If complexity is a fraudster’s friend, then the European Union (EU) is a near-perfect stomping ground for scammers.

Bring together 27 member states, 24 official languages, a land mass that borders 20 countries (including war-torn Ukraine), a long history of national conflicts as well as multiple laws and customs, and opportunities for wrongdoing abound. That’s not to mention an EU budget that now runs in the trillions of euros, which fraudsters would love to get their hands on and have already on several occasions successfully pillaged.

“Europe is a complicated place,” says Ernesto Bianchi, acting deputy director-general in charge of operations and investigations at the EU’s anti-fraud office, which goes by the French acronym OLAF. “In the United States you have one country. We have 27. That is not always easy to organize.”

Bianchi has been on the frontline in Europe’s fight against fraud since he started in his current position in 2020 amid the chaotic outbreak of the COVID-19 pandemic in Italy, his country of birth and where the Continent first experienced the devastating effects of the disease. Bianchi’s career as a civil servant in Brussels spans 28 years, during which he managed various policy departments known as directorate-generals at the European Commission. He joined OLAF in 2015, where he’s been responsible for agricultural and structural funds, trade and customs fraud, and tobacco and counterfeit goods.

Bianchi, who also oversees OLAF’s revenue and international operations, investigations and strategy, talked to Fraud Magazine earlier this year via Zoom about the challenges the anti-fraud agency has faced over the past few years and the hurdles ahead as the EU seeks to spend more on COVID-relief and mitigation programs, green projects, digitalization and the fight against global criminal organizations.

Verify, verify, verify

The difficulties of detecting and preventing fraud in a multination union became all too apparent amid the chaos at the start of the COVID crisis, when fraudsters benefited from poor communications among various national agencies tasked with verifying the quality of masks and other personal protective equipment (PPE) being sent to Europeans desperate for help.

“The authorities in the different countries were reacting at different speeds,” says Bianchi. “[Fraudsters] looked for the weakest link. So, if there was one member state where COVID was really not a problem, they’d try to enter the European market from that country, where checks were lower.”

Poorly made, counterfeit masks that went for five to 10 euros each — three times the normal price — flooded European ports at the time. Among other scams, fraudsters used falsified documents and fake CE marks — certification that the products met European standards — to sell PPE across the union. (“Fraudsters offer 1 billion COVID-19 doses across EU, agency warns,” by Gabriela Baczynska, Reuters, March 1, 2021; “OLAF launches enquiry into fake COVID-19 related products,” OLAF, March 20, 2020; and “Questionable Paperwork Lets Fake and Faulty Masks Flood Europe,” by Aubrey Belford, Sarunas Cerniauskas, Matteo Civillini and Ola Westerberg, OCCRP, July 2, 2020.)

Face masks would arrive at a major European port, authorities would check the ones staying in that particular country and ignore the rest that were being sent to other EU countries, says Bianchi. The problem was that nobody had told verification authorities in other member states that they were supposed to run their own checks.

“So, when the other countries received them, they just assumed that somebody had checked them at the port of entry,” says Bianchi. “This horror story triggered by good faith is perhaps one of the biggest lessons we have learned from the COVID pandemic.”

That was just one of many frauds perpetrated in Europe that OLAF had to handle during the crisis. But OLAF’s prevention efforts have only just started. The EU plans to extend 723.8 billion euros in loans and grants to member states through the Recovery and Resiliency Facility (RRF), which is partly designed to help mitigate the social and economic impact of the pandemic. And those billions are just a fraction of the trillions of euros slated for dispersal in coming years, making OLAF’s mission of investigating cases of fraud and corruption involving those EU funds just that bit tougher.

“That money is being spent now, so we will see if fraudsters will attack it too,” says Bianchi. “I am sure they will as some of it is for procurement, which is something they love.”

