The Applicable Law in OLAF’s On-The-Spot Inspections

By Koen Bovend’Eerdt

The Commission established OLAF (Office de Lutte Anti-Fraude), an administrative investigative service of the Commission, in 1999, in the wake of the fall of the Santer Commission, to strengthen the fight against illegal activities affecting the Union’s financial interests. One of the shortcomings in OLAF’s legal framework on the conduct of on-the-spot inspections, one of the service’s main investigative powers, is that it refers back to national law at various instances, requiring OLAF to cooperate with national authorities which operate on the basis of national law. A question that has lingered in academic circles for some time is when precisely – and to what extent – national law applies. In the recent Sigma Orionis case the General Court shed light on  this issue. The General Court’s solution has been embraced by the Commission in its recently published proposal to amend the rules which govern OLAF’s investigations. The Commission´s proposal, as a result of the Court´s judgment, places OLAF shoulder to shoulder with other Union bodies – at least when it comes to the applicable law – in the business of enforcing Union law by means of inspections.

  1. A Primer on OLAF

OLAF is a Commission service whose mission is to step up the fight against fraud, corruption and any other illegal activity affecting the financial interests of the Union. To that end OLAF conducts, amongst other things, administrative investigations directly on economic operators in the Member States to gather evidence of illegal activities detrimental to the Union´s financial interests. On completion of an investigation, OLAF draws up a report concerning the matter investigated, and may adopt non-binding recommendations on whether or not action should be taken (disciplinary, administrative, financial and/or judicial) by the competent authorities of the Member States or by the relevant EU institution, body, office or agency. OLAF reports are admissible as evidence in punitive proceedings under the same conditions as reports established by national administrative investigators.

OLAF conducts its investigations under the overarching framework of Regulation (EU, Euratom) 883/2013 (the “OLAF Regulation”) which provides rules on OLAF’s powers and the applicable procedural safeguards (e.g., the right to be assisted by a person of choice and the privilege against self-incrimination). One of OLAF’s main powers is to conduct on-the-spot investigations on economic operators in the Member States which allows OLAF to find proof of irregularities or fraud with EU finances. Detailed rules on on-the-spot inspections are laid down in Regulation (Euratom, EC) 2185/96. This Regulation grants OLAF the power to, for instance, gain access to premises, land, means of transportation and other areas used for business purposes. These inspections may concern in particular access to professional documents, computer data, budgetary and accounting documents, the taking and checking of samples, and physical checks as to the nature and quantity of goods or complete operations.

  1. Shortcomings That Affect the Effectiveness of OLAF On-The-Spot Inspections

Recently the Commission identified a number of problems that hamper the conduct of OLAF investigations in a report. In particular with regard to on-the-spot inspections the Commission pointed out that, although the OLAF legal framework puts in place detailed provisions on the conduct and organisation of inspections, it does not lay down an exhaustive Union-level code of procedure, but to the contrary, in many instances refers back to national law. For instance, Article 3(3) of the OLAF Regulation states that during inspections, OLAF shall act, subject to the Union law applicable, in compliance with the rules and practices of the Member State concerned and with the procedural guarantees provided for in this Regulation. The competent authority of the Member State concerned, whomever that may be, shall provide OLAF with the assistance needed in order to carry out their tasks effectively. If that assistance requires authorisation from a judicial authority in accordance with national rules, such authorisation shall be applied for. In short, while OLAF operates on the basis of a directly applicable regulation, this regulation does not regulate everything.

The fact that the application of OLAF’s power to conduct on-the-spot inspections is subjected to conditions of national law, results in two problems. The first problem is that of – what is often called – “variable geometry”. The OLAF legal framework consists of a patchwork of powers, requiring OLAF to cooperate at various instances with national authorities acting on the basis of national law. This legal framework however, does not specify which national authority is the competent one (customs or financial police, etc.), what their tasks are, what powers they have to fulfil these tasks, the scope and enforceability of these powers, the necessity of a judicial authorisation, whether these powers are administrative or criminal law powers, and what the applicable accompanying safeguards are. For example, in Italy OLAF in certain cases depends on the Guardia di Finanza, the Italian financial police, which has criminal law powers in its arsenal (e.g., seizure). In other Member States, such as the Netherlands and Germany, OLAF depends on a variety of administrative authorities – depending on the affected area of the Union’s financial interests – which operate solely on the basis of an administrative law framework with concomitant administrative powers. As a result of the differences that exist – and are likely to persist – between Member States’ enforcement regimes, OLAF’s ability to effectively conduct investigations, on-the-spot inspections in particular, is fragmented across Member State jurisdictions. The variable geometry in which OLAF operates does not only pose a problem to the effective conduct of inspections and the equivalent protection across all Member States of the Union’s financial interests of the Union (as required per Article 325 TFEU), but also makes the treatment of the subjects of OLAF’s inspections dependent on their respective location in the Union.

