Effective Fraud Prevention Strategies for Managing Authorities

1. Fraud Prevention The role of the Managing Authorities Johan KHOUW, European Commission, OLAF

2. WHAT IS FRAUD? • Fraud is a “criminal law” notion. • In 1995, through the Convention on the Protection of the Communities’ Financial Interests (PIF Convention), Member States reached an agreement concerning the definition of EU fraud under criminal law (some elements: intentional act or omission, use of false/incorrect documents, non disclosure of information leading to a loss for the Community budget and misappropriation) • Only a final decision of a judicial authority can qualify a suspected fraud as a fraud case. Fraud Prevention The role of Managing Authorities

3. FRAUD AS A “SUB-SPECIES” OF IRREGULARITY Definition of irregularity: “any infringement of a provision of Community law resulting from an act or omission by an economic operator which has, or would have, the effect of prejudicing the general budget of the European Union by charging an unjustified item of expenditure to the general budget.”* * Article 2(7) of Council Regulation (EC) N. 1083/2006 Fraud Prevention The role of Managing Authorities Irregularities Fraud

4. THE COSTS OF FRAUD • Economic costs • Social Costs • Threat to the trust between institutions and civil society (damage to the reputation of the institutions) Fraud Prevention The role of Managing Authorities

5. THE FIGURES ON IRREGULARITIES IN THE STRUCTURAL ACTIONS AREA PROGRAMMING PERIOD 2000-2006 • 12,161 irregularities • € 1.78 billion involved • € 0.54 billion recovered • € 0.8 billion to be recovered • € 0.44 billion suspended before payment Fraud Prevention The role of Managing Authorities

6. THE FIGURES ON FRAUD IN THE STRUCTURAL ACTIONS AREA PROGRAMMING PERIOD 2000-2006 • 12-15% of irregularities are or can be described as suspected fraud • 20-25% of related amounts Fraud Prevention The role of Managing Authorities

7. WHY IS FRAUD COMMITTED? THE FRAUD TRIANGLE: A SOCIOLOGICAL/CRIMINOLOGICAL CONCEPT Even if a person has a motive, he or she cannot perpetrate a fraud without being given an opportunity Human nature dictates that people will not commit an act unless they can justify it to themselves (“culture”) Fraud Prevention The role of Managing Authorities The existence of "need or greed" factors can trigger individuals to find a way to meet their needs

8. GOALS OF FRAUD PREVENTION Clear rules and good management Fraud Prevention and Repression Group of individuals complying with rules Group of individuals complying with rules Group of individuals complying because of fear of sanctions Group of individuals complying because of fear of sanctions Fraud Prevention The role of Managing Authorities Group of non-deliberate offenders Group of deliberate offenders Group of non-deliberate offenders Group of deliberate offenders

9. WHY IS FRAUD PREVENTION SO IMPORTANT?- OLAF’s EXPERIENCE - • Prevention is a cost-effective approach to dealing with fraud • Investigation and prosecution remain costly and are the responsibility of agencies which may have different priorities and objectives • Investigation and prosecution may take years to achieve results • Fraud prevention can be pursued and achieved at different levels in the management “chain” Fraud Prevention The role of Managing Authorities

10. WHO IS RESPONSIBLE FOR FRAUD PREVENTION? Fraud Prevention The role of Managing Authorities

11. RESPONSIBILITIES OF THE MEMBER STATES - SHARED MANAGEMENT/ Art. 53b (2) of Financial Regulation (1605/2002) […] Member States shall take all the legislative, regulatory and administrative or other measures necessary for protecting the Community’s financial interests. To this effect they shall in particular: (a) satisfy themselves that actions financed from the budget are actually carried out and to ensure that they are implemented correctly; (b) prevent and deal with irregularities and fraud; (c) recover funds wrongly paid or incorrectly used or funds lost as a result of irregularities or errors; (d) ensure, by means of relevant sector-specific regulations […], adequate annual ex post publication of beneficiaries of funds deriving from the budget. To that effect, the Member States shall conduct checks and shall put in place an effective and efficient internal control system […] Fraud Prevention The role of Managing Authorities

