Report - A4-0313/1996Report
A4-0313/1996

REPORT on the draft second Protocol, pursuant to Article K.3 of the Treaty on European Union, to the Convention on the protection of the European Communities' Financial Interests (7752/96 - C4-0137/96 - 95/0360(CNS))

9 October 1996

Committee on Civil Liberties and Internal Affairs
Rapporteur: Mr Rinaldo Bontempi

By letter of 8 June 1996 the Council consulted Parliament on the draft second Protocol to the Convention on the protection of the European Communities' Financial Interests which had resulted from the Council's deliberations (Council document 7752/96) pursuant to Article K.6(2) of the Treaty on European Union. The draft was based on the Commission proposal for a Council Act drawing up the additional Protocol to the Convention on the protection of the European Communities' financial interests and for the Protocol to the Convention on the protection of the European Communities' financial interests pursuant to Article K.3 of the Treaty on European Union (COM(95)0693).

At the sitting of 15 July 1996 the President of Parliament announced that he had referred the draft to the Committee on Civil Liberties and Internal Affairs as the committee responsible and the Committee on Budgetary Control, the Committee on the Rules of Procedure, the Verification of Credentials and Immunities and the Committee on Legal Affairs and Citizens' Rights for their opinions.

At its meeting of 11 June 1996 the Committee on Civil Liberties and Internal Affairs had appointed Mr Bontempi rapporteur.

It considered the draft report at its meetings of 8-9 July, 26-27 September and 7-8 October 1996.

At the last meeting it adopted the draft legislative resolution unanimously.

The following took part in the vote: Marinho, chairman; Colombo Svevo, vice-chairman; Wiebenga, vicechairman; Bontempi, rapporteur; d'Ancona, Caccavale, Camison Asensio (for Cederschiöld), Chanterie (for Lehne), D'Andrea, De Esteban Martin, Deprez, Elliott (for Ford), Haarder, Hlavac (for Wemheuer), Lambraki (for Crawley), Lindeperg, Linzer, Lööw, Nassauer, Newman, Posselt, Reding, Schulz, Stewart-Clark, Terron i Cusí and Van Lancker (for Zimmermann).

The opinions of the Committee on Budgetary Control is attached. The Committee on Legal Affairs and Citizens' Rights and the Committee on the Rules of Procedure, the Verification of Credentials and Immunities decided not to deliver opinions.

The report was tabled on 9 October 1996.

The deadline for tabling amendments will be indicated in the draft agenda for the relevant part-session.

A LEGISLATIVE PROPOSAL - DRAFT LEGISLATIVE RESOLUTION

Draft second Protocol drawn up on the basis of Article K.3 of the Treaty on European Union, to supplement the Convention on the Protection of the European Communities' financial interests (7752/96 - C4-0137/96 - 95/0360(CNS)).

The draft is approved with the following amendments:

Council draft

Amendments by Parliament

(Amendment 1)

Title

Second Protocol drawn up on the basis of Article K.3 of the Treaty on European Union, to supplement the Convention on the protection of the European Communities' financial interests

Second Protocol drawn up on the basis of Article K.3 of the Treaty on European Union, to supplement the Convention on the protection of the European Communities' financial interests concerning the liability of legal persons and money laundering

(Amendment 2)

Recital X (new)

whereas a separate instrument will determine the arrangements for assistance and judicial cooperation and also priority jurisdiction and the coordination provided by the Commission in cases of transnational fraud against the Community budget;

(Amendment 3)

Article 1(c)

(c) ['corruption' shall mean the conduct referred to in Articles 2 and 3 of the first Protocol to the Convention on the protection of the European Communities' financial interests, drawn up in Brussels by the Council Act of 26 July 1995;[

(c) 'corruption' shall mean the conduct referred to in Articles 2 and 3 of the first Protocol to the Convention on the protection of the European Communities' financial interests, drawn up in Brussels by the Council Act of ...;

(Amendment 4)

Article 1(d)

(d) 'legal person' shall mean any entity having such status under the applicable national law, except for States or other public bodies in the exercise of State authority and for public international organizations.

(d) 'legal person' shall mean any entity having such status under the applicable national law, except for States or other public bodies in the exercise of State authority and for public international organizations, and any economically active enterprise in which independent rights and obligations are vested.

Member States shall ensure that, in accordance with their national law, the liabilities laid down in this draft second protocol are applied to those units of activity (with separate assets) which operate for legal purposes with apparent or de facto independence of their owners.

(Amendment 5)

TITLE II

Legal persons

Liability of legal persons

(Amendment 6)

Article 2(1)

1. Each Member State shall take the necessary measures to ensure that legal persons can be held liable for fraud [and corruption[ committed to their benefit by any persons having power to take decisions or exercise control within the legal person as well as for involvement as accessories or instigators in or attempted commission of such fraud [or corruption[.

