EU fraud doubles in a year to cost £700m

• Report on EU budget criticises failure to manage funds

• EU auditors refuse to sign off accounts due to errors in expenditure areas

• Fraud includes expense claims, customs duty avoidance and claims for work

• Claim EU fails to account for 134 million to the Palestinian authority

Key quote: "I endorse the court’s view that this situation is unlikely to improve until the commission has completed the reform of its accounting policies and IT systems.” -Sir John Bourne.

Story in full: A REPORT into European Union funding has highlighted more than 10,000 examples of suspected fraud, with losses of more than 700 million.

The National Audit Office (NAO) report on the EU’s 2002 budget criticised continuing failures to manage funds and warned that plans for reform were unrealistic.

The NAO drew attention to increases of up to 96 per cent in fraud cases compared with the previous year. In 2001, the accounts showed that there were 5,482 cases, with a value of 365 million.

For the ninth year running, the EU’s own Court of Auditors, which is responsible for overseeing the organisation’s 65 billion budget, has refused to sign off the accounts and found that there were material rates of error in four of the six main expenditure areas - agriculture, structural measures, internal polices and external action - which accounted for 90 per cent of expenditure.

Sir John Bourn, the head of the NAO, said his report drew attention to continuing problems. "It is a matter of concern that, for the ninth year in succession, the Court of Auditors has qualified its opinion on the reliability of the accounts," he said.

"I endorse the court’s view that this situation is unlikely to improve until the commission has completed the reform of its accounting policies and IT systems.

"Given the pace of current developments, public interest in the EU’s use of resources will inevitably increase."

The dramatic increase in cases has been attributed to a number of structural fund projects reaching a conclusion and their finances being examined. The EU claims that those projects and the inconsistency in the reporting of fraud and irregularity by individual member states makes it difficult to discern whether fraud has increased or decreased year on year.

Last year, the Court of Auditors provoked anger when it sacked a Scottish whistleblower, Dougal Watt, after he exposed a culture of nepotism and misconduct.

Mr Watt, who joined the court in 1995 from the NAO, had accused senior members of securing jobs for family. He also accused it of dragging its feet on investigating corruption at the European Commission in the Nineties.

In a letter, he wrote: "Since external controls upon the court are absent and the court’s internal control environment is very weak, there is consequently a high inherent risk of abuse."

Frauds identified by member countries in 2002 include bogus expenses claims, customs duty avoidance and fraudulent claims for work.

Up to 300 million of the cases involve the Common Agricultural Policy, while aid programmes to the third world accounted for another 14 million of fraud.

The EU has also recently been accused of failing to account for 134 million handed over to the Palestinian Authority, amid accusations that Yasser Arafat, the Palestinian president, had personally signed cheques to people linked with terrorist activity.

The European Commission placed Neil Kinnock, its vice-president, in charge of bringing in measures to tighten up financial probity, but today’s report suggests that there is still a long way to go.

Notable frauds include a scheme to develop the Kosovan electricity industry which saw 1.8 million siphoned off into private bank accounts.

In another case, aerial photographs of alpine pastures in Austria revealed that claims for subsidies had been inflated by 60 per cent.

British farmers also got in on the act, with inflated claims for subsidies and claims for payments for sheep culled during the foot-and-mouth epidemic.

In Northern Ireland, 103 farmers exaggerated their foot-and-mouth claims and 17 who claimed had no sheep on their land at all.

Sir John will present his report to Parliament today.

A briefing note from the NAO says: "Sir John notes that member states notified the European Anti-Fraud Office of just over 10,000 cases of irregularity and suspected fraud in 2002, with a value of 700 million.

"The number of cases was some 84 per cent higher, and the value of cases some 96 per cent higher, than in 2001, when there were 5,482 cases, with a value of 365 million."