Broad mandate

OLAF’s mandate already stretches far and wide, encompassing everything from the evasion of customs duties to preventing the trafficking of endangered species to clamping down on counterfeit products. The agency itself was born as a result of a big corruption scandal 23 years ago. In 1999, when the European Commission, then headed by Jacques Santer, resigned en masse amid accusations of corruption and nepotism, the authorities decided to create OLAF. In an effort to better combat fraud affecting EU’s budget, they gave the new agency greater powers than its predecessor, the Anti-Fraud Coordination Unit (UCLAF), which had only been in existence for a year and was seen failing in its duties. (See “European Anti-Fraud Office – History.”)

OLAF doesn’t have prosecutorial powers, and it’s defined as an administrative body, meaning its investigations can only lead to financial, disciplinary, administrative or judicial recommendations to member states or the European authorities. But it does have useful investigative powers, such as on-the-spot checks and inspections as well as access to bank accounts to trace money flows. It can also knock on the door of authorities in member states, including the police and judges, to point out wrongdoing. “This is a unique set of powers that we have to carry out administrative investigations,” says Bianchi. (See “Questions and Answers on OLAF’s new legal framework to protect the EU budget,” European Commission, Brussels, Dec. 17, 2020.)

Sometimes those investigations involve probing wrongdoing at the highest level. It recently looked into accusations that French presidential candidate Marine Le Pen and her party had misappropriated thousands of euros in EU funds, while its investigation into reports of the illegal pushback of asylum seekers this year led to the resignation of the head of the EU border agency Frontex. (See “French prosecutor studying EU anti-fraud agency report on Le Pen,” Reuters, Europe, April 17, 2022, and “Head of EU border agency Frontex resigns amid criticisms,” by Jennifer Rankin, The Guardian, April 29, 2022.)

Much of OLAF’s work still revolves around Europe’s agricultural subsidies, which have long been a bone of contention and traditionally one of the biggest line items on EU’s budget. For the period 2023-2027, 386.6 billion euros have been allocated to the EU farm subsidies program — known as Common Agricultural Policy (CAP). That amount is split in two: 291.1 billion euros for the European agricultural guarantee fund (EAGF), and 95.5 billion euros for the European agricultural fund for rural development (EAFRD). (See “Show me the money: How much is the next CAP worth?” by Esther Snippe, Gerardo Fortuna and Natasha Foote, EURACTIV, updated March 31, 2022, and “EU lawmakers pass Common Agricultural Policy deal — but green critics sound alarm,” Deutsche Welle (DW), Nov. 11, 2021.)

Fighting agricultural fraud

Unsurprisingly, CAP is a popular target for fraudsters keen to get their hands on the billions of euros handed out by Brussels each year. Indeed, fraudsters have found all sorts of imaginative ways to gain access to EU agricultural funding. (See sidebar “Weeding out agricultural fraud.”)

Cases of fraud in the agricultural sector are rife, often bizarre and, perhaps unsurprisingly, have attracted officials in high office. Former Czech prime minister, Andrej Babiš, is expected to be prosecuted for fraud in a case brought to light by OLAF. Babiš, one of the richest men in the Czech Republic, allegedly hid his ownership of a resort to receive millions of euros slated for small- and medium-sized businesses. (See “Former Czech PM, Andrej Babiš, to face trial in EU subsidy fraud case,” AP via Guardian, March 21, 2022, and “Czech Republic Passes PM Andrej Babiš’s Fraud Case to EU Prosecutors,” by Emily Tian, OCCRP, June 8, 2021.) And abuse of the system, particularly among a powerful few, has come under intense media and government scrutiny in recent years. (See “The Money Farmers: How Oligarchs and Populists Milk the E.U. for Millions,” by Selam Gebrekidan, Matt Apuzzo and Benjamin Novak, The New York Times, Nov. 3, 2019.)

Exploiting loopholes

These cases are good examples of how fraudsters and other criminals exploit multiple legal jurisdictions in Europe to their advantage. Earlier this year, the European Court of Auditors (ECA) — the EU’s independent external auditor — called for greater vigilance of fraud in CAP, particularly “land grabbing.” In Europe, that term has come to describe the “concentration of agricultural land and CAP subsidies in the hands of large companies and investors, especially in Eastern European Member States,” according to the ECA’s 2022 report, “The Commission’s response to fraud in the Common Agricultural Policy - Time to dig deeper.”