1. Each Member State shall take the necessary measures to ensure that legal persons can be held liable under criminal or administrative law for fraud and corruption which is committed on their account and behalf* by any persons having de facto or de jure power to take decisions or exercise control within the legal person. Involvement as accessories or instigators in or attempted commission of such fraud or corruption shall be equated with their commission.[*The German version of Amendment 21 to the draft report (orig. nl: in hun opdracht) reads auf ihre Rechnung und Gefahr, i.e. 'on their account and at their risk'; however, the Dutch phrase, translated in the English version of Amendment 21 as 'or by their order', appears to originate in a correction to the Dutch text in Amendment 6 of the draft report of 9 September 96 (orig. de: im Auftrag der juristischen Person). The phrase 'on behalf of a legal person' is accordingly restored, suitably modified. - Translator's note[

(Amendment 7)

Article 2(2)

2. Apart from the cases already provided for in paragraph 1, each Member State shall take the necessary measures to ensure that a legal person can be held liable where the lack of organization, supervision or control by a person referred to in paragraph 1 has made possible the commission of a fraud [or an act of corruption[ on behalf of a legal person by a person under its authority.

2. Apart from the cases provided for in paragraph 1, each Member State shall take the necessary measures to ensure that a legal person can be held liable under criminal or administrative law where the lack of organization, supervision or control by a person referred to in paragraph 1 has made possible the commission of a fraud or of corruption on behalf of a legal person or for its account by a person under its authority.

(Amendment 8)

Article 2(3)

Liability of a legal person under paragraphs 1 and 2 shall not exclude criminal proceedings against natural persons who are perpetrators, instigators or accessories in the fraud [or corruption[.

Liability of a legal person under paragraphs 1 and 2 shall not exclude criminal proceedings against natural persons who are perpetrators, instigators or accessories.

(Amendment 9)

Article 3(1)

1. Each Member State shall take the necessary measures to ensure that a legal person held liable pursuant to Article 2(1) is punishable by effective, proportionate and dissuasive penalties, including in particular the following penalties:(a) payment of a fine;(b) exclusion from entitlement to public benefits or aid;(c) temporary or permanent disqualification from the practice of commercial activities;(d) placing under judicial supervision;(e) a judicial winding-up order.

!. Each Member State shall take the necessary measures to ensure that a legal person held liable pursuant to Article 2(1) is punishable by effective, proportionate and dissuasive penalties, including in particular the following:(a) payment of a fine or administrative fine;(b) exclusion from entitlement to public benefits or aid, or from participation in public works contracts;(c) temporary or permanent disqualification from the practice of commercial activities;(d) placing under judicial supervision;(e) a judicial winding-up order, if the purpose or essential activity of the legal person consists of fraudulent or corrupt activities.

(Amendment 10)

Article 3(2)

2. Each Member State shall take the necessary measures to ensure that a legal person held liable pursuant to Article 2(2) is punishable by effective, proportionate and dissuasive penalties or measures.

Deleted.

(Amendment 11)

Article 3(3)

3. Each Member State may declare, when giving the notification referred to in Article [X[(2), that it will not apply, or will apply only under special conditions, one or more of the penalties listed in paragraph 1(c), (d) and (e).

Deleted.

(Amendment 12)

Title III

Confiscation and laundering

Confiscation, dispossession or sequestration of unlawful gain, and laundering

(Amendment 13)

Article 4

Each Member State shall take the necessary measures to enable it to confiscate instruments and proceeds of fraud or goods the value of which corresponds to such proceeds.

1. Each Member State shall take the necessary measures to enable it to distrain instruments and proceeds of fraud or corruption or goods the value of which corresponds to such proceeds and transfer all or part of them to the budget of the European Communities.

2. Each Member State shall take the necessary safeguard measures if there is reason to fear that confiscation pursuant to paragraph 1 may otherwise be jeopardized or rendered substantially more difficult. Such measures shall in particular include:(a) freezing of accounts(b) seizure of property(c) prohibiting the alienation or encumbrance of immovable property.

(Amendment 14)

Article 5

Each Member State shall take the necessary measures to establish as a criminal offence laundering as defined in Article 1 of Council Directive 91/308/EEC of 10 June 1991 on the prevention of the use of the financial system for purposes of money laundering, of the proceeds of fraud, at least in cases of serious fraud within the meaning of Article 2(1) of the Convention.

Each Member State shall take the necessary measures to establish as a criminal offence laundering as defined in Article 1 of Council Directive 91/308/EEC of 10 June 1991 on the prevention of the use of the financial system for purposes of money laundering, of the proceeds of fraud or corruption, at least in cases of serious fraud within the meaning of Article 2(1) of the Convention and comparable serious corruption cases.

Each Member State shall take the necessary measures to ensure that legal persons can be held liable for laundering the proceeds of fraud. In such cases the penalties laid down in Article 3(1) shall apply. The liability of the legal person shall not exclude criminal proceedings against the natural persons who have carried out acts of laundering on behalf of the legal person.

