bring their money, but also their business ethics, which had a very positive effect on the advancement of the Estonian economy.’ In this context, Juhan Parts sees a clear role for the EU. ‘If the EU distributes its funds through different programmes, we should aspire to spread good ethics as well. Otherwise we should not distribute EU funds. And the EU should show the necessary vision and leadership to address these issues.’

If the EU distributes its funds through different programmes, we should aspire to spread good ethics as well.

… because it is a fact of life…

Juhan Parts thinks the ideal of a fraud-free society neglects basic features of human behaviour. ‘In all cultures you can encounter different types of behaviour. The EU therefore faces a lot of different challenges when deciding on policies to address the numerous realities it has to deal with in all parts of the world.’ He points out that one very difficult question is how to deal with corrupt and fraudulent governments. ‘Should we subsidise or support such governments? Should we accept their behaviour is not in accordance with our values, although we do not accept that in our Member States, simply because we want to support development projects for the people there? Can we justify spending EU taxpayers money in such countries, even for good projects, when some of the money might end up in the hands of corrupt politicians?’

For Juhan Parts, the answer to these questions is clear. ‘If we want to promote our European values worldwide, we have to take the current geopolitical problems into account.’ In this context, he notes the increasing number of authoritarian regimes that are emerging around the world and that such regimes are often kleptocracies in which corruption is widespread. ‘These developments create enormous problems and hinder development and the increase of well-being around the world. And I believe the EU should take a firm stance here and, quite literary, put its money where its mouth is. And with this I do not only refer to our aid to third countries. This first and foremost should apply to our actions, financial support and investments within the EU.’

‘Fraud cases,’ Juhan Parts continues, ‘regularly receive a lot of attention in the media, and rightly so. People tend to say fraud is a sensitive topic and they falsely assume that if a fraud case linked to EU funding appears in the news, the public will think the entire EU is fraudulent. But this is not true!’ He argues that it is of course sad that some people commit fraud sometimes and that there are many reasons and causes for this behaviour. ‘But instead of trying to keep the lid on, I would argue we have to be transparent and react professionally. Show that we have a robust anti-fraud management framework and strategy and that we take the necessary measures to prevent, detect and fight fraud. This is a question of leadership, drive and vision.’

… also in the EU

Eurobarometer surveys show that more than 71% of EU citizens believe that in many cases, the spending of EU money involves some form of fraud. Juhan Parts: ‘Let’s analyse that. I know there are some officials that say these people are wrong, or that these figures are anti-EU propaganda. But I can assure you that the one thing I learned as a politician is that the citizens are never wrong!’

… I learned as a politician is that the citizens are never wrong!’ […] [their] worries stem from real- life experiences.

He is not surprised that many EU citizens think this way. ‘The EU must ask itself: what causes our citizens to worry? I believe these worries stem from real- life experiences.’ He explains: ‘In many places, our citizens see projects that are funded with EU money. For example, agricultural subsidies, infrastructural works or research projects. And many of those citizens might also have heard stories about people taking undue advantage of such EU funding .’

Juhan Parts gives the example of fraud in public tendering, which is one of the main fraud risks for the EU. ‘This is an obstinate problem. Take for example a public procurement that is rigged by three bidders that are connected to each other. There will be dozens of businesses around them that know about it, and these will say they do not stand a chance in public tenders because the competitions are fake. If we fail to address such problems, if we cannot ensure fair competition and level playing fields, it will have substantial effects on our economy. Moreover, people will lose trust in the EU and its institutions. And rightly so!’

Complex rules as a cause of fraud

On the topic of the causes of fraud in EU expenditure, Juhan Parts notes that there are of course many different causes, but that scientific research clearly also points at the complexity of certain EU rules. ‘As we mentioned in our fraud report, some of the experts we consulted highlighted the possibility of a causal link between the complexity of rules and fraud. What is really worrying here, is that this complexity does not only provide professional fraudsters with loopholes to circumvent the rules, in some cases it might also force otherwise honest citizens to behave dishonest!’

