Explanatory Memorandum to COM(2012)363 - Fight against fraud to the Union's financial interests by means of criminal law

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dossier COM(2012)363 - Fight against fraud to the Union's financial interests by means of criminal law.
source COM(2012)363 EN
date 11-07-2012
1. CONTEXT OF THE PROPOSAL

4.

1.1 General context


Fraud and related illegal activities affecting the Union's financial interests pose a serious problem to the detriment of the Union budget and thereby of taxpayers. The objective of the Union budget to improve living conditions and to generate growth and jobs is endangered if money is misused. This especially holds true in times of fiscal consolidation and responsibility and structural reforms for growth. According to the 2010 Commission report on the protection of the Union's financial interests,[1] suspected fraud amounts to approximately 600 million euro annually on the revenue and expenditure side despite the legal framework in place. It can be assumed that the actual amount is even higher as not all cases are detected and reported.

The Union needs to defend taxpayers' money in the most efficient way, making use of all possibilities offered by the Treaty on European Union. The damage to the EU budget calls for action to ensure equivalent and effective protection of the Union's financial interests, including criminal law as far as this proves necessary. Despite the development of an EU acquis in this area which includes fraud, corruption and money laundering i, Member States have adopted diverging rules and consequently often diverging levels of protection within their national legal systems. This state of affairs shows that there is no equivalent protection of the Union's financial interests, and that measures against fraud have not reached the necessary level of deterrence.

For example, with respect to fraud the Member States have included definitions of this crime in many different forms of legislation, ranging from general criminal law, which may include specific or generic offences, to criminal tax codes.[3] A similar divergence can be noted with respect to the levels of sanctions, which are applicable to these forms of crime in the different Member States:[4]

MS| Sanctions

AT| Imprisonment up to 6 months (§ 146 StGB), 3 years (§ 147 (1) and i StGB), 10 years (§§ 147 (3), 148 StGB); Imprisonment up to 3 resp. 5 years and fine up to the double amount of the evaded amount (§ 7 AEG).

BE| Imprisonment from 1 month to 5 years (Article 450 Income Tax Code), Imprisonment from 2 months to 3 years (Article 451 Income Tax Code) and fines (Articles 259, 260 and 261 of the General Law on customs and excise tax).

BG| Imprisonment of 1 to 8 years (Article 209, 210 CC), Imprisonment of 3 to 10 years (Article 211 CC), Imprisonment of 2 to 8 years for (Article 212 CC), Imprisonment of 3 to 10 years (Article 212(3) CC)

CY| Imprisonment of 5 years (Article 300 CC), Imprisonment of up to 3 years or a fine that does not exceed €5,125.80 or both

CZ| Imprisonment of up to 2 years (§ 209 - 212 CC)

DK| Imprisonment not exceeding 1 year and 6 months (Article 279 Penal Code) (Article 289A Penal Code), 8 years in aggravated cases

EE| Fine or imprisonment of up to 3 years (§209 Penal Code), 5 years ((§210 Penal Code)

FI| Fine or imprisonment from 14 days to 2 years (Ch.36, Section 1 CC), (Ch.29, Section 1 CC) (Ch.29, Section 5 CC), 4 months to 4 years in aggravated form

FR| Imprisonment of maximum 5 years and fine of €375,000 (Article 313-1 to 313-3 CC), maximum 7 years and fine of €750,000 in aggravated form

DE| Imprisonment of not more than 5 years or a fine (§263 GCC)

EL| Between 10 days and 5 years, 3 months to 5 years (Article 386(1) CC), 2 years to 5 years in aggravated form

HU| Imprisonment of up to 2 years (§318 CC), 5 years (§314 CC).