(Amendment 15)

Article 6(1)

1. Member States shall provide mutual assistance for all judicial proceedings relating to fraud in accordance with Article 6 of the Convention.

1. Member States shall provide mutual assistance for all proceedings relating to fraud, corruption or money laundering and in enforcing the penalties resulting from them.

(Amendment 16)

Article 6(3)

3. Member States shall cooperate among themselves and with the Commission in the fight against fraud. To that end, the Commission shall lend any technical and operational assistance necessary to facilitate coordination of the investigations undertaken by the competent national authorities.

3. Member States shall cooperate among themselves and with the Commission in the fight against fraud, corruption and money laundering. To that end, the Commission shall lend any technical and operational assistance necessary to facilitate coordination of the investigations undertaken by the competent national authorities.

(Amendment 17)

Article 6(4), first paragraph

4. The competent authorities in the Member States may exchange information with the Commission so as to make it easier to establish the facts and to ensure effective prevention of fraud. The Commission and the competent national authorities shall take account for each specific case of the requirements of investigation secrecy.

4. The competent authorities in the Member States may exchange information with the Commission so as to make it easier to establish the facts and to ensure effective prevention of fraud, corruption or money laundering. The Commission and the competent national authorities shall take account for each specific case of the requirements of investigation secrecy.

(Amendment 18)

Article Z(1)

1. [Requests for judicial assistance with regard to fraud may be transmitted directly between judicial authorities and replied to in the same way.The provisions of this Protocol shall be without prejudice to the supplementary provisions of any other Conventions binding upon the Member States concerned.[

1. Requests for judicial assistance with regard to fraud, corruption and money laundering may be transmitted directly between the competent authorities and replied to in the same way. The judicial assistance requested shall be provided immediately. The provisions of this Protocol shall be without prejudice to the supplementary provisions of any other Conventions binding upon the Member States concerned.

(Amendment 19)

Article Z(2)

2. In pursuance of the objective laid down in Article 6(2) of the Convention and for the purposes of ensuring the effectiveness and consistency of investigations, the latter shall be carried out in concert by the competent authorities whenever a fraud offence concerns more than one Member State or fraud offences concerning more than one Member State are linked with one another.

2. For the purposes of ensuring the effectiveness and consistency of investigations, the latter shall be carried out in concert by the competent authorities whenever a fraud, corruption or money laundering offence concerns more than one Member State or fraud, corruption or money laundering offences concerning more than one Member State are linked with one another.

The Unit for the Coordination of Fraud Prevention (UCLAF) shall be responsible for coordinating such joint consultation in these cases. In the event of a conflict the Commissioner responsible shall act as mediator.[

Legislative resolution embodying Parliament's opinion on the draft second Protocol drawn up on the basis of Article K.3 of the Treaty on European Union, to supplement the Convention on the Protection of the European Communities' financial interests (7752/96 - C4-0137/96 - 95/0360(CNS))

(Consultation procedure)

The European Parliament,

- having regard to the Council draft of 30 May 1996 (7752/96 - - 95/360(CNS)),

- having been consulted by the Council pursuant to Article K.3(2) of the Treaty on European Union (C40137/96),

- having regard to Rule 58 of its Rules of Procedure,

- having regard to the report of the Committee on Civil Liberties and Internal Affairs and the opinion of the Committee on Budgetary Control (A4-0313/96),

1. Approves the Council draft, subject to Parliament's amendments;

2. Calls on the Council to notify Parliament should it intend to depart from the text approved by Parliament;

3. Instructs its President to forward this opinion to the Council and Commission.

B EXPLANATORY STATEMENT

I. Introduction

For many years, the European Parliament has been making strenuous efforts - in so far as its powers permit - to combat the prevalence of fraud against the Community budget. Reference may be made, inter alia, to its resolutions of 24 October 1991 on legal protection of the Community's financial interests[1], 11 March 1994 on the independent power of investigation and inquiry which the Union may exercise for the purposes of legal protection of its financial interests[2] and 15 March 1995 on the proposal for a Council of the European Union Act establishing a Convention for the protection of the Communities' financial interests and on a draft Council Decision on joint action regarding the protection of the financial interests of the European Communities on the basis of Article K.3 of the Treaty on European Union[3]. Finally, reference may also be made to the resolution in the European Parliament's report of 19 September 1996 on follow-up measures to the interparliamentary conference on combating fraud against the Community budget (23 and 24 April 1996).

In recent years the Council too has sought to improve the legal basis for combating fraud against the Community. Particularly worthy of mention are the Convention pursuant to Article K.3 of the Treaty on European Union on the protection of the European Communities' financial interests[4] and Council Regulation (EC, Euratom) No 2988/95 of 18 December 1995 on the protection of the [5]European Communities' financial interests.