12. SECTORAL LEGISLATION STRUCTURAL ACTIONS (Reg. 1083/2006) • Member States are responsible for the management and control of operational programmes, in particular through the following measures: • preventing, detecting and correcting irregularities • recovering amounts unduly paid • notifying these to the Commission • keeping the Commission informed of the progress of administrative and judicial proceedings • When amounts unduly paid to a beneficiary cannot be recovered, the Member State is responsible for reimbursement of amounts lost when it is established that the loss has been incurred as a result of fault or negligence on its part (“deterrent effect”). Fraud Prevention The role of Managing Authorities

13. INITIATIVES ADOPTED BY THE COMMISSION IN RELATION TO FRAUD PREVENTION • SEC(2001)2029 of 7.11.2001, Communication concerning the fraud proofing of legislation and contract management • COM(2007)806 of 17.12.2007, Communication from the Commission: "Prevention of fraud by building on operational results: a dynamic approach to fraud-proofing". Fraud Prevention The role of Managing Authorities

14. NOTIFICATION OF IRREGULARITIES TO THE EC • The notification of irregularities is of great value for the EC • Provides first/overall impression of what goes or could go wrong • Provides information for OLAF/EC analyses to identify risks and threats, in order to improve provisions and controls and strengthen fraud prevention • Particular interest for those irregularities classified by MS as “suspected frauds” giving the Commission services a more exact idea about the level of fraud • Allows the competent EC services to follow-up the financial impact • The role of the managing authorities to contribute to the correct implementation of the reporting obligation is essential Fraud Prevention The role of Managing Authorities

15. HOW CAN MANAGING AUTHORITIES PREVENT FRAUD ? • By putting in place an effective control system, e.g.: • Administrative verifications including written standards and procedures • On-the-spot verifications of individual operations including sampling methods for selection • Ensuring that the provisions of the regulations are understood and applied by all (guidance and training) • Action plan of the Commission to strengthen its supervisory role Structural Actions [COM (2008)97 final] Fraud Prevention The role of Managing Authorities

16. INTERNAL (within the organisation) Integrity / impartiality Specific attention to tendering procedures Composition of selection committees Appropriate remuneration of staff EXTERNAL (outside the organisation) Specific attention to tendering procedures Economic viability of recipients Integrity of recipients HOW CAN MANAGING AUTHORITIES PREVENT FRAUD? 1 Fraud Prevention The role of Managing Authorities 1

17. INTERNAL Internal controls Information exchange and cooperation/partnerships Adequate staffing Training EXTERNAL Transparency / publication of beneficiaries Controls Specific attention to tendering procedures HOW CAN MANAGING AUTHORITIES PREVENT FRAUD? 2 Fraud Prevention The role of Managing Authorities 2

18. INTERNAL Fraud awareness raising Promoting internal awareness Promoting an anti-fraud/integrity culture Training / “Motivation” of staff managing the funds EXTERNAL Fraud awareness raising Promoting public awareness (free phone and other tools) Promoting an anti-fraud culture HOW CAN MANAGING AUTHORITIES PREVENT FRAUD? 3 Fraud Prevention The role of Managing Authorities 3

19. RECOMMENDATIONS • MA should develop their own fraud prevention strategy, Specific: • Identify risks – analysis of types of operation/beneficiary and of already reported cases of irregularities and fraud • Take the appropriate actions to mitigate risks General: • Training • Fraud awareness raising (internally and externally) • Fraud hot-line Fraud Prevention The role of Managing Authorities

20. CONCLUSIONS – KEY WORDS Fraud awareness National law enforcement agencies, the Commission, OLAF, etc. Fraud Prevention The role of Managing Authorities Effective and efficient internal control systems, etc Sound financial management Partnership