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Cooperation is key to make the fight against fraud successful

Ville Itälä. Source: OLAF.

The EU Anti-Fraud Office — OLAF — investigates a wide variety of wrongdoings, from embezzlement to customs fraud, and even food fraud. OLAF investigates and detects fraud, but it also carries out activities aimed at fraud prevention. Ville Itälä, OLAF’s Director-General since August 2018, shares his views on OLAF’s mandate, its core activities and its outlook.

Interview with Ville Itälä, Director-General of the EU Anti-Fraud Office — OLAF
By Gaston Moonen

Before you became Director-General of OLAF you were an ECA Member, so you know the audit profession from the inside. And as a Member of the European Parliament and former minister in Finland, you know the political dimension. In Finland, you worked both in audit and in investigations and prosecution. Which aspect of your previous professional experience do you think is most beneficial to you in your current job?

Ville Itälä: I have had different jobs in different organisations and environments, and I feel that the experience I gained in all of them is highly useful in my job here at OLAF. What was common across all of them was a strong belief in our European values, especially in human rights. And the need to maintain the trust of citizens: that is also an important aspect. In the Finnish Parliament, I was Chairman of the Constitutional Committee in the period when we first put human rights into the Finnish Constitution; the Committee was dealing with human rights issues on a daily basis. So I feel that human rights are an important part of my background, and that they are also very important for my current job.

Can you give a specific example of such cooperation which clearly paid off?

Ville Itälä: It was 35 years ago when I was working as a police chief and a prosecutor. In this case, there was a company which breached all the possible provisions of Finnish criminal law. What we found was just a small cardboard box with some invoices. They had no accounts, no registration: nothing. They were stealing things and selling them on, among other things. What surprised me at the time was that all the evidence fitted inside a small box. In those days, the dimensions were different from now, and it was quite easy to recognise the structure of the fraud. Fraud schemes are more complex now, and much more systemic. And since fraud is now often cross-border, it is more difficult to detect and investigate. And in that sense I am quite happy to be here, because our added value comes from this cross-border investigation and cooperation. Our work requires knowledge about the legislation and the language of different countries. National police authorities have generally neither the capacity nor the resources to do that. In this regard, OLAF clearly adds value.

… our added value comes from this cross-border investigation and cooperation.

Key input in cross-border investigations

Can you give a specific example of such cooperation which clearly paid off?

Ville Itälä: An example that comes to my mind is a VAT case in Romania. It involved cooperation between the Italian and Romanian authorities, and OLAF coordinated it. It was really a success story: it involved “big money”. A national authority acting alone could not have cracked the case. With the help of OLAF’s knowledge, the team was able to put the pieces of the puzzle together, and we tracked the fraudsters down in Romania. Basically, it was a joint operation with the Guardia di Finanza in Italy and the Romanian authorities, and there have already been arrests and seizures of assets. But it seems that the same gang copied its actions elsewhere. So that will keep on going in terms of case work.

We present the different types of cases we deal with, and the trends we see, in our annual report. And under each trend you can see a lot of real-life examples. For the VAT case, we also had a press release: you can find it on our website.

OLAF cannot bring prosecutions, because it cannot undertake legal action. So what is exactly OLAF’s role? Does it involve following up on leads where national police authorities are also involved?

Ville Itälä: We usually start off with information from our leads. Then we sometimes notice that our partners actually possess identical information about a case which has come to OLAF: for example, in the case I just mentioned, the Romanians were already working on it, and we knew that in Italy they were following related leads… so by putting the case together, we managed to catch the bad guys.

Another success story is called ‘Operation Bonifica.’ Together with the Italian authorities we found thousands of instances of what we call ‘false farmers:’ people who are deceased or who own pieces of land that are not cultivated. But claims for EU funding have been submitted by these people, and for these unused plots of land. So grants were being paid out by the Italian authorities, but it was actually a whole scam managed by the mafia.

The Italian authorities came to us because we possess expert knowledge on how these funds are supposed to be managed. They concluded the national level investigations, we concluded the EU-level investigations, and we recommended that about €30 million be recovered. This brings me to another significant role played by OLAF: our prerogative to recommend recoveries via the financial route, so that the money claimed by fraudsters is returned to the EU budget. In the “false farmers” case, our recommendation meant that the European Commission was able to recover the money without any additional proceedings.

Significant recovery recommendations

Speaking about money: your 2017 report mentions recovery recommendations of over €3 billion?

Figure 1 — Some figures related to OLAF’s activities. Source: OLAF.

