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The OLAF Report: European Commission refuses to accept the blame

March 18, 2005

After more than two years of deliberations, OLAF issued a press release announcing the closure of its "investigation into EU assistance to the Palestinian Authority budget". The anti fraud office of the EU stated:

On the basis of the information currently available to OLAF, the investigation has found no conclusive evidence of support of armed attacks or unlawful activities financed by the European Commission's contributions to the budget. However, the possibility of misuse of the Palestinian Authority's budget and other resources, cannot be excluded, due to the fact that the internal and external audit capacity in the Palestinian Authority is still underdeveloped.

To translate: We at OLAF feel that we did not have all the information. The PA's reporting procedures are severely limited. We cannot conclude with certainty where the EU's money has gone.

OLAF's work is a substantial departure from the findings of the majority report of 7 MEPs from March 2004. These elected officials had previously accepted at face value that all the information received was sufficient, barely questioning the reliability of the PA's procedures. As the Funding for Peace Coalition noted at the time, the MEPs' report patently failed to prove that aid had reached its intended target.

OLAF has now confirmed the Funding for Peace Coalition's assessment.

However, still unanswered is the question: Where has the taxpayers' money gone?

The potential scale of abuse is extensive. OLAF's work covers € 391.3 million in direct assistance between November 2000 and February 2005. A further € 1.8 billion has been transferred in indirect aid since 1993. Additionally, sovereign European states have donated similar amounts over that time period.

Of greater concern is the attitude of the European Commission. In its statement on OLAF's deliberations, Brussels has made three brazen claims:

First: "OLAF has arrived at the same conclusion as the European Commission: there is no proof that EU taxpayers' money has been used to fund Palestinian terrorism or other illegal activities."

In light of the above, the Funding for Peace Coalition suggests that this claim must be seen as an inexactitude employed to suit the EC's spin.

Second: "The EU contribution helped to alleviate poverty..."

Certainly, some of the money has gone to help some Palestinians. However, as the World Bank has continued to stress, poverty has not been and will not be alleviated by aid.

"You cannot substitute donor assistance and money for a fundamental change in the policy environment." - Nigel Roberts, the World Bank's country director for the West Bank and Gaza Strip. [Related story]

Indeed, if the aid was effective in alleviating poverty, the World Bank may not have been moved to comment "55% of those who receive emergency assistance are not needy.... 32% of the needy do not receive emergency assistance." [Related story]

If the aid has been effective, then Muhammed Dahlan, Abu Mazen's close ally, would hardly have stated in August 2004 that all of the funds which foreign countries had donated to the Palestinian Authority, a total of $5bn "have gone down the drain, and we don't know to where." [Related story]

To put it bluntly, aid has been diverted and the EC cannot admit it.

Third: "...international donors now pay into the very same Single Treasury Account that EU conditions put in place".

However, OLAF's press release states very boldly:

....risks of misuse of the PA budget and other resources cannot yet be excluded. This is primarily due to the fact that the internal and external audit capacity in the PA remains underdeveloped.

Pursuing OLAF's logic, this means that at least some of the € 105.8 million of European taxpayers' money, which was transferred to the PA directly and via the World Bank in 2004, has disappeared. Evidently, the EC needs to be reminded that funding corruption is a contravention of the EU's constitution.

The public is left to question how, after over two years of investigation and with the full weight of EU resources behind it, OLAF could not form a stronger case. After all, the public domain is full of disclosures.

For example, OLAF requested and was provided with an advance copy our own report. This detailed how over 20 PA employees, supported from the PA budget, carried out terrorist attacks.

In February 2005, The Financial Times of London reported how Chairman Arafat had consistently raided the wealth of the PA. Similarly, Khaled Abu Toameh noted in the Jerusalem Post that hundreds of Palestinian policemen, whose salaries were paid for by the PA budget had participated in acts of violence on behalf of the Aksa Martyrs Brigades or Hamas. No amount of self-congratulation from the EC can ignore those facts.

In summary, the Funding For Peace Coalition is content to leave the final words to OLAF:

There are consistent indications to support the hypothesis that it cannot be excluded that some of the assets of the PA may have been used by some individuals for other than the intended purposes.

It is time for the EC to admit its mistakes. It is time for the EC to tell its taxpayers and the average Palestinian where the money went and continues to go.

We reprint here the OLAF press release, and the response from the European Commission.

OLAF Press Release

OLAF INVESTIGATION INTO EU ASSISTANCE TO THE PALESTINIAN AUTHORITY BUDGET

Brussels, 17 March 2005

The European Anti-Fraud Office (OLAF) has closed its investigation into the European Commission's Direct Assistance to the Palestinian Authority's budget. On the basis of the information currently available to OLAF, the investigation has found no conclusive evidence of support of armed attacks or unlawful activities financed by the European Commission's contributions to the budget. However, the possibility of misuse of the Palestinian Authority's budget and other resources, cannot be excluded, due to the fact that the internal and external audit capacity in the Palestinian Authority is still underdeveloped.