IR| Imprisonment not exceeding 5 years (Section 42 of the 2001 Act)

IT| Imprisonment of 6 months to 3 years and a fine of from € 51 to € 1,032.00 (Article 640.1 C.P), imprisonment from 1 to 6 years (Article 640 bis C.P)

LV| Imprisonment for a term not exceeding 3 years, or custodial arrest, or community service, or a fine not exceeding sixty times the minimum monthly wage (€17,074.20) (Section 177 Criminal Law)

LT| Community service or a fine, or restriction of liberty, or arrest, or imprisonment for a term of up to 3 years (Article 182 CC) or up to 8 years (serious crime)

LU| Imprisonment from 1 month to 1 year or fine from €500 to €30,000 (Article 490 CC), Imprisonment from 1 month to 1 year or fine from €500 to €10,000 (Article 498 CC)

MT| Imprisonment from 4 months to 1 year (Article 298(1) CC), Imprisonment for a term not exceeding 18 months and payment of a fine of €2,329.37 to €34,940.60 (Article 298C CC), Imprisonment from 7 months to 2 years for (Article 308 CC), Imprisonment from 1 to 6 months or a fine (Article 309 CC)

NL| Imprisonment not exceeding, 1 year (Article 328 PC), 2 years (Article 334 PC), 3 years (Article 360 PC), 4 years (Articles 227, 326 PC) or 6 years (Articles 225, 336, 359 PC) or fines of up to €76,000

PL| Imprisonment for a term of between 3 months and 5 years (Article 297 Penal Code)

PT| Imprisonment up to 3 years or a fine (Article 217 CC)

RO| Imprisonment between 6 months and 12 years (Article 215 CP) (basic case)

SI| Imprisonment for not less than 3 months and not more than 3 years (Article 229 KZ-1), Imprisonment for not more than 3 years (Article 211 KZ-1), Imprisonment for not more than 5 years (Article 228 KZ-1), Fine or imprisonment for not more than 3 years (Article 231 KZ-1)

SK| Imprisonment of up to 2 years (Section 221 CC), Imprisonment of 1 to 5 years (Section 222-225)

ES| Imprisonment of 6 months to 3 years (Article 252 CC)

SE| Imprisonment for at most 2 years (Ch.9, Section 1 Penal Code)

UK| Summary conviction: imprisonment not exceeding 12 months, to a fine or to both (Section 1 Fraud Act 2006); Conviction on indictment: imprisonment not exceeding 10 years, to a fine or to both

Such diversions have a negative impact on the effectiveness of the Union's policies to protect its financial interests, as demonstrated in the Impact Assessment accompanying this proposal. Common offences in all Member States would reduce the risks of divergent practice, as they would ensure a uniform interpretation and a homogeneous way to meet all the necessary prosecution requirements. They would also strengthen the deterrent effect and enforcement potential of relevant provisions, and reduce the incentive for potential perpetrators to move to more lenient jurisdictions within the Union to exercise their intentional illegal activities.

Equivalent protection of its financial interests is also a matter of credibility of the Union's institutions, bodies, offices and agencies, and of ensuring a legitimate budget execution. Therefore, not only fraud in its strict sense should be covered by this proposal, but also other fraud-related forms of illegal behaviour through which the EU budget is damaged, including corruption, money laundering and obstruction of public procurement procedures. The decisive element is that a profit is made at the expense of the EU budget, and thus at the expense of all taxpayers.

An additional reason for proposing a new legal instrument is the need to adopt concrete measures to implement the Commission's overall strategic approach to combating fraud. The Commission is therefore proposing this Directive.

5.

1.2 Legal context


The first elements of criminal law protection of the Union's financial interests were introduced in 1995 with the Convention for the protection of the financial interests of the European Communities and accompanying protocols (hereinafter collectively referred to as the 'PIF Convention').[5] The PIF Convention was subsequently ratified by, and entered into force with respect to, almost all Member States.[6] Relevant general Union criminal law measures include the Council Framework Decision 2005/212/JHA of 24 February 2005 on Confiscation of Crime-Related Proceeds, Instrumentalities and Property,[7] which the Commission proposed to replace by a Directive on the freezing and confiscation of proceeds of crime in the European Union[8] for Member States participating therein.

This framework is complemented by general Union criminal law measures for the fight against certain illegal activities particularly harmful to the licit economy, such as money laundering[9] and corruption[10], which - although not specific to the protection of the Union's financial interests - also contribute to their protection.