Ville Itälä: Yes, but mostly because of one case. It concerned big shipments of Chinese food and textiles to Hamburg (Germany). Then the fraudsters put the textiles on to trucks, which then went to the UK where they formally entered the Single Market. The UK customs authorities however undervalued the textiles. On the basis of our investigation covering three to four years, we calculated that €1.9 billion in customs duties had been lost. In fact, the Commission sent an even bigger bill because it looked further back, and realised that the issue dated back far longer. Finally, they concluded that an amount of €2.5 billion has to be paid back by the UK. As you probably know, this case is currently at the European Court of Justice. This example shows that criminals are looking for the weakest links in the customs control chain. And this requires cooperation within the EU.

When you find such a case you normally cannot extrapolate from it, correct?

Ville Itälä: Yes, that is correct. Everything is case-specific. That is also what we say in our annual report. We do not want to ring the alarm bells and suggest that there is more fraud in Europe than there actually is. When we say that fraud is “systemic”, we do not mean that fraud is embedded in all the EU does. Instead, we mean that the fraudsters have created a whole system, which at first sight may not necessarily seem to be fraudulent, even when you audit it. For example, in some Member States we identified an issue of conflict of interest in public procurement. We made recommendations on this and the Commission is working on the recovery.

The judicial process takes time to recover funds. To what extent is it capable and equipped to deal with such cases?

Ville Itälä: This is why it is so important the European Public Prosecutor’s Office (EPPO) is being created. There are too many criminal laws and different practices, and it is too fragmented. Currently, the judicial procedures take too long. This needs to be addressed and we believe that the EPPO will be very helpful in this regard.

More instruments to fight fraud than rules and controls

Tender procedures and customs duties have long been associated with voluminous rules and procedures. To what extent does complex regulation lead to opportunities for fraud and corruption? According to some experts, regulation can also have the reverse effect from a trust point of view. How do you see that?

Ville Itälä: I think it is not about how simple or complex the rules are. The issue is that fraudsters are doing what they are doing. There are different motivations for that. But it always has the same consequence: fraudsters take the money away, with as a consequence that there is less funds getting to people who really need it. And, as the ECA has often pointed out, procurement rules can be very complex and difficult. That can make such proceedings more vulnerable to irregularities and fraud. But the core problem is that fraudsters are exploiting the possibilities of our single market. Capital can move freely, people can move freely…and the criminals can move freely too. That is why we need a system to follow that, and here OLAF’s added value of is evident. You need somebody to keep an eye on what the fraudsters are doing.

… the core problem is that fraudsters are exploiting the possibilities of our single market.

So when it comes to the single market, law enforcement is not agile enough. But criminals exploit the systems immediately. So we are always a little bit behind. We have to develop our systems however in a sensible way and we should not put in place too many controls, either. This would only push costs up, and would be an obstacle to the main overall objective of the single market: free trade. That is why we are developing our information systems. The exchange of information is so important. That is one of our priorities. If we have better information, fraudsters will find it harder to act.

Is one of the instruments for exchange of information also blacklisting? In the past, Member States did not us this tool very often, not least because it might hurt some of their own companies. Is that changing? In the sense that the overall interests of the EU will suit Member States’ own interests now too?

Ville Itälä: Yes, we have seen this change, and it has happened quite rapidly now. Even on the borders of the EU, so not only inside the EU but also from an international point of view. So far, at conferences, everyone has said: ‘Yes, we have to cooperate.’ But in reality, cooperation was lagging behind. Now I think the situation has changed a lot: people are going further than just talking.

As I said before: exchanging information is crucial, but there are also many legal limits on that. A big one relates to data protection, which clearly is an important issue. Sometimes data protection rules limit the exchange of information which is really necessary to go after fraudsters. Often, however, we can find a way to exchange such information and still comply with these rules. For OLAF, this is important because preventing the sharing of data makes cross-border investigations more difficult.

Box 1 — ECA — OLAF workshop on 21 May 2019

After mutual updates on recent trends and plans for near future, representatives of OLAF and ECA provided some insights on procedures and criteria shaping each institution’s daily work. Close cooperation of both institutions was tested in practice by solving case studies in four thematic areas:

- Agriculture;

- Structural funds;

- Cases in 3rd countries; and

- Parallel OLAF investigations and ECA audits.

Results of the case studies were discussed in groups and presented to all participants. The importance of exchange of information and use of IT tools in audit work was stressed by several speakers both form ECA and OLAF.

Fear of reputational impact

One of the issues often linked to fraud is the reputational risk: speaking about fraud as such can already trigger some reluctance because of reputational impact. The fear is that mentioning fraud will make people think that a lot of EU funds is tainted. So let’s not speak too much about it. OLAF is often associated with fraud, with costs for the EU budget, and not necessarily benefits. How do you plan to turn around this image? What is your strategy?