… possibility of a causal link between the complexity of rules and fraud.

To illustrate this, Juhan Parts gives the example of EU funding for university programmes on a very technical topic, where the subsidy would only be paid in case the course would be attended by a minimum of 15 participants. ‘The field of studies is a niche, so in any country, only a handful of academics would be working in that area. So imagine how difficult it would be for a small university in a small country to find enough qualified participants. We have found cases in which the university would add the names of other students in order to become eligible for the subsidy.’ Juhan Parts emphasizes that he obviously does not approve such behaviour, but that he can understand what causes it. ‘In my opinion, one-size-fits-all legislation does not work in real life as complex conditions can lead to unintentional fraud when people try to adjust their situations to fit the rules. We also hear this message from national authorities, and I think it should be one of the main points the European Commission needs to take into account when redeveloping the EU fraud risk management strategy.’

The scale of the problem

A recurrent issue in the discussion about fraud risks in EU expenditure is the lack of reliable information about the number of fraud cases and the amounts involved. Juhan Parts, citing the recent ECA report: ‘The Commission does not have comprehensive data on the scale, nature and causes of fraud. Its official statistics on detected fraud are not complete and it has so far not carried out any assessment of undetected fraud.’ He laments the lack of a detailed analysis to identify what causes some recipients of EU money to behave fraudulently and underlines that this lack of information reduces the practical value of the EU’s fraud risk management strategy.

The Commission does not have comprehensive data on the scale, nature and causes of fraud.

Juhan Parts: ‘You can manage fraud risks if you can measure them and to measure them you need to know where to find them. So to manage the scope of fraud in expenditure, we recommended the Commission to develop a proper fraud risk management strategy and to use tailor made models to define the scope of the fraud.’ The ECA Member repeats that the report’s recommendations are in line with academic research, in which scientists often proposes the use of two types of measurements. Juhan Parts: ‘Experts usually advise to use specific surveys that show what fraud could amount to in procurement, and to apply different methods to research big data, also to estimate the impact of the different risks. Whatever EU programme or legal act is initiated or adopted, if there is a financial consequence, they should be accompanied by a proper fraud risk impact analysis. Sadly, however, this is not the current practice.’

In response to the ECA report, the Commission acknowledged the need for a well-informed fraud risk assessment, and a robust fraud risk management strategy, which it announced to develop in the near future. Juhan Parts explains further: ‘Our dialogue with the Commission was interesting. Everyone agreed this is necessary. But we also pointed out it took them a very long time to get to this point. After all, the Commission promised the European Parliament already in 2010 it would come up with a strategy as from 2022 . So after quite a long period in which it displayed a lack of drive and serious political will, it is about time that the Commission shows leadership and steps up its fight against fraud in EU spending.’

Inapt anti-fraud toolbox

In its special report on fraud in EU spending, the ECA also looked at the Commission’s anti-fraud strategy and its fraud prevention tools, including EU Anti-Fraud Office (OLAF). Juhan Parts: ‘Our conclusion was that OLAF’s results are rather poor, to which they replied is that they are actually doing a pretty good job, but that national law enforcement agencies do not take them seriously and that the Commission’s Directorates General (DGs) do not recover enough.’

… our report points out that OLAF lacks the power or responsibility to defend their findings in front of a court of law.

For Juhan Parts these poor results can be partly attributed to OLAF’s set-up as well as to its mandate and working methods. ‘This is such that it can never be effective. First, for financial recoveries, it sends recommendations to the individual DGs, who may then decide whether or not they will do that. Second, OLAF sends national prosecutors information about fraud cases and recommendations to prosecute people.’ He continues: ‘But OLAF has no final responsibility. It is only sending recommendations and that is the reason its results are so poor! So our report points out that OLAF lacks the power or responsibility to defend their findings in front of a court of law.’