Yet while critics see the use of EU funds for land grabbing as going against the common good and defeating the intended purpose of agricultural subsidies, the practice itself isn’t necessarily illegal in member state countries. And this has raised questions about how best to monitor and investigate cases of land grabbing when fraudsters acquire land — legally or illegally — to solely receive EU payments but fail to use it for the required agricultural purposes. They might do this through a variety of fraudulent means, including falsification of documents, coercion, the use of political influence, insider information and bribes. Is it then the responsibility of national authorities to decide whether to investigate or not? Or does it fall on the agencies that are caretakers of EU funds, like OLAF, or both? (See “Gaps in CAP monitoring leave it open to fraud, illegal land grabbing, say auditors,” by Natasha Foote and Yaroslava Bukhta, EURACTIV, July 5, 2022.)

The European Commission said earlier this year that member states should address the abuses of land grabbing, which are linked to deficiencies in national legal and supervisory systems rather than faults with CAP legislation.

The ECA took a different view. In its report, the auditors concluded EU authorities have done too little to proactively address the risk of illegal land grabbing on CAP payments and the monitoring of anti-fraud measures in member states.

The ECA also called for the greater use of new technology to better check on fraud and other abuses, such as the use of satellite images, artificial intelligence, big data and risk-scoring tools like the Arachne system — an anti-fraud, data-mining software developed by the European Commission. But it noted that member states have been slow in adapting these new tools to fight fraud. (See “EU Commission and auditors at odds over ‘land grabbing’ and CAP fraud,” by Charles O’Donnell, Agriland, July 5, 2022; “ARACHNE risk scoring tool,” European Commission; and “Replies of the European Commission to the European Court of Auditors Special Report,” European Commission.)

Tech know-how

Experts see those tools as essential in the struggle to catch increasingly sophisticated fraudsters. And Bianchi concedes that the EU still lacks much of the technological prowess required to beat fraudsters at their own game.

“As we say here in Brussels, ‘chapeau’ — really well done. Fraudsters are really much more adaptable and much more ahead of the game than we are,” he says. “Of course, they have a natural advantage. These people work without borders. They don’t have to worry about having the same systems in different states and jurisdictions.” (See the Global Fraud Footprint column in this issue.)

But above all, what still gives national and EU agencies like OLAF a competitive disadvantage against fraudsters is the lack of consistency in the data various agencies and countries collect and an inability to share it efficiently. “Some of us collect certain data; some of us don’t collect anything at all,” Bianchi says. “We tend to have 27 different systems collecting and sharing data.” Pulling together good data to draw a complete picture of fraud in the EU — often perpetrated by criminal gangs working across borders — is vital to OLAF’s work. “OLAF is pushing very hard for the member states to use the same risk management tool at least for the European-related expenditure, and this is something that is taking a big effort, again because of that digitalization syndrome,” he says. “We have some situations in which digital systems are just not there. You still have paper checks, which is something from the 1950s.”

The anti-fraud agency has taken steps in this direction through its anti-fraud information system (AFIS) — an IT application designed to help facilitate the exchange of information between national and EU administrations. Part of that program is the Customs Information System (CIS) — a central database accessible through terminals at customs in each member state. The use of the technology is also part of a broader agreement established last year between OLAF and World Customs Organization to crack down on counterfeiting of goods and other types of illicit trade. (See “Union Anti-Fraud Programme - AFIS component,” OLAF; “Sharing data and expertise,” OLAF; and “OLAF and WCO strengthen cooperation to tackle customs fraud,” OLAF, July 6, 2021.)

“We try to make this tool more and more sophisticated, so we monitor transits, arrivals and departures, and it is really quite effective. A lot of the cases we have done are really based on that tool,” he says. “The next step for that would be to throw in e-commerce data. So, we go from big data to humongous data. But for that of course you need artificial intelligence.”