However, these Council acts are only the first steps, and must be followed by many more. So far, these measures have made insufficient impact to combat fraud against the Community budget in the long term. Indeed, the number of irregularities and fraud cases continues to increase from year to year (1992: 2146 cases, 1993: 2538 cases, 1994: 4132 cases, 1995: 4758 cases), as does their financial impact on the European Communities (1992: ECU 204 m, 1993: ECU 403 m, 1994: ECU 1087 m, 1995: ECU 1146 m). In 1995, around 1.4% of the budget fell into the hands of smugglers and other defrauders[6] (this figure of course comprises only those cases detected by the Member States and the Commission; estimates of undetected fraud range up to 10% of the Community budget).

Some quite substantial progress has been made towards detecting irregularities, not least thanks to the restructuring of the Commission's Unit for the Coordination of Fraud Prevention (UCLAF) in 1995 to create an operational and multidisciplinary unit, but the Commission should be granted further powers of supervision and on-the-spot monitoring (a Regulation which is under discussion seeks such powers). As the Member States administer some 80% of Community funds[7], however, it is mainly they which must be called upon to improve their investigative resources.

A further problem with the measures to combat fraud lies in the fact that the proportion of the fraudulently acquired Community funds which is returned to the Community as a result of the detection of irregularities is very small. Experience shows that there is a real chance of recovering money which has been wrongfully retained or misappropriated only if action is taken quickly and entails measures to secure assets. The main responsibility for the small amount of money recovered by the Community lies with the recovery procedures in the Member States, which are mostly very cumbersome; in this field too, the scope for improving efficiency has not by any means been exhausted.

The following draft Council acts are currently under consideration with the aim of improving the Commission's opportunities to carry out checks on the spot and to empower and encourage the Member States to comply with their obligations under Article 209a of the Treaty on European Union better than they have hitherto:

- proposal for a Council Act drawing up the additional Protocol to the Convention on the protection of the European Communities' financial interests and draft Protocol drawn up on the basis of Article K.3 of the Treaty on European Union to supplement the Convention on the Protection of the European Communities' financial interests (officials and members); the European Parliament delivered its opinion on the subject on 22 May 1996;

- a draft agreement on combating corruption involving officials of the European Communities or of the Member States of the European Union;

- the (above-mentioned) proposal for a Council Regulation (EC, Euratom) on on-the-spot checks and examinations by the Commission to protect the financial interests of the European Communities against fraud and other irregularities; the European Parliament delivered its opinion on the Commission's proposal on 22 May 1996 and has recently been consulted again by the Council because of changes to the text.

All these drafts and proposals are undoubtedly somewhat confusing, particularly since the individual proposals overlap and duplicate one another considerably. Current legislative measures to combat fraud regrettably tend to take the form of legal acts comprising individual details for short-term implementation (within the six-month term of a Presidency), while no effort is made to adopt comprehensive and coordinated provisions based on an overall strategy. The resulting confusion of legal bases is not conducive either to effective detection of fraud or to long-term efforts to combat it. The European Parliament has repeatedly criticized these legislative inadequacies, which are due partly to the lack of clarity as to who is responsible for combating fraud (first pillar/third pillar) and partly to the cumbersome nature of deliberations under the third pillar (Parliament hopes that the IGC will resolve these problems).

II. The scope for prosecuting legal persons under the criminal law of the Member States

The growing economic importance of legal persons (enterprises) has for a long time raised the question of their liability. However, the scope for imposing penalties on enterprises depends very much on the law of the individual Member State. Unlike in the 'common law' countries, it is simply not possible under continental bodies of law, where the Roman-law axiom 'societas delinquere non potest' prevails, to impose penalties directly on a legal person; only people acting on behalf of the legal persons can be deemed to have committed crimes. For various reasons, however, this situation is no longer tenable: if a custodial sentence is imposed on an offender, the legal person on whose behalf he committed the crime will generally replace him with someone else while the structure or 'philosophy' of the enterprise will survive. If employees of a legal person are fined (in which case the fines are often paid by the legal person), this has little lasting effect on the legal person, because as a rule the size of the fine will be geared only to the means of the employee, which are far more modest than those of the legal person.

In recent years, therefore, nearly all the Member States which have continental legal systems have begun to introduce individual exceptions to this Roman-law principle, particularly in the sphere of economic and environmental crime, and to create various forms of quasi-criminal penalty for enterprises, partly under criminal law and partly under administrative law. Most Member States now have the option of fining legal persons, as well as holding employees (particularly those in positions of responsibility) liable under the criminal law; in a number of Member States, money unlawfully acquired or retained by an enterprise can in addition be confiscated. As well as this, some Member States have even more far-reaching penalties at their disposal (e.g. ineligibility for public funding, prohibition of activities in a particular field, compulsory winding up).

