Creating a common market for fraud in the European Union.

• Author: Warner, Carolyn M.

The preamble to the Treaties of Rome, which founded the European Economic Community (EEC), now part of the European Union (EU), declares that the treaties have as their goal the creation of an "ever closer union" among the peoples of Europe. (1) Considering the actual operations of the EU's major programs, however, it appears that what they really created was ever greater opportunities for legal and illegal rent seeking within Europe. The EU's structures and the means by which its authority is delegated and its programs implemented seem to reflect almost a deliberate effort by the member stares to protect special interests that profit from opportunities to collect legal and illegal rents, for which the unorganized taxpayers across Europe pay. In fact, it might be argued that the member states have manifested benign neglect toward fraud, corruption, and regulatory enforcement.

Fraud can be thought of as the deliberate cheating of others in violation of legal rules, which has the effect of illegally producing financial gain. It is corruption when committed by those acting in the public interest who subvert the role of their office to obtain private benefits or benefits for a political party. Since the early 1990s, the EU's budget has been approximately 90 million euros per year (roughly equivalent to $105 billion). Detected fraud amounts to approximately 2 percent of the budget; estimates of actual fraud range from 1 percent to 20 percent, but many authorities refuse to try to establish a number, saying it is impossible to do so (House of Lords 1989, 17; House of Lords 1992, 1; Giordano 1990, 55; UCLAF interviews by the author, June 4, 1998). (2) The additional monetary cost of fraud and corruption associated with deliberate avoidance or nonapplication of the EU's many regulations, especially in the areas of competition policy and public-works contracting (areas in which the EEC's regulatory emphasis is on creating open, transparent competition), is unknown, but it may be enormous.

Institutions of the EEC/EU

Established in 1958 as the European Economic Community, the EU originally consisted of the Commission, the Council, the Parliament, and the Court of Justice. The Commission's responsibility has been to propose and oversee the implementation of "legislation" and to oversee and enforce the member states' adherence to the treaties. It now has twenty commissioners, who act essentially as cabinet ministers overseeing a set of "general directorates" responsible for the day-to-day operations of the EU. Upon unanimous nomination by the member stares, and after approval en bloc by the Parliament, the commissioners are appointed collectively to a five-year term.

The Council of the European Union, which has long been the primary locus of power in the EU, comprises the member stares' cabinet ministers, by topic under consideration, who vote on and amend proposals coming from the Commission. Starting with the Single European Act of 1986, the Council has gradually been required to take into account, through various complex procedures, the views and sometimes the votes of the European Parliament, but it retains heavy influence over EU "legislation." To some extent, that influence is enhanced by the twice yearly formal meetings of the unfortunately named European Council, composed of the member states' prime ministers (and the French head of state). This institution is responsible for setting the EU's broad policy goals, for attempting to reach agreement on difficult issues (such as monetary union), and for giving direction to the Commission. The European Parliament initially was nothing more than an advisory body, or a nod to "democracy." Its members began to be elected directly by citizens in 1979, but not until 1993 did it gain any significant influence on EU policymaking. The European Court of Justice was established to keep the supranational institutions in check and to enforce the member stares' adherence to the treaties and regulations. In addition, it has acquired responsibility for interpreting the treaties.

In 1977, almost twenty years after the EEC's founding and in response to adverse publicity about fraud, the member states established the Court of Auditors to provide audits of the EU's budget. In 1992, they accorded this court status as a completely independent institution with the obligation to provide a statement of assurance as to the regularity and legality of expenditures in the EU's budget. In 1988, in response to continuing adverse publicity, this time via press reports on findings of the Court of Auditors, the EU created a separate "antifraud" unit (UCLAF) to facilitate the Commission's efforts to coordinate the detection and prosecution of fraud against EEC programs within the member states.

EU Budget and Programs

The EU's 90 billion euro annual budget reflects the EU's hybrid nature and the extent to which the member states try to retain control over the supranational organization and institutions they have created. Initially financed by direct contributions from the member stares, then by funds from customs duties, agricultural tariffs, and a percentage of each states' value-added tax (VAT), the EU increased state contributions through a percentage of gross national product (GNP), with special concessions for less-wealthy states, and, for a time, with a rebate to the United Kingdom. Various agencies of the member states collect all of these resources and then transfer them to the EU. Arrangements for the first decade of...