In May 2011, the Commission issued a Communication on the protection of the Union's financial interests by criminal law and by administrative investigations[11] accompanied by a Staff Working Document.[12] These documents point to the patchwork of provisions on crime definitions and criminal sanctions which has developed across the EU under the current legal framework. The documents also set out that the Commission would consider criminal law as one of the elements to improve this state of play.

The Communication 'Towards a European criminal policy' of September 2011[13] sets out a proposed general framework for the content and structure of EU criminal law, as well as general principles of EU criminal law legislation, namely the need that EU criminal law does not go further than what is necessary and proportionate in relation to its objectives.

A body of administrative law for the fight against illegal activities at the expense of the Union's financial interests has developed gradually. Regulation (EC, Euratom) No 2988/95 sets out administrative rules for dealing with illegal activities at the expense of the Union's financial interests[14], flanked by sectoral administrative rules[15]. In addition to the horizontal instruments specifically on the protection of the Union's financial interests referred to above, a number of administrative law instruments of the Union contain relevant provisions relating to illegal activities affecting the Union's public money.[16]

Contents

1.

RESULTS OF CONSULTATIONS


6.

WITH INTERESTED PARTIES AND IMPACT ASSESSMENT


7.

2.1 Consultations with interested parties


The Commission has consulted stakeholders on a number of occasions. The Commission has in particular consulted criminal law academics on 25 October 2011 as well as government officials from the Member States in a dedicated meeting on 6 December 2011. Representatives of the Civil Liberties, Justice and Home Affairs Committee of the European Parliament were also in attendance. Views of Member States' prosecution services were gathered through questionnaires and discussion at the Forum of the Prosecutors-General convened by Eurojust in The Hague on 23 June 2011 and again on 16 December 2011. The Commission has also met with representatives of the Taxpayers' Association of Europe in an expert meeting held on 25 January 2012.

Experts have underlined significant weaknesses of the existing legal framework for the protection of the Union's financial interests. This was specifically the case as regards time limitation periods for prosecutions. Academic experts underscored the importance of the principle whereby criminal law should only be used as a last resort, with due attention to the principles of subsidiarity and proportionality. As criminal law constitutes a very stern mechanism of social control, deeply affecting fundamental civil liberties, it must be used as a measure of last resort and implemented in a manner that protects fundamental interests whilst respecting civil liberties and benefiting citizens. Member State experts were generally supportive of the objective pursued by the Commission, i.e. safeguarding taxpayers' money and fundamental interests worthy of protection equally across the European Union. Amongst practitioners, there was a widely shared perception that clear criminal law providing a level playing field was relevant, and that it should be complemented by measures in the procedural field to respond to the deficiencies they identified in this context. The latter point is reflected in the Commission's work programme which foresees a separate initiative on procedural measures for the protection of the Union's financial interests in 2013. The Taxpayers' Association of Europe expressed strong support for the Commission's intention to better safeguard the Union's financial interests against illegal misuse, as well as for its approach to set out a comprehensive, deterring criminal law framework for the protection of the Union's financial interests.

8.

2.2 Impact Assessment


The Commission conducted an impact assessment of policy alternatives, taking into account the outcome of an external study which was completed in February 2012.[17] After considering the possible options, the impact assessment concludes that a solution which in particular would extend the types of some fraud-related offences, introduce minimum sanctions and harmonise statutory limitation is to be preferred.

2.

LEGAL ELEMENTS OF THE PROPOSAL



9.

3.1 The legal basis


The proposal is based on Art. 325 i of the Treaty on the Functioning of the European Union.

Article 325 sets out the EU's competence to enact the necessary measures in the fields of prevention of and fight against fraud and any other illegal activities affecting the Union's financial interests which 'act as a deterrent'. Article 325 i provides for the legislative procedure to adopt the necessary measures with a view to affording effective and equivalent protection. It also provides for a legal base to legislate on fraud and any other illegal activities affecting the Union's financial interests in the fields of the prevention and the fight against fraud. The term fraud must in this context be understood in a broad sense, including also certain fraud-related criminal offences.