However, when instituting direct liability of legal persons, it has become clear that a system of penalties designed for people cannot simply be applied to enterprises: in the case of complex organizations, where decision-making processes involve numerous levels and procedures, it is generally very difficult to prove guilt, which is of course the main precondition for imposing a penalty; in the course of their investigations, the authorities often encounter structures which make it virtually impossible to assign individual responsibility because the information, decision-making and executive levels are distinct (a state of affairs sometimes described as 'organized freedom from responsibility'). To some extent, moreover, it is impossible for penalties which were originally designed for people to be applied to legal persons (custodial sentences), so that in practice the penalties are generally of a purely financial nature (fines, administrative fines, confiscation of assets). Here the intended preventive effect is particularly limited in cases where the losses are covered by insurance. The option of winding up an enterprise, which exists in some Member States (and which may in a sense be equated with the death penalty), is appropriate only in extreme cases, particularly as it has farreaching and sometimes unpredictable consequences (in the case of large enterprises, for example, there may be an economic and social impact on a whole region: job losses, reduced purchasing power, emigration, etc.). In certain Member States there is also a constitutional obstacle to the imposition of criminal sanctions on legal persons (strict separation of criminal and administrative law).

These manifold difficulties suggest the need to ensure that proposals for the introduction of a liability system for legal persons are as flexible as possible in order to make it easier for the Member States to incorporate the penalties concerned into their national systems of law.

III. Analysis of the Council proposal and comments on the amendments

On 19 January 1996 the Commission submitted to the Council and Parliament a proposal for a second Protocol to the Convention on the protection of the European Communities' financial interests[8] containing provisions - some of them very far-reaching - on the protection of the Communities' financial interests by means of the criminal law. The draft forwarded to Parliament by the Council on 8 June 1996 for consultation modified a number of points in the Commission proposal: in addition to introducing comprehensive liability of legal persons for fraud (without, however, like the Commission proposal, basing this exclusively on criminal law) and providing for the inclusion of fraud in the list of actions preliminary to money laundering, the draft explicitly calls into question the extension of these provisions to corruption (in the sense of Articles 2 and 3 of the first Protocol).

However, some important points contained in the Commission proposal -particularly in the field of judicial cooperation and assistance- have been dropped. While admittedly the wording of certain articles of the Commission's proposal was confused and of uncertain application (for example the priority jurisdiction mechanism),the introduction of a register, the Commission's coordinating role, direct contacts between judicial authorities and the concept of liaison judges represented feasible and useful innovations ahead of the longoverdue adoption of a horizontal instrument for judicial cooperation to help combat organized crime.

So, while regretting this reduction in the scope of the protocol, nevertheless the necessary political and procedural measures must be taken at once to ensure that a specific instrument is drawn up and submitted as soon as possible. This act should seek primarily to eliminate existing substantive legal obstacles to extradition and judicial assistance in criminal matters, and to facilitate procedurally and expedite the latter assistance between Member States. Account should also be taken of the main substance of the agreements drafted within the framework of European Political Cooperation which have still not entered into force because they have not yet been adequately ratified.

In some respects, however, the draft under consideration represents an improvement on the Commission's proposal. In particular, the more flexible provisions concerning liability of legal persons, the extension of this concept to include corruption, and the further development of the provisions on money laundering and confiscation are particularly welcome. Admittedly, Parliament remains convinced that legislation on protecting the financial interests of the European Communities should be adopted within the Community framework[9]; however, as the Council does not agree and has instead, in adopting the Convention, opted for a legal instrument based on Title VI of the Treaty on European Union, it now seems sensible to continue discussion of the legal acts supplementing the Convention on the basis of the approach which has been adopted. Only on these grounds is the selection of the legal form 'supplementary protocol' acceptable to Parliament, as this - in accordance with the statements concerning the relevant legal act of the Council - must be regarded consistently, from the systematic point of view, as a 'further legal instrument to improve the efficiency of the criminal-law protection of the Communities' financial interests'.

However, there are still many problems of detail with the Council's draft, which will be described below, and on account of which the European Parliament wishes to make a number of amendments:

a. The title

The proposed title of the supplementary protocol does not contain any reference to the subject with which it deals. However, it ought to do so, at the very least on the grounds that any lack of clarity or transparency and any danger of confusion with other protocols or supplementary protocols must be avoided. For this reason, the title should incorporate a form of words indicating the protocol's subject-matter.

b. Definitions

It seems both desirable and necessary that the scope of the 'second' supplementary protocol to the Convention should include corruption as referred to in Articles 2 and 3 of the 'first' supplementary protocol, because in cases of fraud, attempts are frequently made to bribe individual decision-makers at national and European institutions. Legal persons should be liable to punishment not only for fraud but also for corruption; it also seems appropriate to include at least serious cases of corruption - by analogy with fraud - in the list of actions preliminary to money laundering.

The definition of 'legal person' is inadequate in that it does not include enterprises in which independent rights and obligations (distinct from those of the partners) are vested but which are not organized as legal persons under the domestic law applicable. As a result, liability does not extend to trading partnerships and unincorporated firms, for example, even if legal persons are partners in them. A more comprehensive definition of 'legal person' is also needed in order to compensate for differences in company law between Member States. (This would also overcome the problem which arises in international cooperation as to how to decide which country's law should apply).

c. Liability of legal persons

The heading of Title II suggests a definition, whereas in reality this section concerns the liability of legal persons. The heading should be altered accordingly.