Broader oversight

Technology will also help improve communication among agencies in member states and close loopholes that fraudsters have learned to identify and exploit. Whether it’s certification officials in each country assuming goods have already been checked — as illustrated earlier — or criminals from one country applying for funding in another, the Continent’s patchwork of laws, customs and languages provides multiple ways fraudsters can take advantage of  blind spots in control systems and poke holes in Europe’s defenses.

At the moment, for example, a Slovak agency simply wanting to check on an Italian corporation seeking funding in its country can be complicated. “Today you have to either speak Italian, be extremely good at finding things online in Italian Google, or you need to be able to have a name and phone number of someone you can call in the Italian administration,” Bianchi says. “What are the chances you will always have that when you have to make a decision in a day or two?”

OLAF does cooperate with national agencies during investigations. In the case of the fraudulent tomato production cited in the sidebar “Weeding out agricultural fraud,” OLAF worked as part of a joint task force, which also included Romanian National Anticorruption Directorate (DNA) and the prosecutor’s office of the Italian municipality Enna. The launch just last year of the European Public Prosecutor’s Office (EPPO) — the EU’s first supranational prosecuting agency — is an important step toward further integration and broader oversight of fraud cases.

While OLAF has investigative powers and can make recommendations to national authorities, up until now the decision whether to prosecute fraudsters accused of stealing EU money fell on the relevant member state. Much of that will now be taken up by the EPPO. (See “EU Public Prosecutor’s Office Launches Operations,” White & Case, Publications & Events, June 4, 2021.)

The idea is that OLAF and EPPO will complement each other and exchange information in their fight against fraud. So far, 22 EU countries have signed up to cooperate with EPPO, which is mandated to investigate and prosecute crimes against the financial interests of the EU, including VAT fraud, money laundering and corruption. (See “The Complementary Roles of the European Public Prosecutor’s Office and the European Anti-Fraud Office,” White & Case, February 8, and “EPPO and OLAF working arrangement: ensuring no case goes undetected,” EPPO, July 5, 2021.)

“It is a huge step forward in integrating Europe more,” says Bianchi. “For us at OLAF, the difference it makes is that instead of having 22 different prosecutors potentially we now have one. It is much easier. The decision to take matters to court now will come from one common authority, and that is an essential improvement.”

It will further help fraud fighters and law enforcement to take a big-picture view of criminal activity in the EU rather than look at it through the lens of the laws and regulations of each state. Bianchi hopes that this will prevent fraudsters playing law enforcements agencies in different states off each other to hide their tracks and their dirty dealings.

“Understanding the cross-border European dimension of these phenomena is crucial. It is very hard for local authorities, who only see part of the bigger picture, to reconstruct a fraud scheme if the enforcement body — a judge or the police — is seeing in its territory only minor facts that do not look like a crime,” he says. “The EPPO removes the temptation (for fraudsters) to work across borders, so they don’t get caught.”

Bigger budgets

Indeed, fraud fighters will likely need that extra layer of oversight as the EU budget grows in size. The EU’s long-term budget, coupled with NextGenerationEU (NGEU) — the economic package to support member states to recover from the COVID pandemic — now totals 2.018 trillion euros. That’s the largest stimulus and funding package ever financed in Europe. The 2021–2027 long-term budget, or the multiannual financial framework (MFF), now stands at 1.211 trillion euros, while the NGEU tops that off with another 806.9 billion euros to support COVID-relief efforts. (See “The EU’s 2021-2027 long-term Budget and Next GenerationEU – Facts and Figures,” European Commission, April 2021.)

That much money is bound to lure fraudsters much like the billions of dollars in aid money in the U.S. became an easy target for criminals the world over. And Europol, the law enforcement agency for the European Union, is already sounding the alarm.

“Recent experience from the evolution of the criminal landscape during the COVID-19 pandemic suggests these efforts [the NEGEU] will attract criminal groups active in the European Union and beyond,” the agency said in October last year. “Criminals have shown themselves to be quick in adapting to the pandemic and its impact, and they are using every opportunity to maximize illegal profits.”