The fight against illegal activities affecting the Union's financial interests is a very specific policy area, as the provision's positioning in a special chapter dedicated to 'combating fraud' in the title on 'financial provisions' in the Treaty indicates. Also, the term 'deterrent' appears nowhere else in the Treaty. This shows that in this specific field, the Union has a broad array of tools at its disposal. This peculiarity is further strengthened by Article 310(6) TFEU which already in the very first article of the Title on financial provisions underscores the need to fight illegal activities affecting the Union's financial interests ("shall counter").

The purpose of Article 325 is to protect the single interest which this priority policy is about, i.e. Union public money, wherever it should be collected or spent.

· The protection of Union public money is a solidarity interest at Union level which is different from the sum of the Member States' national financial interests. For these reasons, the Treaty confers upon the Union strong powers to adopt 'measures' which 'act as a deterrent' and 'afford effective' (Article 325(1) and 'equivalent protection' (Article 325(4)).[18] Deterrent, effective and equivalent protection comprises by nature, and historically (see PIF Convention of 1995), a criminal law dimension. Criminal law is needed in order to have a preventive effect in this area, where the threat of criminal law sanctions, and their effect on the reputation of potential perpetrators, can be presumed to act as a strong disincentive to commit the illegal act in the first place. Article 325 therefore includes the power to enact criminal law provisions in the context of the protection of Union's financial interests against all angles of illegal attacks, which was not the case in the correspondant Article 280 i in the EC-Treaty.

· The Union's financial interests are not defined by the Treaty itself, but it is clear from the wider wording than the 'budget', which is used elsewhere in the Treaty (e.g. Article 310(1) second subparagraph) that all funds managed by or on behalf of the Union are covered[19].

This proposal replaces the proposal for a Directive on the criminal-law protection of the Community's financial interests.[20]

10.

3.2 Subsidiarity, proportionality and the respect for fundamental rights


It is considered that there is a need for Union action based on the following factors:

The Union's financial interests relate to assets and liabilities managed by or on behalf of the Union. Thus, the Union's financial interests are by nature, and from the start, placed at Union level. As such, they are even more 'Union-centred' than a field subject to harmonisation of rules in the Member States. They are more comparable in form and substance to rules on the Union institutions', bodies', offices' and agencies' self-protection, such as in terms of physical or IT-security. As a result, they cannot reasonably be dealt with by the Member States alone. It goes in line with this assessment that the Treaty itself presumes in Articles 310(6) and 325(1) and i TFEU the necessity of Union legislative action for setting out equivalent and deterrent measures to protect the Union's financial interests against illegal activities. Furthermore, under Article 48 of Council Regulation (EC, Euratom) No 1605/2002, the European Commission is fully responsible for implementation of all the revenue and expenditure of the Union budget.

The Union is best placed to protect its financial interests, taking into account the specific EU rules which apply in this field. These include the budgetary rules of the Financial Regulation, the general rules on the protection of financial interests by administrative law, and sectoral rules on the protection of financial interests in the various policy areas which can be affected. This applies also to the extent that criminal law provisions for the protection of the Union's financial interests might be rendered more similar. The general subsidiarity requirement for EU legislation must be given special attention with regard to criminal law. This means that the EU can only legislate if the goal cannot be reached more effectively by measures at national or regional and local level but rather due to the scale or effects of the proposed measure can be better achieved at Unions level. Only the Union is in a position to develop binding approximation legislation with effect throughout the Member States, and thus to create a legal framework which would contribute to overcoming the weaknesses of the current situation, including in particular the lack of equivalence which is inconsistent with the Treaty objectives set out in Article 325 i TFEU.