In the light of what has been said about the problems of general principle, partly even of a constitutional nature, which would arise if legal persons were to be held liable (purely) under the criminal law, it is probably more realistic not to expect the Member States to thoroughly revamp their systems (as they would have to if penalties were introduced purely under the criminal law). In comparison with the Commission proposal, the formulation selected by the Council facilitates the incorporation of the new provisions in domestic systems of penalties; it is therefore also more appropriate because it will make it possible to attain more rapidly the objective envisaged (the introduction of independent comprehensive liability provisions in all Member States). From the point of view of prevention it is important, above all, that the probability of fraud and corruption coming to light should increase and that, when their perpetrators are identified, even legal persons should stand to lose something of material significance to them; of less relevance for purposes of prevention is whether the penalties are imposed under the criminal law or under administrative law. The proposals in the draft concerning this point therefore deserve support; they require amendment only for the purpose of clarification.

It is also very much to be welcomed that the grounds for liability of legal persons laid down in the draft include an imputed duty of supervision and control. This means that the system of 'organized freedom from responsibility' referred to above can no longer be used to immunize legal persons against any and all liability.

d. Penalties

The division of the penalties between two paragraphs is neither necessary nor helpful, as effective, appropriate and dissuasive penalties must be provided for both offences. There is adequate flexibility to make it possible to comply with the requirement that penalties should be appropriate, allowing for the conceivably less serious nature of a failure of supervision, particularly given that the list of penalties in any case only has the status of an example ('including in particular'). Declarations as referred to in Article 3(3) are unnecessary for the same reason.

In addition to 'fines', the list of penalties should include 'administrative fines', in the interests of the abovementioned flexibility. In the case of the most far-reaching penalty - a judicial winding-up order - additional conditions should be attached to ensure that this penalty can be imposed only in extreme cases. Resort to it is justified only if the purpose or essential activity of the legal person consists of fraudulent or corrupt activities.

e. Confiscation

As instruments and proceeds which are declared forfeit generally accrue to the Member State which confiscates them, the Protocol should explicitly ensure that these assets are transferred to the injured party (i.e. the European Communities). In order to compensate Member States for the procedural costs involved in confiscation decisions and improve their motivation to recover sums declared forfeit, consideration could possibly be given to establishing a system analogous to that provided for by Article 7 of the Council Regulation (EEC) of 4 March 1991 concerning irregularities and the recovery of sums wrongly paid in connection with the financing of the common agricultural policy[10], under which Member States may under certain conditions retain for themselves 20% of the money recovered.

The Member States should also be required to secure assets with a view to confiscation in cases where there is reason to fear that confiscation will otherwise be jeopardized or rendered substantially more difficult. The principal safeguard measures should be listed by way of example ('in particular').

f. Money laundering

This provision takes account of the call in point 7(i) of the Council resolution of 6 December 1994[11] for laws concerning money laundering to be extended to the protection of the Communities' financial interests. Fraud and corruption should therefore be added to the list of actions preliminary to money laundering. However, in order not to burden the courts of the Member States with cases of petty crime, it seems sensible to define as preliminary actions only serious fraud (as referred to in Article 2(1) of the Convention) and (to be assessed by analogy) serious corruption.

  • [1] () OJ C 305, 25.11.1991, p.106
  • [2] () OJ C 89, 10.4.1995, p.82
  • [3] () OJ C 89, 10.4.1995, p.82
  • [4] () OJ C 316, 27.11.1995, p.48
  • [5] () OJ L 312, 23.12.1995, p.1
  • [6] () 1995 Annual Report of the European Commission of 8 May 1996 on the fight against fraud
  • [7] () According to the Commissioner responsible, Mrs Gradin, in The European, 9May 1996
  • [8] () OJ C 83, 20.3.1996, p.10
  • [9] () Cf. inter alia the Legislative Resolution of 15 March 1995, OJ C 89, 10.4.1995, p.82
  • [10] () OJ L 67, 14.3.1991, p.11
  • [11] () OJ C 355, 14.12.1994, p.2

O P I N I O N

(Rule 147 of the Rules of Procedure)

of the Committee on Budgetary Control

for the Committee on Civil Liberties and Internal Affairs

Draftsman: Mrs Diemut R. Theato

At its meeting of 25 June 1996, the Committee on Budgetary Control appointed Mrs Diemut R. Theato draftsman.

At its meeting of 2 September 1996, it considered the draft opinion.

At this latter meeting it adopted the conclusions as a whole unanimously.

The following took part in the vote: Theato, chairman and draftsman; McCartin, Vice-President; Bardong, Fabra Vallés (for Garriga Polledo), Kellett-Bowman, König, Tomlinson, and Wemheur.