Juhan Parts: ‘Another problem is OLAF’s mandate. We talk about hidden crime here, and OLAF is an investigative body, not a police force. But it does not have a sufficiently robust mandate. It cannot take documents forcefully, check bank accounts, or carry out intelligence work, etc.’ He continues: ‘So how could anyone expect OLAF to be able to carry out its investigations effectively and successfully without such powers?’ Juhan Parts concludes that OLAF has no responsibility for real outcomes, no real power, and no opportunities to achieve its mission. ‘And with real outcomes I mean prosecuted people or recovered money.’

Filling the gaps at OLAF

When discussing how to address the gaps in OLAF’s set-up, Juhan Parts starts from a taxpayer’s point of view. ‘OLAF is the nucleus of the part of law enforcement that protects the EU’s financial interest against fraud. So there is a big expectation gap between what OLAF is doing — or is able to do — and what people think it is or should do.’ In this context, Juhan Parts notes the ECA fraud report comes up with a number of options. ‘Considering its legal possibilities, OLAF should take on a coordinating role to help Member States’ law enforce systems to investigate fraud cases and prosecute fraudsters.’

… there is a big expectation gap between what OLAF is doing — or is able to do — and what people think it is or should do.

Juhan Parts explains that, in practice, this would mean that when OLAF discovers a fraud case, it should not start its own investigation. ‘Instead, it should contact the proper law enforcement and prosecution bodies in the Member Statas and forward the case to those bodies. That would be a logical step, as, also in the current situation, if a fraud case ends up before a judge, the proceedings will always take place in front of a national criminal court, as there is no EU criminal court.’

This approach and a coordinating role would make a lot of sense, also in the light of the newly established European Public Prosecutors’ Office (EPPO), which will set up offices in 22 Member States. Given the fact that fraud cases are often cross-border Juhan Parts argues: ‘OLAF should coordinate, facilitate, and provide information. And it should do so systematically, not only case-by-case. In addition to this, OLAF should monitor Member States’ capacity to investigate and prosecute fraud, assess the independence and effectiveness of national law enforcement bodies, and keep track of how many people are convicted and how much money is recovered.’ He gives an example: ‘At present we have no idea how many national investigators are investigating suspected fraud cases that involve EU money. So it would be very useful if OLAF were to monitor that.’

[on effective steps to fight fraud] … currently we do not have a mechanism to check how governments address this Treaty obligation, but OLAF could do that.

Further to this, Juhan Parts explains that the EU Treaty stipulates that Member States are obliged to take effective steps to fight fraud. ‘However, currently we do not have a mechanism to check how governments address this Treaty obligation, but OLAF could do that.’ He adds: ‘In that case, it could inform the Commission which countries do not put in place the necessary capacity to investigate and prosecute fraud. The Commission could then reduce, or stop, its funding to protect the taxpayers’ and EU financial interests. If you add this to an increase in prosecuted fraudsters and recovered money, the EU’s fight against fraud would become a lot more successful. And, most importantly, having such a robust framework of fraud prevention, detection and prosecution would have a strong deterring effect on potential fraudsters.’ He highlights that these fraudster would think twice before attempting to defraud the EU when the chance of being caught would be much higher than in the current situation. ‘After all, strategic fraud management is only effective if you have effective law enforcement.

The ECA’s role in the fight against fraud

Auditing the EU’s anti-fraud strategy and its tool-box induced the ECA to also consider its own role in the fight against fraud in EU spending. In doing so, Juhan Parts starts from another expectation gap. ‘Just as OLAF, we might think we are doing alright, but our stakeholders or the EU citizens might have totally different expectations. Imagine a situation in which they think we are doing tasks A and C. And the public wants us to do A, B and C. While we only do A and B. This quickly leads to an expectation gap.’ Juhan Parts: ‘Auditors are not a police force or part of the law enforcement branch. So auditors have a different role in the fight against fraud and we have to communicate this clearly.’