The proposal is relevant to the following rights and principles of the Union Charter of Fundamental Rights: the rights to liberty and family life (by possible imprisonment of convicted perpetrators), the freedom to choose an occupation and to conduct a business (by possible disqualifications of convicted perpetrators), the right to property (by possible shutting down of businesses having committed offences), criminal fines upon conviction and confiscation, legality and proportionality of criminal offences (because new offence definitions are set out), the right not to be tried twice (because of interplay with administrative sanction regimes). These interferences are justified because they serve to meet objectives of general interest recognised by the Union (see Article 52 para. 1 of the Charter), and in particular to provide effective and deterring measures for the protection of Union's financial interests. In light of the lack of improvements as far as levels of irregularities and fraud are concerned and the ineffectiveness of the current measures under the PIF Convention, it is necessary to adopt criminal law measures to fight and prevent fraud and related illegal activitities. It has carefully been ensured that these measures do not go beyond what is necessary to achieve this objective and are thus proportionate.

11.

3.3 Choice of instruments


In order to set out harmonised criminal law provisions in the field of the protection of the Union's financial interests, while allowing Member States a certain degree of flexibility as regards how to impose more stringent provisions, a Directive is the appropriate instrument.

12.

3.4 Specific provisions


Article 1: Subject matter – this provision sets out the purpose and scope of this proposal, and in particular that it only applies to the protection of the Union's financial interests.

Article 2: Definition of the Union's financial interests – this provision sets out a definition of the Union's financial interests which applies throughout the instrument. The European Court of Justice has confirmed[21] that there is a direct link between, on the one hand, the collection of the Value Added Tax revenue in compliance with the applicable Union law, and on the other, the availability to the Union budget of the corresponding Value Added Tax resources, since any lacuna in collection of the first potentially causes a reduction in the second. Value Added Tax fraud therefore has to be considered as affecting the EU's financial interests and is therefore covered by this proposed Directive.

Article 3: Fraud affecting the Union's financial interests – this provision provides for a definition of fraudulent behaviour to be criminalised in the Member States.

Article 4: Fraud related offences affecting the Union's financial interests – this provision concerns illegal activities in the context of preventing and fighting fraud.

It provides that dishonest conduct of tenderers in public procurement is to be criminalised in the Member States. It covers behaviour similar to fraud, whereby true information, albeit based on information unduly received from public authorities, is given to a tendering body in the course of a grant procedure. Such a provision already exists in a number of Member States, but the level of sanctions vary considerably (for example, from one day imprisonment in one State to a minimum of three years imprisonment in another[22]). It has been estimated that the lack of efficient legislation on this point entails 40 million euro of losses for the Union budget annually[23]. Bid-rigging behaviour between tenderers is already subject to enforcement action and sanctions at Union and Member State level and will remain outside the scope of the Directive.

Article 4 also provides for a definition of corruption, largely based on the PIF Convention and its protocols, to be criminalised in the Member States. National laws implementing the Convention for the protection of the European Communities' financial interests of 1995 and its Protocols and relevant case-law indicate that the Convention's definitions of passive and active corruption need to be developed further. Contrary to the PIF Convention, it will not be required that the conduct is 'in breach of official duties' to be covered by the provision. A specific provision is necessary here, since corruption is a particularly serious problem in the area of the Union's financial interests. Article 4 also provides for a definition of misappropriation, which covers conduct by public officials that does not constitute fraud in a stricter sense, and which consists in the misappropriation of funds or assets contrary to the purpose foreseen, with the intention to damage the Union's financial interests. A reference to anti-money laundering legislation with respect to money-laundering of the proceeds of the offences criminalised under the Directive is also made, so that such money laundering will be criminalised in the Member States. This will ensure that the same sanctions regime applies to all criminal offences against the Union's financial interests.

The Article gives a definition of public officials, which includes not only persons that hold a legislative, administrative or judicial office or otherwise exercise public service function for the Union or in Member States, but also persons exercising such a function in third countries. Indeed, the Union's financial interests require protection also in case of active and passive corruption, or misappropriation of funds, with regard to persons in third countries to the extent that they manage Union funds.

Article 5: Incitement, Aiding and Abetting, Attempt – this is a provision applicable to the offences mentioned above, which requires Member States to criminalise also forms of preparation of and participation in such offences. Criminal responsibility for attempt is excluded for the majority of the offences, since the basic crime definitions in question already cover elements of attempt.