The Committee on Budgetary Control calls on the Committee on Civil Liberties and Internal Affairs to incorporate the following amendments into its report:

I. Amendments to the proposal for a Council Act drawing up the additional Protocol to the Convention on the protection of the European Communities' financial interests:

Commission text

Amendments

(Amendment 1)

New recital

whereas a separate instrument will determine the arrangements for assistance and judicial cooperation and also priority jurisdiction and the coordination provided by the Commission in cases of transnational fraud against the Community budget;

II. Amendments to the additional Protocol to the Convention on the protection of the European Communities' financial interests:

(Amendment 1)

Article 3(3)

Each Member State may declare, when giving the notification referred to in Article [x[(2), that it will not apply, or will apply only under special conditions, one or more of the penalties listed in paragraph 1(c), (d) and (e).

Deleted

(Amendment 2)

Article 4

Each Member State shall take the necessary measures to enable it to confiscate instruments and proceeds of fraud or goods, the value of which corresponds to such proceeds.

Each Member State shall take the necessary measures to enable it to confiscate instruments and proceeds of fraud or goods, the value of which corresponds to such proceeds. Each Member State shall take measures to pay back to the Community the proceeds of the fraud or the value corresponding to those proceeds in proportion to the amount of Community funding provided, pursuant to the Community provisions governing the budget sector concerned.

(Amendment 3)

Article 5

Each member State shall take the necessary measures to establish as a criminal offence laundering, as defined in Article 1 of Council Directive 91/308/EEC of 10 June 1991 on the prevention of the use of the financial system for purposes of money laundering, of the proceeds of fraud, at least in cases of serious fraud within the meaning of Article 2(1) of the Convention.

Each member State shall take the necessary measures to establish as a criminal offence laundering, as defined in Article 1 of Council Directive 91/308/EEC of 10 June 1991 on the prevention of the use of the financial system for purposes of money laundering, of the proceeds of fraud, at least in cases of serious fraud within the meaning of Article 2(1) of the Convention. Each Member State shall take the necessary measures to ensure that legal persons can be held liable for laundering the proceeds of fraud. In such cases the penalties laid down in Article 3(1) shall apply. The liability of the legal person shall not exclude criminal proceedings against the natural persons who have carried out acts of laundering on behalf of the legal person.

I. THE NEED FOR RULES - AN INAPPROPRIATE INSTRUMENT

The proposal for a Council act, which has been submitted by the Commission in order to establish a protocol to the Convention of the protection of the European Community's financial interests, is a necessary supplement to the rules laid down in that Convention, which was signed on 26 July 1995[1].

Basically, the Convention lays down substantive law (definition of fraud, penal sanctions, etc.). It also contains provisions concerning jurisdiction and procedures relating to extradition, prosecution, cooperation and the settlement of disputes regarding the interpretation or application of the Convention. However, the rules relating to formal penal law and penal procedure are no more than general principles which, in most cases, need to be supplemented by an additional act. The draft protocol submitted by the Commission[2] sought to meet this requirement by adding provisions relating to:

- priority jurisdiction;

- assistance and judicial cooperation;

- register of fraud prosecutions;

- jurisdiction of the Court of Justice.

Other provisions relating to substantive penal law (liability of legal persons and money laundering) are also added.

The Commission proposal therefore helps to complete the legal framework outlined in the Convention by making it possible to regulate areas such as jurisdiction and judicial cooperation which are essential if transnational fraud is to be combatted effectively.

However, the instrument selected - the protocol under Title VI of the Treaty on European Union ('Justice and Internal Affairs') - is unsuitable for a matter such as defraudment of the Community budget, which should be regulated by means of the Treaty establishing the European Community. For a detailed account of the reasons for this view we refer to Parliament's resolution of 15 March 1995, which rejected the proposal for a Council act concerning the Convention[3], and the opinion drawn up by the Committee on Budgetary Control for the Committee on Civil Liberties and Internal Affairs[4].

For its part the Commission has noted Parliament's views regarding the need for a Community instrument. However, it considers that the current institutional framework does not allow for recourse to such an instrument, although this is not to say that there is no possibility of change in the future.

In view of this institutional deadlock it seems sensible to await developments regarding:

1. proposals concerning the communitarization of the 'third pillar' in the context of the IGC;

2. ratification by the Member States of the conventions and protocols signed in third-pillar areas, ratification being required before these acts can come into force.

Whilst making clear that it disagrees with the nature of the instrument, this opinion will restrict itself to proposing additions to the rules envisaged by the Commission.

II. INADEQUATE RULES IN RELATION TO THE OBJECTIVES

The purpose of the rules proposed by the Commission was to supplement the Convention. However, the substance of the draft has been extensively amended by the Council, which has reduced the scope thereof, particularly as regards judicial cooperation. The Council's draft therefore seems inadequate in relation to the initial objectives.

