For Europe, Fraud Has a $4-Billion Price Tag--and It’s Getting Worse

Widespread fraud is costing European Community taxpayers at least $4 billion a year--and possibly twice that amount--according to experts here. They predict that the single integrated market scheduled to come into being in 1992 will make the situation even worse.

The fraud--mostly involving agricultural subsidies--is said to extend to all 12 countries in the community. Among others, it involves Italian and Spanish wine makers, Irish and British pig farmers, Dutch and Danish dairymen, Greek and Portuguese grape growers and West German sausage makers.

Masterminding the fraudulent conspiracies are white-collar executives in Northern Europe, Irish Republican Army activists on the border of Northern Ireland and Mafiosi in Italy.

“We can’t even assess our loss,” Pieter Dankert, a Dutch member of the European Parliament, complained recently. “We simply don’t know how much we are missing. It could be $4 billion; it could be a lot more.”

Klaus Tiedemann, a professor of criminology at the University of Freiburg, estimates that at least 10% of the European Community budget of $44 billion is skimmed off by fraud every year.

He, too, says this figure may be on the low side, for only recently has any notion of the extent of the fraud come to light.

“Once the internal border controls are abolished at the end of 1992,” Tiedemann said in an interview, “I fear that the fraud will increase.”

The European Commission, the executive arm of the community, has set up an anti-fraud squad in Brussels, and an independent Court of Auditors has been established in Luxembourg, but neither has been able to do much to lower the staggering scale of theft, according to specialists in Brussels.

One report, by Britain’s House of Lords, said: “The reported fraud is no more than the tip of the iceberg.” It added:

“The huge sums that are being lost due to fraud and irregularity against the community are losses borne by all the taxpayers and traders of Europe. This strikes at the roots of democratic societies and is a public scandal.”

Dankert, the Dutch member of the European Parliament, said: “After 20 years, we are finally admitting the problem. Now we have to come to grips with it.”

John Tomlinson, a British member, said: “I don’t want just to shout, ‘Shock, horror!’ I want to stop the fraud.”

Although Dankert, Tomlinson and others point out that most of the fraud involves the agricultural subsidies paid to farmers and exporters in member countries, it can also involve funds paid out in many other areas, among them steel and textiles.

“Basically,” an official in Brussels said, “what we used to call the Common Market produces much more than it can consume or can sell to other countries at the going world price. Hence the subsidies given to members for hundreds of different items they export at the lower world price.”

Subsidies for choice beef, for example, are higher than those for the cheaper cuts of meat and higher on shipments to poor countries such as Egypt than to beef-rich countries such as the United States, Canada and Argentina.

One scam went like this: A farm exporter shipped offal, or entrails, labeled as prime beef in order to obtain the highest export refund. Then he re-imported the low-grade meat, now labeled choice beef in order to evade import duties. This went on for two years and netted the swindler almost $20 million before it was discovered.

Merry-Go-Round

A clever operator can say meat is headed for a subsidy-rich African destination when it is actually going to a country with a lower payoff.

Then there was the so-called merry-go-round fraud in Ireland. Cattle and grain were smuggled across the Northern Ireland border in one direction and then, because of differentials between Britain and Ireland, shipped back to collect a subsidy. In this case, the outlawed Irish Republican Army, which is seeking to drive the British out of Northern Ireland, is believed to have received a share of the windfall.

On one occasion, railroad ties left Amsterdam for Africa labeled as beef, with resultant big profits in meat subsidies.

Sometimes goods are not even exported. Phony paper work is presented as evidence that subsidies are owed to the “exporter.”

Equally lucrative is the export of milk products from Denmark and the Netherlands that have been falsely upgraded to buttermilk or cheese to get higher, illegal subsidies.

Mediterranean grape, wine and brandy producers have long been involved in various forms of fraud against the community, demanding high subsidies for adulterated wine. Some have pulled off a double-dip by distilling the wine into surplus alcohol and getting an additional subsidy.

The Italian Mafia is said to be behind claims for millions of dollars in subsidies for tomatoes and citrus fruits in southern Italy that have never been grown, let alone shipped.

Fraud involving the building of storage facilities for surplus products is also prevalent, officials admit.

The rationale behind the huge agricultural subsidies is that they keep small farmers and villages in business and thus protect traditional country life.

“There’s a point to the argument,” one official said. “But--all too often--subsidies simply turn the farmers into fraudsters.”

According to observers in Brussels, one reason for the widespread fraud in the European Community is that it is perceived as a victimless crime. It is the European Community that is being cheated, in this view, not your neighbor.

Finding cheaters and prosecuting them is generally the individual nation’s responsibility, and many national politicians see no reason to ruin a good thing--money paid to their constituents, however undeserved, by far-off Brussels.

Corruption at the Core

The farmers involved are generally supported by producers, merchandisers and exporters, as well as by lawyers and accountants who cook the books that they present to customs agents and European Community officials.

Some cynical observers believe that it is difficult to root out fraud while the European Commission and ancillary agencies are themselves rife with questionable working practices. Back-scratching and favoritism are endemic, as British author Nigel Tutt points out in a recently published book, “Europe on the Fiddle.”

Tutt suggests that there is corruption at the core--facilitated by large salaries for the Brussels-based staff, the difficulty or near-impossibility of firing anyone, the easy access to early retirement on full pension.

A high proportion of middle-level employees of the European Community claim disability at work or “professional illness” to qualify for 70% of full pension at current salary. It is suspected that many found their jobs boring and chose a soft way out in time to begin a second career.

European Commission President Jacques Delors tends to turn a blind eye toward the situation, which he calls a “fake issue.”

But it is not fake to the House of Lords, the Court of Auditors, the authors of several other recent reports and those members of the European Parliament who care about reducing the level of criminal activity.

Way for More Massive Swindles

Many observers believe that the removal of national barriers at the beginning of 1993 will increase the opportunity for fraud rather than reduce it.

Agricultural subsidies may be shifted to planned regional development aid to the community’s poorer countries and this could open the way for even more massive swindles.

“These fraudsters can always stay two steps ahead of the game,” Tomlinson, the Briton, said.

He and his fellow reformer, Dankert, believe that subsidies must be drastically reduced, that farmers should not be encouraged to grow products they cannot sell at world market prices.

Further, they feel, the complex regulations should be simplified.

“It’s these complicated, loophole regulations that we have to get rid of,” Dankert said. “Much EC legislation is full of weak compromises. And the budget is a haven for criminal activities because there’s not much control.”

Tomlinson wants clearer, shorter regulations, tighter laws, better export controls, closer auditing, more careful inspection and the tough pursuit of lawbreakers.

“And we have to stop producing surpluses,” he said. “No surpluses, no subsidies, no fraud. We have to change the system that gives rise to all the criminality. This direct theft from European citizens is unacceptable.”