The OLAF investigation was originally triggered by allegations of misuse of European Commission (EC) funds for terrorist activities. On 6 February 2003, OLAF opened an external investigation in order to examine the alleged irregularities concerning European Commission budget assistance provided to the Palestinian Authority (PA) under different instruments since 1997. This investigation was closed on 12 March 2005, and its results were communicated to the European Commission together with a number of recommendations on how further to improve safeguards and controls.

Findings

On the basis of the information available to date, the investigation found no conclusive evidence of support of armed attacks or unlawful activities financed by EC contributions to the PA budget. However, there are consistent indications to support the hypothesis that it cannot be excluded that some of the assets of the PA may have been used by some individuals for other than the intended purposes.

OLAF considers that even though the PA has made significant progress since 2002 by introducing a single treasury account for the consolidation of revenues, risks of misuse of the PA budget and other resources cannot yet be excluded. This is primarily due to the fact that the internal and external audit capacity in the PA remains underdeveloped.

In the course of its investigation, OLAF established that the PA leadership had transferred an amount of US $238 million to Swiss bank accounts between 1997 and early 2000, without informing its international donors. It is clear, however, that this cannot concern EU funds as the European Commission only made its first disbursement in the framework of the Special Cash Facility in November 2000. In the meantime, according to the information available to OLAF, the funds transferred to Switzerland have been fully accounted for and have been integrated into the Palestine Investment Fund under the control of the PA Ministry of Finance. In addition, the investigation also revealed the existence of at least one account in Tunis for which the PA was not yet able to clarify either the origin or the owner.

The investigation: scope and methods

OLAF opened its investigation on the basis of information received from two different sources. The investigation focussed on two aspects: on the one hand on allegations that EC funds were misused to finance armed attacks; on the other hand on the systems and control mechanisms operating within the EC programme of Direct Budget Assistance. The EC programme of Direct Budget Assistance, like similar programmes of other donors, took the form of direct payments to the PA's general budget which were not linked to any specific kind of expenditure. The first payments under this programme were made in November 2000 after the Israeli Government's decision to withhold the transfer of tax and customs revenues to the PA in response to the second Intifada. The EC made payments of € 246.3 million under this scheme up until April 2003 when the Commission replaced this by other forms of assistance and the OLAF investigation also covered the € 145 million subsequently made available from 2003 until February 2005.

In the course of their enquiries, the OLAF investigators, all of whom have a professional background in justice, police services or financial departments, collected and analysed information from a number of sources. These sources included: the European Commission and its Technical Assistance Office (ECTAO) in Jerusalem, the International Monetary Fund, the World Bank, representatives of third countries in the Middle East, the intelligence services of several EU Member States, audit firms and private sector sources. The OLAF investigators also worked in close co-operation with the Israeli administration and the PA. During several missions to the region, OLAF investigators met senior officials and witnesses from both Israel and Palestine and were able to obtain a number of original documents from both sides. OLAF assessed all the material gathered against the standards of evidence commonly accepted within the EU.

Legal and factual limitations

The subject of this investigation was the financial conduct of a foreign public authority outside EU territory. The former Financing Agreements between the European Commission and the Palestinian Authority did not provide for a legal basis for OLAF directly to monitor the expenditure of the Palestinian Authority. Nevertheless, the European Commission had put in place a surveillance system which, in scope and quality, went far beyond those of other donors. During its investigation, OLAF noticed a strong willingness in the present PA leadership to take the necessary measures to achieve more transparency, to clarify the past situation and to avoid misuse of donors' funds. However, OLAF was never in a position directly to monitor the expenditure of the PA. In this respect, OLAF had to rely on the answers given by the PA Ministry of Finance which were not always supported by documentation. In addition, OLAF does not have the legal powers necessary to investigate some further details, e.g. through gaining access to bank information. A number of factors continue therefore to remain unclear.

Recommendations

On the basis of its investigation, OLAF's main recommendations to the Commission are:

  • The current European Commission's financing agreements with the PA contain safeguards to counter misuse of EC funds. Any further budgetary assistance granted by the EC to the Palestinian budget (either directly or via other International organisations) should continue to be subject to well-monitored provisions established in close co-operation and co-ordination with the other international donors.
  • A single system of monitoring, shared by all donors, should improve the control of the revenues and the expenditure of the PA budget. This independent audit activity should continue until a fully independent financial control and auditing of accounts exists within the PA.
  • The present EC support given to the PA to improve their controls and internal audit should continue and should be reinforced.
  • The PA should do the same in respect of the funds still circulating outside the budget such as the funds available on bank accounts in Tunis.
  • Some of the practices of the past, such as the payment of salaries to convicted persons or the financial aid given to families of "martyrs" as well as the Fatah contributions by PA staff, are liable to be misunderstood and so to lead to allegations that the PA is supporting terrorism. These issues should be raised with the PA.