A. CRIMINAL LIABILITY OF LEGAL PERSONS

Under certain national legal systems it is not possible for legal persons to be held criminally liable, on the basis of an ancient principle of Roman law (societas delinquere nequit: a legal person cannot commit crimes). This is why the Council text has adopted a compromise solution. Criminal/administrative liability is provided for in the case of legal persons who have committed fraud by means of natural persons having power to take decisions or exercise control on behalf of the legal person (Articles 2 and 3). Liability of the legal person does not exclude the criminal liability of natural persons who are perpetrators, instigators or accessories in the fraud (Article 2). Liability accompanied by penalties which are not defined but which are effective, proportionate and dissuasive is provided for in cases where the fraudulent act has been committed by a natural person under the authority of the decision-maker (Article 3).

In this particular case we regard the question of the nature of the liability of the legal person (criminal, quasicriminal, etc.) as a purely semantic one. The penalties which the Council plans to impose where such liability is established and which range from the payment of a fine to a judicial winding-up order are such as to serve the dissuasive purposes which the penalties are designed to achieve.

The Council compromise is therefore acceptable, provided that the current text is retained in the final version; any attempt to water it down must be resisted, particularly as regards the natural person whose actions result in the liability of the legal person: in addition to the decision-maker, this should also apply to the person having power to exercise control within the legal person (Article 2(1)).

On the other hand, the clause by means of which the Member States could unilaterally avoid the requirement to apply certain penalties (Article 3(3)) is not acceptable since it would reduce the degree of equivalence as regards the level of protection provided.

B. CONFISCATION AND LAUNDERING

The confiscation of the proceeds of fraud should be accompanied by the return of the amount confiscated to the Community budget (in proportion to the degree of co-financing by the Community) in accordance with the particular provisions of the sectoral rules governing the various budget areas (in the case of the Structural Funds, for example, re-use is provided for in the context of operational programmes).

Article 5 of the draft, whilst establishing the laundering of the proceeds of fraud as a criminal offence (at least in the case of serious fraud), 'forgets' to lay down penalties to be imposed on legal persons. However, it is well known that the proceeds of large-scale international fraud are laundered by means of legal persons belonging to financial and trade circles. There should thus be provision for specific liability at least of the same kind (noncriminal) as that provided for in Articles 2 and 3 in the case of fraud by legal persons.

C. MUTUAL ASSISTANCE AND JUDICIAL COOPERATION

The Commission's original proposal was based on three pillars:

. an investigation procedure centralized by the Member State which had priority jurisdiction (which did not exclude the jurisdiction of the other Member States concerned);

. an obligation to provide mutual assistance on the basis of direct relations, a system of liaison judges and the reciprocal recognition of the validity of evidence and procedural acts;

. the Commission to provide technical assistance and to centralize and disseminate information with the assistance of a register of fraud prosecutions.

The Commission draft, although lacking in certain respects (for example, as regards priority jurisdiction), could have formed the basis for a law on transnational cooperation relating to fraud against the Community budget.

Very few of the above features have been carried over to the Council draft, which merely contains a vague obligation to provide mutual assistance, without defining the substance thereof (Article 6). The Commission's coordinating role is not formally acknowledged since the Commission can only provide technical assistance to facilitate the coordination of investigations (Article 6(3)) and exchange information with the Member States (without any obligation on the part of the latter). No priority jurisdiction or centralized procedure is provided for. Certain aspects which could have strengthened the principle of cooperation (direct links between the judicial authorities of the individual Member States; investigation by common agreement; admissibility of referrals) are, incidentally, still under negotiation.

In the face of such disappointing results the question should be asked as to whether the third pillar, as currently envisaged, is the most appropriate legal instrument for regulating judicial cooperation. The draft version discussed by the Council does not in any case seem capable of amendment, not just because it is not final[5] but also because it contains a number of features which are inadequate as a means of properly regulating mutual assistance and transnational judicial cooperation in respect of fraud against the Community budget[6]. There are grounds, therefore, for devising an instrument which is entirely devoted to this issue and which contains a minimum core of rules governing:

. priority jurisdiction in the case of fraud committed inside or outside the Community;

. mutual assistance and cooperation at both pre-judicial and judicial level (validity of evidence; direct links between national authorities; forwarding of procedural documents, etc.);

. coordination to be provided and information to be centralized by the Commission.

  • [1] () OJ C 316, 27.11.1995, p. 48
  • [2] () COM(95)0693
  • [3] () OJ C 89, 10.4.1995, p. 82. Report of the Committee on Civil Liberties and Internal Affairs, A4-0039/95.
  • [4] () PE 211.096/fin. of 22 February 1995.
  • [5] () The Working Party on judicial cooperation in criminal matters has been instructed to consider the aspects which are still under negotiation.
  • [6] () By way of example the European Convention on Mutual Assistance in Criminal Matters, which was signed in Strasbourg in 1961 within an international framework and which should, therefore, have a narrower scope, contains detailed rules concerning letters of request, the forwarding of procedural documents, the calling of witnesses, etc.