The second, interrelated, problem does not concern whether national law applies (it does, as shown above), but rather when and to what it extent national (or European law) applies. As already stated above, the current wording on the on-the-spot inspections states that “during […] inspections [OLAF] shall act, subject to the Union law applicable, in compliance with the rules and practices of the Member State concerned and with the procedural guarantees provided for in the [OLAF Regulation]”. It therefore appears as if OLAF is to act under a cumulative regime of both national and European law. The phrasing in the OLAF Regulation, which does not concretely and specifically regulate the circumstances in which national or European law applies, leaves room for conflict between two simultaneously applicable legal orders. For instance, the OLAF Regulation provides for the privilege against self-incrimination for economic operators during on-the-spot inspections. Because OLAF must, in addition, act in compliance with “the rules and practices of the Member State concerned” there is a real possibility of the applicability of an additional national safeguard also specifying the protection of the privilege against self-incrimination during inspections. Which of the two safeguards (the EU, the national, or both) is to be protected? What happens in case the scope of the protection offered by the privilege diverges in both legal orders? Is there room for higher or lower national standards than those provided for by EU law? It is problems such as these that not only hamper the conduct of inspections, but also affect their later use in national punitive proceedings. It was only recently, in the ruling by the General Court (“GC”) in Case T-48/16 Sigma Orionis v the Commission, that the references to both Union and national law under the current regime for on-the-spot inspections, and the resulting ambiguities and possible conflicts with regard to the applicable law, were subjected to scrutiny.

  1. The General Court Sheds Light on the Applicable Law: The Case of Sigma Orionis v the Commission

Sigma Orionis is a French company that disseminates and reports on European IT-projects. Within the framework of EU funding schemes the Commission agreed to subsidise Sigma Orionis by means of various subsidy agreements. In early 2014 OLAF opens an investigation into alleged manipulation of time sheets and excessively high hourly wages paid out by Sigma Orionis. As part of its investigation, OLAF deemed it necessary to conduct an on-the-spot inspection on the company’s premises. Prior to the inspection OLAF informed the Grasse public prosecutor’s office of its intention to do so and requested all the assistance necessary from the French authorities. In December 2014 OLAF inspected Sigma Orionis’ premises and in doing so collected data and interviewed five witnesses.

After the inspection OLAF sent its report to the Commission, which recommended a recovery measure, the imposition of administrative sanctions, and financial penalties. The administrative sanctions consisted of a temporary exclusion from all EU-funding schemes, suspension of subsidy payments to be received on the basis of one set of agreements, and termination of participation in the other group of agreements. In addition, OLAF forwarded its report to the French authorities and recommended that they initiate criminal proceedings. The Grasse public prosecutor’s office followed-up on OLAF’s recommendation and launched a prosecution against Sigma Orionis, its director and two managers on grounds of alleged fraud against the Union’s financial interests.

The investigation chamber of the Aix-en-Provence court of appeal, before which the suit was brought, delivered a judgment in late 2015 in which the evidence used by the French authorities was declared invalid. According to the court of appeal, the evidence gathered in violation of French laws that aim to ensure that the rights of the defence are respected. Included in the evidence submitted by the French authorities was OLAF’s investigation report.

As a result of the French court’s finding, Sigma Orionis lodged an application before the General Court (“GC”) in which it requested the GC to hold, inter alia, that by suspending and/or terminating the subsidy payments on the basis of an invalidated OLAF report, the Commission had breached its contractual obligations under the subsidy contracts. Sigma Orionis grounded this request, in part, on the fact that the Commission based its actions on evidence gathered by OLAF in violation of national (i.e., French) law. In particular Sigma Orionis held that OLAF violated French law because prior to the inspection OLAF did not obtain a judicial authorisation, OLAF investigators were not accompanied by national investigators, and because OLAF ought to have informed Sigma Orionis of its right to resist an inspection.