Alessandro Butticé

Head of Communication, PR and Spokesman Unit

Tel : +32 (0)2 296.54.25

Fax : +32 (0)2 299.81.01

COMMENT FROM THE EU - 17.3.05

OLAF finds "no conclusive evidence" to link EU funds and terrorism: European Commission welcomes final report on assistance to the Palestinian Authority

IP/05/327 - Brussels, 17 March 2005

The European Union's independent anti-fraud office OLAF has finalised its investigation into EU direct budgetary support to the Palestinian Authority. It has concluded that "there is no conclusive evidence of support of armed attacks or unlawful activities financed by the European Commission's financial contributions to the (Palestinian Authority) budget". These findings are in line with the assessments of the European Commission, which has examined closely all allegations made about the use of EC funding. They are also in line with the conclusions of the European Parliament Working Group on Budgetary Assistance to the Palestinian Authority.

After extensive investigations, OLAF has arrived at the same conclusion as the European Commission: there is no proof that EU taxpayers' money has been used to fund Palestinian terrorism or other illegal activities. The EU contribution helped to alleviate poverty, and the conditions attached to EU assistance were crucial in bringing about reforms in PA financial control and management, paving the way for statehood. Israel itself and other international donors now pay into the very same Single Treasury Account that EU conditions put in place.

The value of the previous EU Budgetary Assistance programme to the PA and EU's current contributions through the World Bank Public Financial Management Reform Trust Fund have been recognised internationally. As the AHLC noted in December 2003: 'budget support remains the most effective form of donor assistance for sustaining employment and stabilizing the Palestinian economy'. The objective, of helping the PA to lay the foundations for a viable Palestinian state, is set out in the "Road Map" supported by the Quartet (EU, US, UN and Russia). The EU budgetary assistance programme has been a driving force for reforms, particularly of PA financial control and management. As a result the International Monetary Fund has described PA "responsibility, control and transparency" as among the best in the region.

As OLAF's report points out, it is impossible to eliminate all risks of misuse from any financial assistance. The Commission has always been committed to exercising maximum vigilance, and to co-ordinating as far as possible with other donors in this respect. The Commission therefore agrees with OLAF's proposals:

  • to further strengthen international monitoring mechanisms. The European Commission welcomes this proposal and will discuss with other donors how monitoring of PA finances can be improved in the context of the World Bank Public Financial Management Reform Trust Fund, and how leverage to promote reforms can be increased.
  • to continue and reinforce current EU assistance to strengthen internal control and audit systems within the Palestinian Authority. Conditions attached to EU assistance have included concrete steps to improve financial management, and the EU will continue to provide technical assistance to improve internal control and audit within the PA administration.

BACKGROUND

The EU's decision to provide non-targeted direct budgetary assistance to the Palestinian Authority was triggered by the unilateral freezing by the Government of Israel in September 2000 of monthly tax transfers agreed between the government of Israel and the PA in the Paris Protocol. The policy was endorsed by the Council and the European Parliament, and implemented by the European Commission. The Commission provided €246 million non-targeted budgetary assistance to the PA 2000-2002. Initially conceived as a short-term Special Cash Facility, from June 2001 on, the aid was paid as Direct Budgetary Assistance. Monthly payments of about €10 million a month were released, each time subject to a "comfort letter" provided by the IMF, which provided macro-economic monitoring of the PA budget.

Payment of the non-targeted Direct Budgetary Assistance was also subject to conditions designed to improve governance in the Palestinian Territories. Concrete results include:

  • A Single Treasury Account has been established centralising the whole PA budget in one fund under the authority of the Minister of Finance.
  • The payroll has been put under the control of the Ministry of Finance, and recruitment capped.
  • A Palestinian Investment Fund was established in 2002 in order to bring PA investment and commercial operations not previously under the authority of the Minister of Finance under centralised control
  • More transparent and accountable budget management practices have been introduced, and a more efficient auditing system is currently being put in place.
  • Legislation ensuring the independence of the Judiciary has been passed. Following the Israeli decision in autumn 2002 to resume regular tax transfers (using the Single Treasury Account set up at the instigation of the EU), the EU discontinued non-targeted budget support.

The conditions attached to EU assistance have helped to create confidence in the PA's accounting systems so that Israel and other donors have felt able to use the structures that the EU has put in place

The EU's relations with West Bank and Gaza Strip:

OLAF Press Release:

OLAF Investigation into EU Assistance to the Palestinian Authority Budget


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