Article 6: Liability of legal persons – this is a provision applicable to all offences mentioned above, which requires Member States to ensure liability of legal persons, while excluding that such liability is alternative to that of natural persons.

Article 7: Penalties for natural persons – this is a provision applicable to all offences mentioned above, which requires Member States to apply effective, proportionate and dissuasive sanctions, in line with jurisprudence of the Court of Justice, and to set out a certain minimum set of criminal sanctions for natural persons. The foreseen penalties are proportionate in relation to the considerable seriousness of the offences and are in line with the sanctions currently provided for in a majority of Member States. Article 7 also clarifies certain aspects of the relation between the Directive and disciplinary penalties decided on other grounds.

Article 8: Minimum imprisonment ranges – these provisions apply to all offences mentioned above, and require certain minimum imprisonment terms for particularly serious offences, based on thresholds set out for each offence. The introduction of minimum sanctions will ensure consistency across the Union in terms of sanctions that apply in any Member State for a given type of conduct, with the effect that the Union's financial interests will be protected in an effective and equivalent manner throughout the Union. Economic crime – including fraud – is typically an area where criminal sanctions can have a particularly deterrent effect, as potential perpetrators can be expected to make a certain calculation of risks before deciding to engage in such criminal activities. The introduction of minimum sanctions is consequently considered necessary to ensure that an effective deterrence all over Europe can be achieved. The minimum sanction of six months remains proportionate in relation to the seriousness of the offences and also ensures that a European Arrest Warrant can be issued and executed for the offences listed in Article 2 of the Framework Decision on the European Arrest Warrant[24], thus ensuring that judicial and law enforcement cooperation will be as efficient as possible.

Article 9: Minimum sanction types for legal persons – this is a provision similar to Article 7, applicable to sanctions for legal persons.

Article 10: Freezing and confiscation – this is a provision applicable to all offences mentioned above, which requires the existence of means of freezing and confiscation of proceeds and instrumentalities from these offences.

Article 11: Jurisdiction – this provision is based on the principles of territoriality and personality. It is applicable to all offences mentioned above, which requires the existence of competence bases for the judicial authorities which allow them to initiate investigations, pursue prosecutions and bring to judgment cases relating to the Union's financial interests. In view of the fact that this Directive does not allow for the prosecution of instances of fraud where Member States cannot exercise jurisdiction, Member States and the Commission will share evidence of fraudulent conduct committed outside the Union territory by non-EU citizens with the third country concerned and will cooperate with a view to the prosecution of such conduct in those countries by the competent authorities.

Article 12: Prescription for offences affecting the Union's financial interests – this is a provision applicable to all offences mentioned above, which requires the establishment of a minimum period of prescription, as well as a provision on the prescription period for the enforcement of penalties following a final conviction.

Article 13: Recovery – this provision clarifies that this Directive does not affect the obligation of Member States to ensure recovery of sums irregularly paid as a consequence of the offences included in this Directive, also irrespective of the criminal prescription provision included in Article 12.

Article 14: Interaction with other applicable legal acts of the Union – this is a provision which clarifies the interaction between administrative and criminal sanctions regimes.

Article 15: Cooperation between the Member States and the European Commission (European Anti-fraud Office) – this is a provision which closely mirrors the provision on cooperation between Member States and the Commission, as included in the Second protocol to the PIF Convention. The inclusion of this provision is necessary due to the repeal of the Convention and its Protocols by Article 16.

Article 16: Repeal of the criminal law conventions for the protection of the European Communities' financial interests – this is a provision which repeals the PIF Convention of 1995 and its Protocols.

3.

BUDGETARY IMPLICATION



This proposal has no immediate budgetary implications for the Union. Its aim is, however, to prevent losses caused by illegal activities affecting the Union's financial interests by increasing deterrence and making enforcement by criminal law authorities of the Member States more effective, as well as to facilitate recovery in cases where losses caused by illegal activities affecting the Union's financial interests have already occurred.