The GC acknowledges that the OLAF legal framework for on-the-spot inspections is characterised by references to national law, which results in ambiguity with regard to the applicable law. In an attempt to resolve this ambiguity the GC grabs the bull by its horns and delivers a judgment that is both direct and clear. The GC states that in the absence of resistance by an economic operator – so if assistance by national authorities is not necessary – an on-the-spot inspection is conducted solely on the basis of OLAF’s European legal framework and the powers and procedural safeguards laid down therein. A contrario, in case an economic operator resists an inspection and, consequently, assistance is necessary, such assistance is to be provided by national authorities in conformity with national law, including the applicable national procedural safeguards. Sigma Orionis did not resist the OLAF-inspection. As a result, the Court reasons, the inspection had to be conducted solely on the basis of the OLAF’s EU-level framework. This framework does not, however, prescribe that OLAF in the absence of resistance, requires an authorisation from a national judicial authority or the accompaniment of national investigators. In addition, the OLAF legal framework – while acknowledging the possibility of resistance by an economic operator – does not give an operator the right to resist or, a fortiori, the privilege to be informed of the right to resist.

In essence, the GC’s chain of reason in this case is that (i) OLAF had to act on the basis of European (not national) law, (ii) that it acted accordingly, and that, as a result, (iii) OLAF did not collect evidence illegally and, finally, that (iv) the Commission’s decision to suspend/terminate subsidy payments was not based on a void OLAF investigation report. Logically, the GC dismissed the appeal.

The overall message of the GC in its judgment is that it wishes to clear up the muddied waters on the applicable law during on-the-spot inspections by stating when and to what extent national law applies during inspections. The GC chooses resistance against an inspection by an economic operator, and the corollary necessity of assistance by national authorities, as a determining factor to decide on the applicable law.

  1. The Commission Proposal Amending the OLAF Regulation

On 23 May 2018, the Commission published its Proposal for a Regulation amending the OLAF-Regulation. The Commission expressed its wish to remedy a number of shortcomings (including the ambiguity with regard to the applicable law noted in §2 above). One of the aims of the proposal, according to the Commission, is to remove ambiguities “by better framing the references to national law to ensure an effective and more coherent application of OLAF’s powers to conduct on-the-spot-checks and inspections in the Member States, without however changing the powers available to OLAF or substantially amending the way the Regulation operates in relation to the Member States”.

In choosing the appropriate the cure, the Commission took the GC’s prescription to heart. The proposed amendment to the OLAF Regulation states that where an economic operator submits to an inspection on the basis of the OLAF Regulation, the applicable law is Union law only (i.e., the OLAF Regulation and Regulation (Euratom, EC) 2185/96, including the procedural guarantees provided therein). However, where OLAF investigators find that an economic operator resists an on-the-spot inspection, the Member State concerned must provide the necessary assistance so as to enable OLAF to conduct its on-the-spot check or inspection. When providing such assistance, the competent national authorities shall act in conformity with the applicable national law (again, including the procedural safeguards).

The proposal of the Commission on the applicable law in on-the-spot inspections is not only fully in line with the GC’s judgment in Sigma Orionis v the Commission, but also places OLAF shoulder to shoulder with other Union bodies in the business of enforcing Union law by conducting, amongst other thing, inspections. The European Commission, under Article 20 of Council Regulation (EC) 1/2003, operates under a similar model. Undertakings and associations of undertakings are required to submit to inspections ordered by decision of the Commission. In case of submission, the Commission operates on the basis of a European framework. However, in case the Commission finds that any of the (associations of undertakings) oppose an inspection, the Member State concerned must afford the necessary assistance, requesting where appropriate the assistance of the relevant law enforcement authority acting under national law, so as to enable them to conduct their inspection. Similarly, the ECB, under Council Regulation (EU) 1024/2013 (“the SSM-Regulation) has the power to conduct on-site inspections on supervised entities in the framework of prudential supervision of credit institutions. Under the SSM-Regulation the ECB may, subject to conditions set out by Union law, conduct all necessary on-site inspections. Also here, where the person who is subject to the inspection opposes an ECB inspection, the national competent authority of the participating Member State concerned is to afford the ECB the necessary assistance in accordance with national law.

  1. Conclusion

The Commission´s proposal, if passed by the European Parliament and Council, takes away a lot of the confusion that surrounds the applicable law in the conduct of OLAF’s on-the-spot inspections. This, in turn, would enhance the effectiveness of OLAF’s investigations and would be a step (albeit a small one) in the fight against fraud, corruption and other illegal activities that prejudice the Union’s financial interest. The proposal also squares the conduct of OLAF inspections – and the way in which it interacts with national law – with bodies such as DG COMP and ECB by making national law relevant only in case assistance of national authorities is required.