Ville Itälä: We are not reluctant to discuss fraud. But when we carry out an investigation, we cannot publicly state what we are doing. Then we conclude the case and issue a recommendation: for example, a judicial recommendation If we inform the public too early, we may jeopardise the national prosecutor’s investigations. So we need to be careful when informing the public since we do not want to jeopardise ongoing investigations.

We are currently trying to find a way of being more transparent. As I said, people do not know, or know enough, about what we are doing. That is why we have this annual report, which describes to people non-technically what we have done and explains our cases.

The latest case we had is also quite telling: it was about counterfeited shampoo being shipped to Mexico and Colombia. We detected it and passed on the information to the Mexican and Colombian authorities. Then they seized them and arrested the perpetrators. That case also shows our mandate regarding revenue fraud. Basically, it is the same thing as in the undervaluation case I mentioned before: the fight against counterfeiting is in the same family of cases, because it is revenue fraud. It was shampoo made in Asia, so it was fake branded. Through our information we knew that the criminals were targeting the EU market. They were sailing around the world…they reshipped the counterfeit goods so many times so that the authorities lost track of the containers containing them. Together with law enforcement in Mexico and Colombia, we caught them, by cooperating internationally. So we prevented this kind of product from flooding the EU market. Preventing such products from entering the EU is one of our objectives: if they reach the EU market, it leads to loss of revenue, customs duties and so on. But even more importantly, such products are potentially dangerous to the health of our citizens.

Do you feel that, as Director-General of OLAF, you have to present contrasting perspectives: you have to indicate the severity of situations — a negative story — while on the other hand you have to present the success stories?

Ville Itälä: I think fraud in a way is indeed negative, but from the citizen’s point of view, what matters more is that there is a European body defending their interests. My communications specialists and I are always discussing how we can be more transparent. We have tried to find solutions, but we are in a different position from most other EU bodies. And it is important to stress this: we provide information where we can, and we certainly do not brush fraud under the carpet: quite the opposite, we expose it. Thanks to us, fraudulently acquired money is returned to the EU budget, where it will be used to finance useful projects and promote the creation of jobs. Another element we have to take into account is the deterrent effect of investigation. Fraudsters know that we are here and working to prevent them from doing what they are up to.

…we certainly do not brush fraud under the carpet: quite the opposite, we expose it.

OLAF’s mandate only goes so far

One of the issues increasingly related to fraud is tax evasion, including money-laundering. The latter often involves banks. We have seen fines levied on ING in the Netherlands, Danske Bank and Nordea, big cases. The Panama Papers were published. What is the role of OLAF on these issues, if any?

Ville Itälä: Tax evasion as such does not fall within our mandate. That is for sure. But the Panama Papers are part of another OLAF success story that I am happy to share. Our investigators and analysts used very innovative methods and they collected this huge amount of data, with around 420,000 documents, all downloaded from publicly available data. And then our analysts cross-referenced these with the names and information of about 45,000 EU staff and Members of the institutions. Commissioners, MEPs and EU officials, mostly those who are in charge of managing funds. These can be project managers, but we also included auditors.

So we cross-referenced these to see if the names of EU staff and Members appeared in the Panama Papers. Out of these, we actually had only 17 matches. But they were not all real matches. Out of these we opened investigations and then we got some information through our regular channels and opened two more. Overall, in connection with the Panama Papers we ended up with six cases, four from our analysis and two through our regular channels.

That is the technological capacity we nowadays have at OLAF. With a very reassuring outcome for the EU institutions: as I said, only six cases out of 45,000 staff. But on tax evasion issues as such, that is dealt with primarily at national level. However, regarding big data analytics, one of our concerns is that each Member State has developed its own databases and systems, and they do not communicate with each other enough, or even at all. We are try to find a way to relay this information; we are also discussing it with the European Commission to negotiate a way for us to gain access. This is also very important for the customs-related aspects of e-commerce where OLAF does have a stake.

A few years ago, the ECA published a report on VAT fraud; on 16 May 2019, we published one on fraud in cohesion expenditure, special report No 6/2019. In 2018, the ECA presented two Opinions on fraud-related issues, and of course we have special report No 1/2019 on fighting fraud in EU spending. What is your take on these publications, and what do you think are the main issues to focus on?

Ville Itälä: I agree with many of the critical remarks made in these opinions, particularly those aimed at improving the system. Once our investigations are finalised, the judicial and financial follow-up by national prosecutors, other Commission departments or national bodies is out of our hands. Our mandate stops when we have issued our recommendation. There were some interpretations that it was OLAF’s fault. Well, absolutely not! There is something wrong with the system. We need to find better ways to recover the money.

Our mandate stops when we have issued our recommendation.