That same month, Europol announced it had set up a joint operation called Operation Sentinel, in which it plans to work alongside EPPO, OLAF and 19 member states to prevent fraud against the COVID-relief funds. (See “New operation to protect Next Generation EU recovery funds,” Europol, News, Oct. 15, 2021, and “Europol Warns of Major EU Recovery Fund Fraud,” by Phil Muncaster, Infosecurity Magazine, Oct. 18, 2021.)

Focusing on green fraud

EU officials describe the new budget and funding package as a shift away from its traditional focus on agricultural funding to other priorities such as investments to help Europe become greener, more digital and better prepared for future challenges. (See “The EU’s 2021-2027 long-term Budget and NextGenerationEU – Facts and Figures,” European Commission.)

And in turn this has also heightened OLAF’s emphasis on fraudulent activity in the green space. “One of the biggest challenges we have in the next three years is to protect the avalanche of money that the EU is making available for its programs for green projects,” says Bianchi.

“The focus now is about green and getting greener. And we already see fraud schemes popping up like mushrooms around the money and the products the EU is importing to get greener.” Schemes range from the importation of substandard green products such as e-bikes to the illegal sale of refrigerant gases to the so-called Ecomafia’s lucrative business in waste disposal.

Experts estimate that criminal syndicates make billions of dollars from illicitly disposing of waste produced by countries in the EU, either at sea, in other countries or in Europe’s back garden. “It becomes a sort of perverse Mary Poppins trick. You solve the problem. The waste disappears. But, of course, the consequences of that are that this stuff is very often buried or burned or thrown at sea,” says Bianchi.

OLAF estimates that up to 30% of waste shipments out of the EU are illicit, allowing those criminals to reap 9.5 billion euros annually. (See “OLAF Report 2021.”) And those profits only exacerbate the problem. “People make obscene amounts of money from this and what do they do with this? They reinvest into more illegal activity. We also see this with the illicit trade of cigarettes and other commodities,” says Bianchi. “So, it’s really a catalyst for crime.”

A growing black market in hydrofluorocarbon (HFC) refrigerant gases has also become a magnet for fraudsters. The EU has strict quotas on HFCs — which are commonly used in refrigeration, air conditioning, fire protection and aerosols — and it wishes to phase them out given how damaging these greenhouse gases are to the environment. “The fraud schemes around refrigerant gases have skyrocketed,” says Bianchi.

OLAF has taken part in a string of joint operations with local law enforcement to prevent the illegal importing of these gases. Last year, for example, it worked with Europol and Dutch authorities to seize at least 2,100 cylinders of illicit HFCs. (See “€10 million worth of illicit refrigerant gases seized,” OLAF, Oct. 19, 2021, and “‘The biggest eco-crime no-one has heard of’ — illegal refrigerant trade in Europe exposed,” Environmental Investigation Agency (EIA), climate, July 8, 2021.)

War and the tracking of fraudsters

If that’s not enough to contend with, the Russian invasion of Ukraine has also complicated the tracking of fraudsters and other criminal gangs. Before the war, OLAF could keep an eye on well-established routes for illicit trade across an eastern land border that stretches from Finland down to Greece. The war has effectively closed any movement across that eastern border, leaving Bianchi and his colleagues at OLAF guessing where fraudsters will reappear to start bringing illicit goods back into Europe.

“The immediate effect is that what we knew, we no longer know,” says Bianchi. “I don’t think even fraudsters like to risk losing their goods, so they need to reroute and go somewhere else. They are clever and reconfigure their lines of business in lightning speed. The land border is closed. I think fraudsters may try using other routes instead, perhaps via sea. But where? We don’t know. Yet.”

Paul Kilby is editor-in-chief of Fraud Magazine. Contact him at pkilby@ACFE.com.

[See sidebar: “Weeding out agricultural fraud”.]