Auditors are not a police force or part of the law enforcement branch. So auditors have a different role in the fight against fraud…

According to Juhan Parts an external audit body (such as the ECA) will never have the deterring effect necessary to keep people from committing fraud. Apart from this he points out that the goal of an audit is different from that of a fraud investigation. ‘However, we still need to address fraud and corruption in our financial, compliance and performance audits, for example through automated data analyses for financial audit. But it will not scare many fraudster. To do so one needs a pro-active policing power to actively and effectively take on fraudsters.’

The ECA Member definitely sees opportunities for the ECA to contribute more to the EU’s fight against fraud. ‘Through our work, we can provide important information which the Commission could then use to recover funds and to improve its fraud risk management.’ He gives the example relating to the ECA’s Statement of Assurance. ‘Take our annual report. Imagine we would manage to successfully develop our data analytical skills to the point where we would be able to check the entire audit population, so every individual transaction, linking all available databases, also national ones. This would provide us with a complete image of the scope of irregularities and a mine of information about underlying patterns.’

Juhan Parts adds that irregularities may not be the same as fraud, but that performing a comprehensive annual data analytical audit would obviously also benefit the fight against fraud, because it would provide insight in which types of rules, programmes, and management structures are effective. Juhan Parts: ‘And although we are not at that point yet, I see a lot of potential and I can imagine the Commission could use the ECA’s future audit reports as a continuous benchmark to establish the minimum quality criteria for its fraud risk management strategy.’

EU and fraud outlook — what needs to be done

Summing up the main actions that need to be taken to improve the fight against fraud in the EU, which were also put forward in the fraud report. Juhan Parts starts recommending that the Commission should put in place a robust system to report on fraud and provide comprehensive information on the scale, nature and causes of fraud. ‘Based on that information it can then develop a new fraud risk management strategy.’ Secondly, he points out that the Commission needs a system of strategic fraud prevention and that it should clearly place the responsibility with one person. ‘Currently, no Commissioner has the final responsibility for strategic fraud management at the Commission. But without leadership and top level engagement there is no hope some serious changes will be made. Therefore we think somebody should have that final responsibility.’

Fraud prevention is the third step towards a more effective anti-fraud system in the EU. Juhan Parts: ‘The Commission should do more to prevent fraud from happening in the first place and setting up a system for early detection is one of the possibilities we suggested in our fraud report.’ Finally, he sees the reform of OLAF as a major step in the fight against fraud. ‘I believe the reform will prove to be the litmus test. Reconsidering OLAF’s role and responsibilities is essential for the EU to become more effective in combatting fraud in EU spending on all levels, also in light of the establishment of the EPPO.

EU’s long term objectives in the fight against fraud

Concluding the interview, Juhan Parts considers there are three achievements the EU should strive for in its fight against fraud. ‘The first would be to bring the amount of fraud cases down substantially, for example by establishing new and reinforcing existing fraud fighting bodies. Juhan Parts: ‘Our law enforcement structures should be so effective and the risk of being caught so high that fraudsters do not even dare to try to defraud the EU.’

Our law enforcement structures should be so effective and the risk of being caught so high that fraudsters do not even dare to try to defraud the EU

Secondly, he calls for measures that reduce bureaucratic complexity that could force ordinary people to behave fraudulently. ‘Simplifying the rules has many benefits, as the current Commission also recognised wen it formulated the objective of better regulation, and reducing fraud is one of the most important reasons to do that.’ Finally, Juhan Parts underlines that the different law enforcement structures on EU and Member State level should be set up in accordance with the highest professional standards. ‘This would mean the end of empty political debates about whether or not the EU should fund projects in countries that do not want to follow the rules, or where there is not enough capacity to ensure every single euro of EU taxpayer’s money is spend according to the rules. The decision to stop funding should be a professional, not a political one. And everyone should respect that decision!’

This article was first published on the 2/2019 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.

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European Court of Auditors

Articles from the European Court of Auditors, #EU's external auditor & independent guardian of the EU's finances.