I was happy to read that the ECA noted in its Special Report No 1/2019 that we need to take action, because that is now on the table for a new regulation, which should give us the possibility to access information on bank accounts, carry out more on-the-spot investigations, and make our evidence admissible in national courts. These will be important tools for us to become more effective. These new tools will help us a lot. In fact, the ECA report helped us in making progress; and the European Parliament also strongly supports this. The Council is however much more reluctant.

… the ECA report helped us in making progress; and the European Parliament also strongly supports this.

What I do not agree with is saying that we are not effective. We are quite effective, and that can be measured in many ways. Instead of criticising OLAF for not being effective, you have to criticise the system, which needs to be changed to allow us to become more effective. We can become more effective if we are given the right tools, that I fully admit. This is why I was very happy with the proposal in special report No 1/2019 that we should focus more on developing the Commission’s anti-fraud strategy. That is now on a wholly new level; I have personally started meeting all of my colleagues in the Commission to discuss this, for example with DG SANTE.

I was in Italy some weeks ago, and the Guardia Finanza has one division dedicated entirely to food fraud. They have very interesting cases, often also involving food stuff coming from non-EU countries. This field has been expanding enormously in recent years. And the citizen are thinking: why is the EU there? The answer is: to provide security, also regarding food. Cooperation is also necessary here, exchange of information between authorities, including to and from OLAF.

Fraud and integrity are two opposite, but interlinked issues. As an MEP, you have also seen sensitive situations in the Parliament. Is integrity something to be concerned about in the EU institutions?

Ville Itälä: First, I must say that even one case is too much if it concerns the EU institutions. Most of the time, not so much money is involved in such cases, but the reputational impact for the EU is huge. But I must also say that in 2017, there were 17 cases, and we issued 12 recommendations. And if you consider that there are around 45,000 people working for the EU, it puts things into perspective. What I am trying to say is that, although people are quick to presume that there is substantial fraud happening inside the EU institutions, there is no evidence to support that! The ECA’s 2017 annual report indicates the same thing. Administrative expenditure for many years has been for many years now below the ECA’s materiality level of 2% of the expenditure, actually close to zero. In reality, fraud and corruption is quite a small issue inside the EU institutions. However, as I said, even one case is too many, and may attract huge headlines. But citizens really should not worry: there is a zero tolerance level for fraud and corruption within the EU institutions and bodies.

In reality, fraud and corruption is quite a small issue inside the EU institutions. However, as I said, even one case is too many…

OLAF as a knowledge centre

What do you think is a key accomplishment to have been achieved by the end of the next Multiannual Financial Framework, so in about seven years from now? Also from a strategic point of view?

Ville Itälä: We should really start building the bridges I mentioned, including improving our cooperation with the ECA. On 22 May this year, I will sign an administrative arrangement with your Secretary-General, Eduardo Ruiz-Garcia, which will help the ECA auditors in their handling of cases of suspicion of fraud in the areas they audit. The other thing I want to improve is that we as OLAF are even closer to EU citizens, especially when we deal with issues such as food fraud and e-commerce. Finally, there will always be new areas where fraud may be committed, and we have to follow that, or better, pre-empt that. Cooperation and the exchange of information are essential in this respect. I want OLAF to follow these developments, and use artificial intelligence and other tools to become a knowledge centre for fraud. We need to build trust and cooperation with other parties to get there. And we also need to contribute to trust in the institutions, and in the EU generally. These are my priorities. And I really hope to continue the good cooperation OLAF has with the ECA, and to create new possibilities for working together, such as joint training measures or the follow-up of cases reported by ECA. Together, OLAF and the ECA, we share a purpose: to protect the EU’s financial interest.

Box 2 — Administrative arrangements between OLAF and the ECA: factual account of arrangement signing on 22 May

From left to right: Ville Itälä, OLAF Director-General, Klaus-Heiner Lehne, ECA President, Eduardo Ruiz Garcia, ECA Secretary General.

On 22 May 2019 the OLAF, represented by its Director-General Ville Itälä, and the ECA, represented by its Secretary General Eduardo Ruiz Garcia, signed a so-called ‘Administrative Arrangement’ at the ECA in Luxembourg. With this arrangement, OLAF and the ECA contribute to a structured framework for cooperation between the two organisations which in principle aims at to facilitating their timely exchange of information. The arrangement provides further details on contact persons, case selection and information provision relating to possible cases of fraud and corruption detrimental to the financial interests of the EU, opening and closing of certain types of cases by OLAF, and also regarding non-operational cooperation issues, such as training, workshops and exchange of staff. The arrangement takes immediate effect.

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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The ECA Journal features articles on a variety of current audit topics, the ECA’s role and work. It is available in electronic form below, and paper copies can be ordered online at the EU Bookshop.

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